Category: Economics 10e: Ch 18

Inflationary expectations can be an important determinant of the actual level of inflation and so the Bank of England monitor people’s perceptions of inflation closely. Expectations of inflation are currently at their highest level in eight years.

Questions

1. Explain the transmission mechanism by which higher inflationary expectations are translated into inflation.
2. What are the key determinants of inflationary expectations?
3. Discuss strategies that (a) the Bank of England and (b) the government can adopt to reduce inflationary expectations.

The Northern Rock crisis has caused significant repercussions in the UK financial system. It may continue to do so as the various groups bidding to take over the beleaguered bank try to persuade the government to write off the interest owed on the money borrowed in the run-up to the crisis. In the Guardian article below the build-up to the crisis is considered in detail, while in the other article Anatole Kaletsky argues that central banks need to stand firm against pressure from financiers.

Questions

1. Explain what is meant by the term ‘moral hazard’.
2. Examine the main factors that led up to the Northern Rock crisis.
3. Summarise the main reasons why Anatole Kaletsky argues that central banks need to stand firm when pressurised by City financiers.
4. Assess the likely impact of the Northern Rock crisis on the performance of the UK economy over the next year.

In the early days of monetary policy, money supply targeting was a core element of anti-inflation policy. This approach was slowly dropped during the 1990s, but the underlying growth of the money supply has remained an important issue for policy makers and recent growth in the money supply has led to concern from some commentators that higher inflationary pressures may yet emerge.

King sees money growth as danger sign Times Online (3/5/07)
Bank’s inflation controllers leave the NICE decade to enter the not-so-nice Guardian (3/5/07)
Should letter-writing be a thing of the past? Times Online (30/4/07)


Questions
1. Explain the relationship between money supply growth and inflation.
2. What were the main factors that led to money supply targeting being dropped as a core element of monetary policy?
3. Assess the extent to which the MPC should pay more attention to the level of money supply growth.
4. Should letter-writing be a thing of the past?

The Office of Fair Trading (OFT) is to set up an investigation into the reality of ‘free banking’ to establish whether greater transparency in charging would benefit consumers. The articles linked to below consider the scope of this investigation and look at what some consider the ‘myth’ of free banking.

OFT probe into bank charges could mean end of ‘free banking’ The Scotsman (27/4/07)
‘Free’ banking could end as overdraft charges challenged Guardian (27/4/07)
Watchdog probes cost of banking BBC News Online (27/4/07)
Charges inquiry may spell end of free banking Telegraph (28/4/07)
OFT considers ending ‘free’ banking Times Online (27/4/07)
Q&A: Banking investigation and you BBC News Online (26/4/07)
Calling banks’ bluff BBC News Online – Robert Peston blog (26/4/07)
Free banking ‘myth’ to be probed Guardian (26/4/07)

Questions

1. Explain the reason why some people consider free banking to be a ‘myth’.
2. Examine the likely impact of the market structure in the market for banking on the level of competition.
3. Assess two policies that the government could implement to ensure that consumers get a fairer deal from their banks.

Hyperinflation in Zimbabwe is no longer news. Indeed the news below that inflation has risen to 2,200% may not even surprise us any more. However, inflation of this level should also mean similar changes in the exchange rate if purchasing power parity is to be maintained. The official exchange rate in Zimbabwe, however, hasn’t changed by anywhere near this amount and there are reports (See Scotsman article below) that the Governor of the Central Bank has even tried to portray a recent devaluation as not really a devaluation at all!

Our mutual friend The Economist (subscription) (12/4/07)
Zimbabwe inflation reaches 2,200% BBC News Online (26/4/07)
Zimbabwe’s inflation rate surges to 231,000,000% Guardian (9/10/08)
A month ago, the hospitals were overflowing. Now they lie empty Guardian (6/12/08)
Hyperinflation in Zimbabwe Wikipedia
(27/4/07)
How Zimbabwe lost control of inflation Newzimbabwe.com (11/12/09)

Questions

1. Explain, using diagrams as appropriate, how hyperinflation will affect the exchange rate in Zimbabwe.
2. Discuss the likely economic impact of not devaluing the official exchange rate in line with the level of inflation in Zimbabwe.
3. Assess possible exchange rate policies that would help reduce the level of hyperinflation in Zimbabwe.