Tag: aggregate demand

The possibility of recession in the UK, the USA and Europe has attracted a great deal of media attention and in this podcast Andy Beharrell considers whether there is any real evidence of recession. The podcast considers the definition of recession, the causes of recession and the different approaches taken by governments to try to keep their economies out of recession. While the UK and Europe have adopted essentially rules-based policy approaches, the USA has taken a more interventionist and discretionary approach with a significant loosening of both monetary and fiscal policy.

The potential relevance of Keynesian economic theory has been sharply brought back into focus as governments struggle to find an appropriate mix of policies to try to avoid or mitigate the impact of recession on their economy. Chancellor Alistair Darling has relaxed fiscal rules to allow spending to rise in an attempt to boost aggregate demand and compensate for falling consumer demand.

How to kick start a faltering economy the Keynes way BBC Magazine (22/10/08)
Situation vacant: a theorist is sought to succeed Mr Keynes Guardian (11/10/08)
In praise of ….. John Maynard Keynes Guardian (9/10/08)
Spend, spend, spend: Alistair Darling adopts John Maynard Keynes doctrine Times Online (20/10/08)
Darling invokes Keynes as he eases spending rules to fight recession Guardian (20/10/08)
Follow Gordon Brown again and spend out of recession Times Online (14/10/08)
Economists condemn Chancellor Alistair Darling’s spending plan Telegraph (26/10/08)
Keynes, the man to get the Government out of a crisis The Independent (20/10/08)

Questions

1. Explain briefly the Keynesian approach to the management of the level of aggregate demand.
2. Using diagrams as appropriate, show the impact of the relaxation of fiscal spending rules on the UK economy.
3. Discuss the extent to which a Keynesian approach to economic policy is likely to help the government avoid a recession in the UK. Is leaving the control of interest rates in the hands of an independent Bank of England a constraint on the effectiveness of this policy approach?

The article below is an economic briefing from The Times, published to support the Bank of England’s Target 2.0 competition. It considers the importance of the exchange rate in determining the demand for imports and exports and therefore the impact that exchange rate changes are likely to have on aggregate demand.

Economic briefing: exchange rate is crucial to export demand and influences inflation Times Online (20/10/08)

Questions

1. Explain how import prices and export prices change in response to a fall in the value of sterling.
2. Define the terms (a) price elasticity of demand for imports and (b) price elasticity of demand for exports.
3. With reference to your answers to questions 1 and 2, assess how the balance of payments will change in response to a fall in the value of sterling. What is the relevance of the Marshall-Lerner condition to these changes?

US national debt has got so large that the national debt clock in Time Square has run out of zeroes and they have had to order a new one. UK national debt is also set to rise in the current financial crisis as government borrowing rose sharply in September. The impact of greater public spending and the part-nationalisation of the banks is all likely to lead to a rapid rise in public borrowing and therefore national debt, but is this sustainable for the UK economy?

How the bank crisis hits Britain’s public finances Guardian (14/10/08)
National debt clock runs out of zeroes – new larger clock ordered Guardian (9/10/08)
Banks’ bail-out: ‘The money’s being spent on buying bank shares, so it shouldn’t hit public borrowing’ Guardian (14/10/08) (podcast)
Rescue plan underlines likelihood of tax rises and spending cuts Guardian (9/10/08)
Darling must spend now Times Online (20/10/08)
Public borrowing hits record high Times Online (20/10/08)
Gordon Brown defends level of national debt Guardian (20/10/08)
UK borrowing hits a 60-year high BBC News Online (20/10/08)
Crisis ‘to double UK borrowing’ BBC News Online (22/9/08)
Deep pockets The Economist (9/10/08)

Questions

1. Explain the relationship between the level of public borrowing and the national debt.
2. Examine the reasons why public spending has risen.
3. Discuss whether this increase in aggregate demand will be sufficient to prevent the UK economy falling into recession.