In 2008, the world global banking system went into meltdown after the bankruptcy of Lehman Brothers. It stemmed from a toxic combination of falling house prices, rising interest rates and sub-prime mortgage debt. To relive the 2008 Credit Crunch – see this article on Credit Crunch Explained (which was one of my earlier articles as …
Higher interest rates increase the cost of borrowing, reduce disposable income and therefore limit the growth in consumer spending. Higher interest rates tend to reduce inflationary pressures and cause an appreciation in the exchange rate. Higher interest rates have various economic effects: Effect of higher interest rates Increases the cost of borrowing. With higher interest …
In theory, there is a strong link between the money supply and inflation. If the money supply rises faster than real output, then prices will usually rise. This means if a Central Bank prints more money, we will often (though not always!) get higher inflation. Explanation of why increased money supply causes inflation The money …
Readers Comment. Why doesn’t the Bank of England just print the money instead of borrowing the money? Printing more money doesn’t increase economic output – it only increases the amount of cash circulating in the economy. If more money is printed, consumers are able to demand more goods, but if firms have still the same …
Readers Question: would you please explain to me how we can have no inflation, or low inflation if the government injects two or three trillion dollars in the US economy and output falls? This is an interesting question. Although printing more money tends to cause inflation, there are circumstances where you can increase the money …
Summary – Periods of high inflation usually lead to lower returns on the stock market because higher inflation is likely to lead to higher interest rates, lower economic growth and lower dividends. Impact of high inflation on share prices If the inflation rate increases, this will make investors wary for a few reasons. Firstly, if …
Inflation is a sustained rise in prices and increase in the cost of living. The general costs of higher inflation will be reduced purchasing power of money, fall in the value of savings, a depreciation in the exchange rate, less certainty for firms and the inconvenience of dealing with changing prices. In addition, developing economies …
Definition: The fiscal stance of a government refers to how its level of spending and taxation impact on aggregate demand and economic growth. Higher taxes and a budget surplus is seen as fiscal consolidation or deflationary stance. A budget deficit has an expansionary impact. A fiscal stance can be expansionary, neutral or deflationary. Expansionary stance: …