Category: Economics: Ch 20
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? |
Inflation has reached a 16-year high of 5.2% in September 2008 with rising energy bills leading to much of the increase. This puts inflation well outside the target rate for the Consumer Prices Index (CPI), but analysts are convinced that it will fall sharply in the coming months with some predicting inflation to be just 1% by autumn 2009. Even the Bank of England has now agreed that inflationary risks have moved “decisively to the downside” allowing them to cut the interest rate from 5% to 4.5% as part of a globally coordinated interest rate cut.
Rising gas bills send inflation to 16-year high Times Online (14/10/08)
Inflation high but fear of recession grows Guardian (14/10/08)
Inflation soars to 5.2% Guardian (14/10/08)
Fresh storm gathering as inflation surge adds £3bn to welfare bill Times Online (15/10/08)
Rising cost of living prompts further pay strike threats Times Online (15/10/08)
Where now for UK inflation? BBC News Online (14/10/08)
Consumer inflation reaches 5.2% BBC News Online (14/10/08)
Questions
| 1. |
Explain how the CPI is calculated. |
| 2. |
What are the principal factors that have led to the rise in inflation to 5.2%? |
| 3. |
Discuss whether, in the current financial crisis, it is appropriate for the Bank of England’s Monetary Policy Committee (MPC) to be targeting just inflation. |
| 4. |
Explain the transmission mechanism whereby a cut in interest rates will affect inflation. Discuss whether this transmission mechanism will be as relevant in the current financial climate. |
During his lifetime Galbraith warned extensively of the problems likely to be associated with financial excesses, and if alive today would almost certainly allow himself a ‘told you so’ moment. He was a lifelong liberal who argued that capitalism was inherently a fragile and unstable system. So what relevance does his work have to the current financial crash?
Galbraith saw this coming Guardian (15/10/08)
In praise of …The Great Crash 1929 Guardian (15/10/08)
Questions
| 1. |
Write a short paragraph summarising Galbraith’s life and work. |
| 2. |
Assess the extent to which his arguments in relation to the fragility of the financial system are still relevant today. |
| 3. |
Galbraith commented that all stockmarket bubbles exhibit “seemingly imaginative, currently lucrative, and eventually disastrous innovation in financial structures“. Discuss the extent to which this kind of innovation (e.g. derivatives and sub-prime mortgages) may have been responsible for the current financial crisis. |
The European Central Bank has its tenth anniversary this year and the year is shaping up to be one of the toughest of the last decade in terms of economic management. While the Eurozone has generally withstood the global credit crisis very well, there are some possible problems emerging and the ECB will have to manage interest rates carefully to cater for the conflicting demands from economies at different stages of the business cycle.
If the Eurozone is on fire, will the ECB get burnt? Observer (1/6/08)
More testing times ahead as the euro turns ten Times Online (26/5/08)
Euro growth better than expected BBC News Online (15/5/08)
Questions
| 1. |
Explain the role of the European Central Bank (ECB). |
| 2. |
Assess the difficulties faced by the ECB in setting interest rates for the whole Eurozone. |
| 3. |
Discuss the extent to which the economic performance of stronger countries in the Eurozone will be constrained by weaker-performing economies. |
Rising food prices (5.5% increase over the past year) and rising energy costs have led to a rise in overall inflation. The consumer price index rose from 2.5% in March to 3% in April, triggering concerns that the Governor of the Bank of England, Mervyn King, would have once again to write an explanatory letter to the Chancellor for inflation going over its target rate.
Biggest jump in cost of living for six years surprises the city Guardian (4/5/08)
The danger of inflation fixation Guardian (14/5/08)
Dear Alistair …. Guardian (13/5/08)
Rising food prices send inflation surging to 3% Guardian (13/5/08)
Playing the percentage game for high stakes Guardian (9/5/08)
High street prices in biggest surge since 1992 Times Online (29/5/08)
UK inflation jumps to 3% in April BBC News Online (13/5/08)
Questions
| 1. |
Explain the principal factors that led to the sharp rise in the cost of living for April. |
| 2. |
Assess the extent to which inflation may be higher for many groups in society than the consumer price index figures indicate. |
| 3. |
Discuss the extent to which an interest rate increase would help to reduce inflation in a climate of rising food and energy prices. |