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 …
When reading economic articles in the past few years, you may frequently come across the reference to the ‘zero lower bound’ or ZLB. What is the Zero Lower Bound rate? In short – when interest rates can’t fall any further below 0% Examples of ZLB UK interest rates were cut to 0.5% in March 2009 …
The Money Multiplier refers to how an initial deposit can lead to a bigger final increase in the total money supply. For example, if the commercial banks gain deposits of £1 million and this leads to a final money supply of £10 million. The money multiplier is 10. The money multiplier is a key element …
Readers question: What is the difference between tax and inflation? Tax is a way for the government to raise revenue. It includes charges placed by the government on goods/income. For example, VAT is a tax which means consumers have to pay an additional 20% of the price in the form of tax which goes to …
Definition Quantitative Easing. This involves the Central Bank increasing the money supply and using these electronically created funds to buy government bonds or other securities. Quantitative easing is a form of expansionary monetary policy. It is usually used in a liquidity trap – when base interest rates cannot be cut any further. Aim of Quantitative …
Readers Question: Could you comment on This BBC programme on Q.E. The programme highlights several criticisms of Quantitative Easing, especially the Q.E. adopted by the Bank of England. Since 2009, the Bank of England’s balance sheet has quadrupled, and now a third of all government bonds are now held by Bank of England. The programme …
Monetarists argue that if the Money Supply rises faster than the rate of growth of national income, then there will be inflation. If the money supply increases in line with real output then there will be no inflation. M.Friedman stated: “Inflation is always and everywhere a monetary phenomenon in the sense that it is and …
Readers Question: If the government has a national debt, why doesn’t it just print more money and pay it off? The problem is that printing money would cause inflation and effectively reduce the value of money. If you print more money the number of goods and services will stay the same, you just have more …