Definition of a liquidity trap: When monetary policy becomes ineffective because, despite zero/very low-interest rates, people want to hold cash rather than spend or buy illiquid assets. A liquidity trap is characterised by Very low-interest rates Low inflation Slow/negative economic growth Preference for saving rather than spending and investment Monetary policy becomes ineffective in boosting …
The optimal inflation rate is often considered to be around 2%. For example: The UK target inflation of 2% +/-1 The ECB target inflation of less than 2% US Federal Reserve target inflation of less than 2% (But from 2020 are likely to make inflation target symmetrical like the UK) Why Central Banks wish to …
Readers Question: How does the MPC predict future inflation? Inflation is caused by a mixture of demand-pull and cost-push factors. Therefore, the MPC will look at many statistics which give an indication of whether the economy is reaching full employment and causing inflationary pressures. This will include rate of economic growth, unemployment and the amount …
Readers Question: what are the advantages and disadvantages of inflation? Inflation occurs when there is a sustained increase in the general price level. Traditionally high inflation rates are considered to be damaging to an economy. High inflation creates uncertainty and can wipe away the value of savings. However, most Central Banks target an inflation rate …
Structural adjustment is a term used to describe the policies requested by the IMF in condition for financial aid when dealing with an economic crisis in. The policies are designed to tackle the root cause of the problem and provide a framework for long term development and long term growth. Structural adjustment policies usually involve …
Definition: Shrinkflation occurs when firms reduce the size or quantity of a good and keep prices the same. Shrinkflation is an alternative to increasing prices, and you could argue it is a disguised form of inflation because if you wanted to buy exactly the same quantity of the good, you would have to spend relatively …
Readers Question: What are the advantages and disadvantages of inflation? The Government have an inflation target of CPI 2%. This suggests they would rather have moderate inflation than no inflation at all. Advantages of Inflation Deflation is potentially very damaging to the economy and can lead to lower consumer spending and lower growth. For example, …
In the UK and US there is often a mistrust of the government’s inflation figures. People often feel that their cost of living is rising faster than official CPI statistics. In developing countries like Venezuela and Argentina, there is even greater mistrust as government’s have an incentive to modify inflation rates and have the power …