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Russia increases policy interest rates to 8%

Sunday, July 27, 2014

The Russian central bank has raised their main policy interest rate by 0.5% to a new level of 8% in a bid to control inflationary pressures in the Russian economy. 

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QE - New evidence of the impact on bond yields

Wednesday, May 28, 2014

New Bank of England research adds further weight to the view that central bank asset purchases (‘quantitative easing’ or QE) can affect government and corporate bond yields. In particular, the study, which is published in the May 2014 issue of the Economic Journal, finds evidence that QE works by reducing the supply of government bonds remaining in the private sector – what are known as ‘local supply effects’.

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Macroeconomics - Why has the UK recovered so fast?

Tuesday, May 20, 2014

Just in time for the unit 2 exam, and in good time for unit 4 students, this week's Deloitte Monday Briefing looks at the reasons behind the rapid recovery of growth in the UK. The Monday Briefing always makes very good reading, and often features analysis which is written with great clarity by Ian Stewart, their Chief Economist in the UK - to subscribe and receive an email every week, visit www.deloitte.co.uk/mondaybriefing

Below, I have copied much of this week's briefing with a little additional comment to emphasise the role of monetary and fiscal policies, and to look forward in order to consider how these may be evaluated in order to assess the contribution they may make in the near future.

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Unit 2 Macro: Should UK Interest Rates be Rising Now?

Friday, May 16, 2014

In remarks made when launching the new quarterly inflation report (May 2014), the Governor of the Bank of England, Mark Carney, has signaled that policy interest rates set by the MPC are likely to remain at historically low levels for some time to come. The first rise in rates is probably less than a year away and some economists have penciled in early New Year 2015 for a rate hike. But what are some of the arguments for raising interest rates now?

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Evaluating UK interest rates

Thursday, May 15, 2014

England's odds of winning the World Cup are about 30-1 - which reflects a rather low level of confidence that we have a realistic chance. However, the Governor of the Bank of England seems to think that a safer bet would be to back the recovery of the UK economy, judging by Mark Carney's launch of the latest Inflation Report yesterday. He likened the path the economy has to follow to that of England's task in Brazil, and said that the Bank's priority was to steer the economy through the opening rounds, all the way to victory. 

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UK Economy: The Rise of Sterling

Thursday, April 24, 2014

In recent months the external value of the pound has been rising quite strongly. Indeed it has outperformed a cluster of other countries even though we have seen a rise in the UK's current account deficit on the balance of payments. Stephanie Flanders, chief market strategist at JPMorgan Asset Management, talks to the Financial Times about the sterling's out-performance and what impact the strong pound is likely to have on the UK economy.

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UK Economy: Debt and Barriers to Growth

Wednesday, April 23, 2014

The BBC's Robert Peston looks at the broader issue of heavy debt in the UK economy and whether it is holding back economic growth.

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Unit 2 Macro: Conditions for a Sustainable Recovery

Friday, April 11, 2014

Here is an extract from a recent speech by Charlie Bean at the Bank of England - the full speech can be found here: www.bankofengland.co.uk/publications/Docume...

For the economic recovery to be both sustained and sustainable we really want to see three things happen

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Unit 2 Macro: Effectiveness of Macro Policies

Thursday, April 10, 2014

We have considered the three key areas of macroeconomic policy – monetary policy, fiscal policy and supply-side policies.

In the longest essay questions on data response papers examiners often ask students to consider how effective these are when they are used to manage the economy. How can we judge whether the performance of the economy is improving as a result of them? In this session we will remember how to assess macroeconomic performance, think about some of the issues with measuring growth, and focus on ways to evaluate the effectiveness of different policies

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Unit 2 Macro: Revision on Managing the Economy

One of the most significant roles of a modern government is to ensure that the economy performs to its full capacity. The government has to consider the performance indicators like inflation, unemployment and economic growth and devise policies to achieve their aims. In this session we will consider the options that fall into the fiscal and monetary policy

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Unit 4 Macro: The Rise of Managed Exchange Rates

The new IMF report on the global economy published in April 2014 includes a focus on the currency regimes chosen by emerging market countries.  An increasing number of central banks have switched from free-floating exchange rates to managed currency regimes - perhaps because they want to make more active use of the exchange rate as an instrument of monetary policy. 

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Unit 4 Macro: Fixed Currencies and Crisis Recovery

Thursday, April 03, 2014

The nominal exchange rate is a key adjustment tool to help countries avoid traumatic balance of payments crises. And when a country is in a crisis, external adjustment is delayed and more difficult under a pegged exchange rate regime. These are the central findings of research by Atish Ghosh and colleagues, to be presented at the Royal Economic Society’s 2014 annual conference.

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Unit 2 Macro: Falling Inflation in the UK Economy

Monday, March 31, 2014

The UK’s official inflation benchmark, the Consumer Prices Index, slid to 1.7 per cent in February – the lowest for more than four years. What are some of the main factors causing inflation to fall below target?

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F585 Pre-Release Resources (and F583, F582 & F581 too)

Sunday, March 23, 2014

I thought it worthwhile sharing my resources which I have been collecting for students (and teachers alike). I have been promoting them on Twitter (@Economics_KSF) through scoop.it but for those of you not on there, the link for the scoop.it boards are here:

http://www.scoop.it/u/economics-kcsf

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Unit 2 Macro: Has 5 Years of Low Interest Rates helped the UK Economy?

Sunday, March 16, 2014

Year 12 economist Tim Rawlinson considers some of the macroeconomic effects of five years of ultra low policy interest rates set by the Bank of England.

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Money Makes the World Go Round

Thursday, March 13, 2014

Money, so it is said, makes the world go around. And to some extent it does. But it's not one of the functions of money that I teach in my lessons. The nature of money is fascinating and there are plenty of books that look at the subject, not least Philip Coggan's "Paper Promises: Money. Debt and the New World Order" or Felix Martin's "Money: The Unauthorised Biography". If we start from the premise that money is "anything generally accepted in payment of a debt" then this leads us into interesting territory.

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Unit 2 Macro: 5 Years of Low Interest Rates

Wednesday, March 05, 2014

I am setting my AS macro students an essay this week evaluating the economic effects of five years of ultra-low monetary policy interest rates. Tom White blogged about this a day or so ago (click here) linking to an excellent article in the Guardian. It is a great way for students to deepen and broaden their understanding and awareness of recent developments in the UK economy.

Teaching colleagues covering monetary policy might want to use the data charts on interest rates contained in the PowerPoint file shown below.

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5 years of low interest rates: an evaluation exercise

Tuesday, March 04, 2014

There’s been lots of media coverage of a recent anniversary: it was five years ago in March 2009 that the Bank of England took the dramatic step of cutting interest rates to their lowest level in more 300 years. And there they have stayed - with some predicting they will stay low for a while longer yet.

How about a quick bit of analysis (why the Bank took the move) and then some evaluation? I’m suggesting an evaluation based on a recent Guardian article. Has it been a good move? Well – it depends – on who you are, for a start.

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Eurozone problems - excellent video resource

Friday, February 14, 2014

Gains from international trade, the history of European economic integration, fiscal and monetary policy, the launch of the €uro and the 2008 financial crisis are all clearly animated and explained in this superb video. In just over 12 minutes it explains the problems of the €urozone and the threats and challenges it still faces. Definitely one to watch for the closing stages of an A2 macro course.

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Mark Carney redfines the MPC’s role again.

Thursday, February 13, 2014

He might have only had his feet under the Governor's desk for 8 months but BOE Governor Carney has announced changes to the role of the MPC for a second time as forward guidance has been overhauled.

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Forward Guidance Mark II - From Forward to Fuzzy!

Forward Guidance Mark II began yesterday as the Forward Guidance Mark I didn't really go as planned, approaching the 7% threshold for unemployment way too quickly for the BoE's comfort. The following video clips discuss some of the issues from yesterday's announcement. Big debate about whether the new Forward Guidance is more fuzzy than it is forward.

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Unit 4 Macro: Currency Instability in the Fragile Five

Wednesday, February 05, 2014

This is a superb article from the Economist for A2 macro students wanting to understand more about the fragility of a large cluster of emerging economies. 

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Macro Policy Challenges in India and Japan

Sunday, January 26, 2014

My A2 macro students are now looking at some fascinating macro policy challenges facing a range of countries. This week they choose one from two set assignments. 

The first offers them an opportunity to analyse some of the causes of high inflation in India and consider how much of a threat it is to India's continued growth and development. 

A second assignment looks at Abenomics in Japan and whether it can lift the Japanese economy out of over two decades of slow growth and deflationary pressures. I am hoping that there will be some interesting insights allied to good A2 macro analysis as students crack on with their independent research. 

Download the assignment sheet below and I have added in some suggestions for further reading on the two topics

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The ‘output gap’: another piece of economic mumbo-jumbo

Thursday, January 23, 2014

The concept of the 'output gap’ is central to mainstream macroeconomics. It is not merely of academic interest. 

The Office for Budget Responsibility (OBR) has a specific requirement to estimate the output gap, which it defines formally as “the difference between the current level of activity in the economy and the potential level it could sustain while keeping inflation stable”. 

The output gap is a key consideration for central banks around the world including the Bank of England. If output is well below its potential, nominal interest rates should be kept low, to try to stimulate the economy. And a large output gap should keep cost and price inflation low. Prices are hard to put up in a depressed economy. 

See: http://www.bbc.co.uk/news/business-23145755 for a discussion of the changes made to the policy of forward guidance.

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Unit 4 Macro: Latvia Joins the Euro

Monday, January 20, 2014

On the 1st January 2014, Latvia became the 18th country to enter the single currency Euro area, joining Estonia who adopted the Euro four years ago. How will it affect the economy? Are the forecast benefits greater than the costs and risks? Here are some resources on the issue:

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Unit 4 Macro: Tough Choices for a Troubled Euro

Thursday, December 12, 2013

The euro should either be dismantled in an orderly way or the leading members should do what is necessary to make it growth- and employment-friendly as fast as possible. That is the central message of Nobel laureate Professor Sir Christopher Pissarides, when he delivers his inaugural lecture as the first Regius Professor of Economics at the London School of Economics.

Professor Pissarides was once a passionate believer in the benefits of European monetary union. He now thinks that either the euro should be dismantled or the direction of economic policy dramatically reversed so as to promote growth and jobs and avoid creating a lost generation of educated young people.

‘We will get nowhere plodding along with the current line of ad hoc decision-making and inconsistent debt-relief policies’, he will say. ‘The policies pursued now to steady the euro are costing Europe jobs and they are creating a lost generation of educated young people. This is not what the founding fathers promised.’

The co-recipient of the 2010 Nobel Memorial Prize in Economic Sciences will outline what needs to be done to bring Europe back to life:

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Too little inflation can be a problem too…

Wednesday, December 04, 2013

We’re very used to the idea of monitoring inflation, measuring it, and worrying about the consequences of it. But like any good answer that requires an element of balance, it’s worth noting that too little inflation can be a problem too.

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Prominent Keynesian (and others) add to the ‘post- Crash Economics’ debate

Sunday, November 24, 2013

Getting out of our slump is challenging economics policy makers.

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econoMAX - How does Quantitative Easing affect the Exchange Rate

Thursday, November 07, 2013

Although A level specifications have not changed for some years the introduction of quantitative easing (QE) programmes by central banks such as the Bank of England and the Federal Reserve in the US has meant that A level students have had to become familiar with it as an instrument of monetary policy. With short term interest rates almost at zero and banks still very risk averse, the monetary authorities have in recent years embarked on QE in an attempt to inject liquidity into the financial system to boost lending in recession hit economies.

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Unit 2 Macro: Aggregate Demand

Monday, October 21, 2013

This is an updated revision presentation on aggregate demand in the UK economy - designed for AS macro students. Revision notes on aggregate demand can be found here. Click here to take a revision quiz on aggregate demand.

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Monetary Policy less powerful in recessions

Wednesday, October 09, 2013

Changes to key interest rates by central banks have a significant impact on economic activity during periods when the economy is expanding. Unfortunately, they seem to have virtually no effect during recessions – the time when the stimulus of monetary policy is most needed.

These are the central findings of research by Professor Silvana Tenreyro and Gregory Thwaites, published by the new Centre for Macroeconomics at the London School of Economics.

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econoMAX - Forward Guidance is No Panacea

Tuesday, October 08, 2013

Robert Nutter examines the use of "forward guidance" as a relatively new part of monetary policy in this recent article from econoMAX:

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Lesson Activity - Macro Policies Under the Spotlight in the Focus Circle

Wednesday, September 11, 2013

The Focus Circle is quickly becoming one of our most popular teaching & learning activities and here is a version that comes ready-made for a lesson macroeconomic policy.

In the Focus Circle, students are shown up to 4 topic areas (categories) inside. Around the Focus Circle are up to 18 words/ phrases which belong to one or more of the different categories. Students select 1 of the topic areas and decide which of the key words/ phrases belong inside the Focus Circle (words that are specifically related to that topic area).

So, is currency intervention a supply-side policy? Is "forward guidance" part of fiscal or monetary policy? Can your students define the words or phrases they select? Can they provide an example to back-up their selection.

The possibilities for an engaging and effective lesson are endless...

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Paul Ormerod: UK Economy - we could learn from the US on austerity

Thursday, August 29, 2013

SOME people are never satisfied! The evidence is mounting that the UK economy is now on the path to recovery. But to those who denied the possibility of any economic revival at all under the policies of “austerity”, this is simply not good enough. It is the wrong kind of recovery, they say. Fuelled by debt-based personal spending, unsustainable house prices, another crash, the doom-mongering litany more or less writes itself.

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Paul Ormerod: Zero hours contracts for the Monetary Policy Committee!

Thursday, August 15, 2013

The new Governor of the Bank of England, Mark Carney, said last week that interest rates will not be raised until unemployment falls below 7 per cent, a process he thinks will take three years. The battle of Austerlitz in 1805 was one of Napoleon’s greatest victories, leading to his complete domination of Continental Europe. In the aftermath, the Prime Minister, Pitt, famously pronounced ‘Roll up that map of Europe, it will not be wanted these next ten years’.

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UK Economy: Carney Provides Forward Guidance on Interest Rates

Wednesday, August 07, 2013

The Governor of the Bank of England has announced a change in the handling of monetary policy for the UK economy. Although the inflation target remains the same (CPI inflation of 2%) and the Bank remains committed to maintaining price stability as their main macroeconomic objective, they have decided to introduce forward guidance in the setting of policy interest rates. This takes the Bank of England closer to the approach to setting interest rates taken by the United States Federal Reserve.

Download this chart

BoE_Forward_Guidance.pptx

What is forward guidance?

Forward guidance means that interest rates will stay at their historic low level of 0.5 per cent and monetary policy in general will remain expansionary until the unemployment falls below seven per cent. More here from the BBC news website.

However, that link could be put aside if the inflation rate threatens to rise above 2.5% in the medium term. Another wind-check to this system is that if the Financial Policy Committee judges that the UK economy is in danger of experiencing another credit boom then the Monetary Policy Committee will also re-visit their decisions on interest rates.

According to Ed Conway from Sky News "The UK inflation target remains in place - in theory - but in practice it has become significantly less important." Developments in the labour market and real output growth are likely to become more significant in helping to shape the future path of policy interest rates and whether monetary policy is expansionary, contractionary or neutral in its effects on the wider economy.

Sky news - Forward Guidance, a Monetary Policy Gamble

Anatole Kaletsky (Reuters): Carney at the Bank of England confirms the end of monetarism and return of neo-Keynesian demand management

With the unemployment rate currently at 7.8% of the labour force and predictions from the Bank that the jobless rate may take between two to three years to drop to the 7% way-marker, we can expect the period of exceptionally low monetary policy interest rates to remain with us well into 2015 and possibly 2016. This is not good news for savers struggling to find any kind of interest rate that at least matches the current rate of CPI inflation.

Governor Carney's response to this is to argue that what the economy needs most is a return to growth - in his words an economy growing sufficiently quickly to achieve "escape velocity". The current recovery has been the weakest for decades and real GDP remains below the peak achieved before the Global Financial Crisis took hold.

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Recovery and summer are in the air, but doom mongers still lurk

Friday, August 02, 2013

The GDP growth figures announced last week for the second quarter of this year have sent most people away on their holidays in a cheerier mood than last year. The recent weather has certainly helped. But gloomy clouds may hover over the exclusive settings of Tuscan villas and beach houses in Martha’s Vineyard, where bien pensant commentators and so-called Keynesian economists ritually gather for the summer.

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Paul Ormerod: No free lunch.  Defaults today mean less jam tomorrow

Thursday, July 25, 2013

Potential defaults in the Euro zone have been in the news again. In Portugal, the ruling coalition parties and the main opposition Socialists have been unable to agree on a European Union-led bailout plan after days of talks. Yields on the country’s 10 year bonds have approached 7 per cent, compared to the 1.5 per cent in Germany. There has been some improvement this week on the news that an early general election has been avoided, but yields still remain over 6 per cent.

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Unit 4 Macro: John Kay on Quantitative Easing

Monday, July 22, 2013

John Kay looks at the lack of evidence for the effect of quantitative easing as a driver for economic growth. He is excellent on some of paradoxes of the impact of QE on the macroeconomy of countries where it has been tried.

The main effect of QE according to Kay is to boost asset prices and the one certain consequence of this is that those who have assets - such as homeowners and stocks and shares - will benefit.

We strongly recommend that ambitious students take a look at some of the other articles written by John Kay - check out his web site by clicking this link

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Unit 2 Macro: IMF Report on UK Economy calls for Increased Investment

Thursday, July 18, 2013

In its annual assessment of the U.K. economy, the IMF called on the UK to invest in skills and infrastructure and increase banking sector competition in order to foster growth and achieve a sustainable recovery.

The report can be found here and contains plenty of relevant background information on the current situation facing the UK - here is a selection of quotes from their summary

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Unit 4 Macro: Time Running Out for the Euro

Sunday, July 14, 2013

Cambridge economist Mike Kitson argues here that the Euro Zone will eventually collapse after a number of difficult years. As pressure again mounts in the Eurozone leading Cambridge economist Michael Kitson says the euro might 'stagger on' for a few more years but eventually it will disintegrate. Policy makers have been papering over the cracks in the Eurozone and causing major problems for many member countries which are trapped by tight fiscal rules

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Unit 2 Macro: The Rise of Bitcoin

Monday, July 08, 2013

Here is an interesting report on the rise of digital currencies. Bitcoin, a decentralised, virtual currency, is gaining increasing interest from investors and entrepreneurs. The currency is not controlled by a government or a central bank and is traded on the internet.

In this short news video, the FT's Maija Palmer reports from a Bitcoin conference on where the currency is heading including the use as a person to person medium of exchange. In technology savvy cities in the USA, there is no a bitcoin ATM that allows people to swap standard currencies for bitcoin credits. Will retailers latch on to the new currency? 

Regulators seem wary about what Bitcoin is and how it might be used, fearing for example the use that might be made of anonymous and untraceable digital currencies for illegal money laundering by terrorist organisations.



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Unit 4 Macro: King’s 10 Years at the Bank of England

Saturday, June 22, 2013

With the help of animators from Cognitive Media, the BBC's Stephanie Flanders considers the record of Sir Mervyn King  who has been the Governor of the Bank of England throughout the financial crisis - click here

The Guardian's editorial on his tenure at the Bank can be found here

Paul Ormerod: Trouble at the Co-op Bank

Wednesday, June 12, 2013

IT’S not all fun and games at the Co-op Bank. Just over a month ago, the bank was serious about acquiring 632 branches from Lloyds. Now its debt has been downgraded six notches to junk status, and veteran HSBC banker Niall Booker has been brought in as replacement chief executive after Barry Tootell resigned.

Inquests have begun, and it is only human nature to look for a scapegoat other than the large amount lost on the bank’s new IT system. Management has delved into its hat, and, hey presto, here is the old Britannia Building Society, merged with the Co-op in 2009. It is, we are solemnly told, the bad debts on the Britannia’s commercial property portfolio which are the problem.

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Chains of argument for analysis - linking inflation figures to the exchange rate

Tuesday, May 21, 2013

The headline on the BBC website this afternoon is "Pound falls after surprise dip in inflation". It is important that students taking the A2 economics papers next month are able to give current figures for the macroeconomic indicators, so they should take note of today's CPI inflation figure for April, which is down to 2.4% from 2.8%.

They should also note the reasons - weaker commodity prices and oil in particular, with petrol and diesel prices contributing half of the drop in inflation. Slow earnings growth is also expected to contribute to the outlook for inflation remaining closer to the 2% target than it has been since the end of 2009 - which also suggests that the remaining inflation is not due to demand-pull pressures, but to cost-push.

But can they explain why and how the announcement of a lower rate of inflation has led to a weaker pound? It is not enough, in an essay, simply to state that this cause-and-effect has taken place; in order to gain good marks for analysis, it is essential to trace the process by which one leads to the other. This article from Reuters should give the clues that they need to fill the gaps on the table below ...


UK Economy: Has High Inflation Damaged the Economy?

What are the costs of a higher average rate of inflation? With CPI inflation staying persistently above target over much of the last six years, to what extent has this undermined UK macro performance? Or has a little extra inflation and an ultra-loose monetary policy (0.5% base rates and £375bn of quantitative easing) been a price worth paying to avoid an ever deeper recession and depression?

"The high retail price inflation seen in recent years has outpaced earnings and eaten into household spending power. Ongoing relatively high inflation will continue to impact consumer spending, especially with unemployment unlikely to fall quickly. The effect on consumer spending will vary between different demographic groups and product sectors, causing companies to revisit their offerings."

Here is the link to the Ernst and Young report - click here

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UK Economy Revision - Policies to Reduce Unemployment

Friday, May 03, 2013

Here is a streamed (and downloadable) presentation on policies to cut unemployment in the UK economy.

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Unit 4 Macro: Credit Constraints and the Economic Recovery

The credit crunch is widely regarded to have started during 2007 and is certainly not over yet! Indeed the period of severe constraints on credit availability and rising borrowing costs most notably for smaller businesses has now lasted longer than the Second World War. It represents a major barrier to sustained and hopefully more robust economic recovery. This short streamed presentation looks at the importance of the credit squeeze on the UK economy. 

A number of new government policy initiatives have been introduced but doubts persist about their effectiveness. Underneath the surface new forms of business finance are taking shape including peer to peer lending and the rise of retail bonds issued by a number of businesses.

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Unit 2 and Unit 4 Macro: Economic Simulation - the Government Game

Sunday, April 14, 2013

Introducing The Government Game - tutor2u's new Economic Simulation game that is just perfect for revising for AS & A2 Macroeconomic Policy topics!

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Unit 4 Macro: Getting Back to Growth - Lessons from the 1930s

Monday, April 08, 2013


How Britain escaped from the travails of the Great Depression and achieved 4% a year growth in the years from 1933 to 1937 has important lessons for today’s policy-makers, according to research by Professor Nicholas Crafts, presented at the Economic History Society’s 2013 annual conference. 

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