Readers Question: Indicate the problems which are created for the government’s finances as a result of having to help avoid an even deeper recession. In a recession, automatic fiscal stabilisers automatically cause a rise in borrowing. The UK recession hit tax revenues hard. Income tax receipts fell as top earners were made unemployed. Corporation tax …
This graph illustrates the difference between actual GDP and potential GDP. It also indicates how much Real GDP growth has lagged behind potential growth. This means the US economy currently has substantial spare capacity. This is reflected by a rise in unemployment and factories operating below full capacity. The Real potential GDP illustrates the long …
Readers Question: I trying to find appropriate policies that the Icelandic government could adopt to deal with the country`s substantial current account deficit. Do you know what policies they are using for the moment, and more importantly which policies they should adopt? Related Problems with Iceland Economy Solving UK Current account deficit At the height …
One of the great challenges of Monetary and Fiscal Policy is knowing exactly where the economy is. If output is falling, then this justifies an easing of monetary policy (lower interest rates, or in the UK’s current situation more quantitative easing). Recently GDP statistics showed an unexpected 0.4% fall in GDP. This was a key …
Readers Question: Is it a good idea for the Baltic states to adopt the Euro before they have met the convergence criteria? Latvia and Lithuania have a target date of 2013 for joining the Euro. Estonia by Jan 1 2011. The four main convergence criteria for the joining the Euro are: Low inflation Low Government …
An interesting graph showing relationship between the output gap and levels of government borrowing. A negative output gap indicates GDP is below full capacity and there is unemployed resources. Therefore, in a deep recession, like 2009, the output gap will rise. In a boom, we will have a positive output gap as firms struggle to …
Readers Question: From my studies in economics I have always known that when there is a recession, there is a high tendency for people to borrow at a low interest rate since there is a fall in the mpc due to high unemployment right? In a recession, people tend to borrow less and save more. …
Readers Question: Hey, what do you think are the implications of the 2009 Budget? The most striking feature was the realisation of how much the government was needing to borrow and the depth of the recession. The Large planned rise in borrowing means that there is little if any scope for further discretionary fiscal expansion. …