Tag: interest rates

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.

China’s rate of inflation has hit an 11-year high, partly due to the cold winter weather destroying crops and pushing up food prices. However, inflationary pressure has been growing for some time with rapid economic growth and the resultant pressure on resources. This is despite six increases in interest rates in the past thirteen months.

Families feel pinch as inflation threatens economic miracle Guardian (25/2/08)
Chinese inflation soars to an 11-year high Times Online (20/2/08)
Chinese inflation hits 11 year high Times Online (19/2/08)

Questions

1. Explain the principal factors that have led to the increase in inflation in China.
2. “Policymakers in China will likely try to tighten monetary policy further, with more reserve requirement ratio hikes, faster Chinese yuan appreciation, and more heavy handed controls over bank lending.” Discuss the likely effectiveness of these policy measures.
3. Assess the extent to which changes in food prices will affect the overall level of aggregate demand in the Chinese economy.

The start of 2008 saw oil prices hit $100 per barrel – a new record. This important psychological as well as economic milestone has, as a result, also seen petrol prices rising to over £1 per litre. The increase in prices may prove to be an important factor in determining whether the Bank of England is able to lower interest rates.

The heavy price of $100 per barrel Guardian (4/1/08)
Oil sets fresh record above $100 BBC News Online (3/1/08)
Oil price at record $100 a barrel BBC News Online (2/1/08)
What is driving oil prices so high? BBC News Online (2/1/08)
Global oil industry in figures BBC News Online (2/1/08)
Plenty of oil left in the global tank Times Online (16/12/07)
Oil at $100 threatens to choke economy Times Online (3/1/08)
Videos
Oil prices break $100 barrier BBC News Online

Questions

1. What are the main factors that have driven oil prices over $100 per barrel.
2. Using diagrams as appropriate, illustrate the changes that have taken place in the oil market.
3. Assess the likely impact of the increase in the oil price on the major UK economic targets.
4. Discuss the extent to which the Bank of England will need to take account of higher oil prices in its decisions on interest rates.

The Governor of the Bank of England, Mervyn King, has signalled that the next year may be the toughest for 15 years with lower economic growth than previously forecast. So, is the UK economy going off the rails?

Questions

1. Explain the main reasons why the Governor of the Bank of England expects a worse than forecast level of economic growth in 2008.
2. Discuss the extent to which a cut in interest rates will help prevent an economic slowdown. What adverse effects could follow from such a policy.
3. Discuss one other policy that the government could adopt to try to reduce the extent of the forecast slowdown in economic growth.