The hypothesis of financial instability was developed by the economist Hyman Minksy. He argued that financial crisis are endemic in capitalism because periods of economic prosperity encouraged borrowers and lender to be progressively reckless. This excess optimism creates financial bubbles and the later busts. Therefore, capitalism is prone to move from periods of financial stability …
Definition of balanced growth: Balanced growth refers to a specific type of economic growth that is sustainable in the long term. It is sustainable in terms of low inflation, the environment and balance between different sectors of the economy such as exports and retail spending. Balanced growth is the opposite of volatile boom and bust economic …
The essential element of Keynesian economics is the idea the macroeconomy can be in disequilibrium (recession) for a considerable time. To help recover from a recession, Keynesian economics advocates higher government spending (financed by government borrowing) to kickstart an economy in a slump. Keynesian economics includes Disequilibrium in macroeconomy (insufficient demand) Imperfect labour markets (e.g. …
In a recent post, we looked at food inflation and noted how prices were often volatile. Primary products like food and oil tend to be volatile because: Supply is inelastic in short run. (Supply is unresponsive to temporary shortages of food) Supply can vary due to the weather/geopolitical events. Demand is price inelastic – a …
Boom and bust economic cycles involve: Rapid economic growth and inflation (a boom), followed by: A period of economic contraction / recession (falling GDP, rising unemployment) Causes of boom and bust cycles 1. Loose Monetary Policy If monetary policy is too loose, it means real interest rates are too low given the state of the …
Diminishing marginal utility of income and wealth suggests that as income increases, individuals gain a correspondingly smaller increase in satisfaction and happiness. In layman’s terms – “more money may not make you happy” Alfred Marshall popularised concepts of diminishing marginal utility in his Principles of Economics (1890) “The additional benefit a person derives from a …
Readers Question: What do you understand by the terms ‘monetary policy’ and ‘fiscal policy’? Explain with reference to a country of your choice:- a) How these policies have been used by the government to try to achieve its objectives Definition – monetary and fiscal policy Monetary policy is managed by the Bank of England. They have …
Readers Question: Is the fiscal policy effective/the best policy to deal with unemployment? It is an interesting question and one that is likely to generate different views from within the ranks of economists. To give a very rough overview: Keynesians say yes, fiscal policy can be effective in reducing unemployment. In a recession, expansionary fiscal policy …