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 …
Readers Question: What caused the massive decrease in the debt to GDP ratio for the UK following World War II? It is a good question to ask. In the past few years, many European policymakers have felt that rising debt levels needed panic levels of austerity/spending cuts. But, that didn’t happen in the UK in …
Debt is one of the oldest financial instruments, but is it good or bad? To some debt is a sinful way of living beyond your means. Debt is an instrument which increases inequality and can cause economic hardship because of the fixed repayment costs. Furthermore, others point to debt as one of the main causes …
Monetary policy involves using interest rates and other monetary tools to influence the levels of consumer spending and aggregate demand (AD). In particular monetary policy aims to stabilise the economic cycle – keep inflation low and avoid recessions. Aim of monetary policy Low inflation. UK target is CPI 2% +/-1. Low inflation is considered an important …
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 misery index (sometimes known as the Economic Discomfort Index EDI ) is simply the sum of the inflation rate plus the unemployment rate. The higher the combined score, the worse the economic situation. The Misery index was developed by economist Arthur Okun. Where Unemployment rate (ut) and the current inflation rate (πt) High unemployment …
Readers Question If one looked at the UK’s Historical Debt to GDP ratio; at the time austerity was introduced; the Debt to GDP ratio was last at this 2010 level in 1966. Having lived in 1966 there was no massive economc requirement to reduce public spending at that time ie everything was fine. So was …
Definition of fiscal policy Fiscal policy involves the government changing the levels of taxation and government spending in order to influence aggregate demand (AD) and the level of economic activity. AD is the total level of planned expenditure in an economy (AD = C+ I + G + X – M) The purpose of Fiscal …