[dan94adibi]

So this is the same as money supply right? If so it would be a monetary policy controlled by MPC. But how would it affect the AD and inflation rates?
Thanks you.

[Amos36]

Hey dan94adibi, if that is your real name...

You're right in saying that Quantative Easing (QE) is a tool of the Monetary Policy Committee (MPC) of the Bank of England (BOE). By expanding a quantative easing programme (currently £325bn) you would increase Aggregate Demand (AD).

If you assume the neoclassical view, this increase in the money supply would not result in an increase in output as the Long-Run Aggregate Supply (LRAS) curve is vertical. The only effect of increasing AD for a neoclassical economist is to increase the Price Level (PL) of the economy, in other words, to cause demand-pull inflation.

If you assume the Keynesian view, you assume that at low levels of employment the AS curve is horizontal. So if you increase AD when the economy is already suffering from demand-deficient (cyclical) unemployment, then you will see an increase in output and employment. Only nearing Full Employment (YF) would you see an increase in the PL of the economy, or demand-pull inflation.

Inflation is currently at 3.0% CPI per annum.

It is quite obvious to say that the Governor of the BOE (Mervyn King) is not a monetarist (a type of neoclassical economist) as he currently has an expansionist monetary policy of low interest rates (0.5%) and quantative easing (£325bn).

Personally, I be a neo-Keynesian economist and a Socialist, but you sadly don't get many of them nowadays. xD

Hope that helps buddy?

Amos36

[dan94adibi]

(Original post by Amos36)
Hey dan94adibi, if that is your real name... :P

You're right in saying that Quantative Easing (QE) is a tool of the Monetary Policy Committee (MPC) of the Bank of England (BOE). By expanding a quantative easing programme (currently £325bn) you would increase Aggregate Demand (AD).

If you assume the neoclassical view, this increase in the money supply would not result in an increase in output as the Long-Run Aggregate Supply (LRAS) curve is vertical. The only effect of increasing AD for a neoclassical economist is to increase the Price Level (PL) of the economy, in other words, to cause demand-pull inflation.

If you assume the Keynesian view, you assume that at low levels of employment the AS curve is horizontal. So if you increase AD when the economy is already suffering from demand-deficient (cyclical) unemployment, then you will see an increase in output and employment. Only nearing Full Employment (YF) would you see an increase in the PL of the economy, or demand-pull inflation.

Inflation is currently at 3.0% CPI per annum.

It is quite obvious to say that the Governor of the BOE (Mervyn King) is not a monetarist (a type of neoclassical economist) as he currently has an expansionist monetary policy of low interest rates (0.5%) and quantative easing (£325bn).

Personally, I be a neo-Keynesian economist and a Socialist, but you sadly don't get many of them nowadays. xD

Hope that helps buddy?

Amos36

You can call me Dan
Very well explained mate.
In theory this would lead to higher inflation right? If the Target is 2% (+-1%) Why would they want to such a thing. Plus if growth is really their main objective why would they increase VAT from 17.5% to 20%. Doesn't that just decrease consumption. Can you please explain Government bonds to me too please oh and what is your view on the new George Osborne budget and the 50P tax.
Cheers buddy.

[Amos36]

(Original post by dan94adibi)
You can call me Dan
Very well explained mate.
In theory this would lead to higher inflation right? If the Target is 2% (+-1%) Why would they want to such a thing. Plus if growth is really their main objective why would they increase VAT from 17.5% to 20%. Doesn't that just decrease consumption. Can you please explain Government bonds to me too please oh and what is your view on the new George Osborne budget and the 50P tax.
Cheers buddy.

Hey there Dan!

Good questions! In terms of why Mervyn King is pursuing expansionary monetary policy at the moment, remember that there is almost always a conflict of objectives. Remember that usually sustainable economic growth and minimal unemployment frequently come at the cost of high inflation and a worsening situation with the BOP CA/C.

The reason why inflation is so high at the moment is because of cost-push factors (such as rising oil prices and increasing wage rates in the economy). Considering that there is currently a UK recession (two last quarters of GDP growth were -0.3%), there is no chance of demand-pull inflation in the economy.

Because of contractionary fiscal policy by George Osborne, Mervyn King has decided to pursue expansionary monetary policy in order to cushion the blow of severe public sector cuts to try and combat the UK budget deficit of £126bn per annum.

Remember that the BOE is completely independent of the Chancellor. The BOE is responsible for monetary policy and the Chancellor, Treasury and OBR are responsible for fiscal policy. The decision to raise VAT from 17.5% to 20% was a fiscal decision by George Osborne.

The Conservatives traditionally favour indirect taxes (e.g. VAT) because they are regressive and hit the poorest income groups hardest and the current Tory cabinet is made up almost exclusively of multi-millionaires who are only concerned about themselves and their garishly large mansions in the country.

They may blame the Labour government perhaps rightly for only taking a short-term approach to the economy, but the Conservatives are no better. Their economic and electoral strategy is simple: get all the austerity out the way in the first few years and prolong the impact of the global economic slowdown and then when the economy picks up naturally because of the trade cycle by 2015, they'll try and take all the credit for it.

Oh, sorry... that's me being biased again. Whoops...

Amos36

[Flinders87]

We are in a sticky situation of being in a huge amount of debt and also in a recession. The government is trying to stimulate growth with QE by keeping the economy liquid so banks don't stop lending, but also by using various measures to reduce our debt. Like increased indirect tax.

Government bonds, more commonly known as gilts, they are effectively a loan to the government. An investor can buy a gilt for eg £100. That means the investor will give the government £100, on the promise that he will get that £100 back after a predetermined amount of time. for eg 5 years. The reason people buy gilts is because the government will promise to pay interest on the money that has been leant to the government each year.

So...

An investor buys 1 gilt for £100, the government will agree to pay him 5% a year, for 5 years, and at the end of the time period the government will give back the £100. So the investor will make a total of £25 profit over the 5 years.

[Amos36]

(Original post by Flinders87)
We are in a sticky situation of being in a huge amount of debt and also in a recession. The government is trying to stimulate growth with QE by keeping the economy liquid so banks don't stop lending, but also by using various measures to reduce our debt. Like increased indirect tax.

Government bonds, more commonly known as gilts, they are effectively a loan to the government. An investor can buy a gilt for eg £100. That means the investor will give the government £100, on the promise that he will get that £100 back after a predetermined amount of time. for eg 5 years. The reason people buy gilts is because the government will promise to pay interest on the money that has been leant to the government each year.

So...

An investor buys 1 gilt for £100, the government will agree to pay him 5% a year, for 5 years, and at the end of the time period the government will give back the £100. So the investor will make a total of £25 profit over the 5 years.

Nice...

[Flinders87]

Amos. I like your politician bashing.

[Amos36]

(Original post by Flinders87)
Amos. I like your politician bashing.

No worries; it's a pleasure.

[dan94adibi]

(Original post by Amos36)
Hey there Dan!

Good questions! In terms of why Mervyn King is pursuing expansionary monetary policy at the moment, remember that there is almost always a conflict of objectives. Remember that usually sustainable economic growth and minimal unemployment frequently come at the cost of high inflation and a worsening situation with the BOP CA/C.

The reason why inflation is so high at the moment is because of cost-push factors (such as rising oil prices and increasing wage rates in the economy). Considering that there is currently a UK recession (two last quarters of GDP growth were -0.3%), there is no chance of demand-pull inflation in the economy.

Because of contractionary fiscal policy by George Osborne, Mervyn King has decided to pursue expansionary monetary policy in order to cushion the blow of severe public sector cuts to try and combat the UK budget deficit of £126bn per annum.

Remember that the BOE is completely independent of the Chancellor. The BOE is responsible for monetary policy and the Chancellor, Treasury and OBR are responsible for fiscal policy. The decision to raise VAT from 17.5% to 20% was a fiscal decision by George Osborne.

The Conservatives traditionally favour indirect taxes (e.g. VAT) because they are regressive and hit the poorest income groups hardest and the current Tory cabinet is made up almost exclusively of multi-millionaires who are only concerned about themselves and their garishly large mansions in the country.

They may blame the Labour government perhaps rightly for only taking a short-term approach to the economy, but the Conservatives are no better. Their economic and electoral strategy is simple: get all the austerity out the way in the first few years and prolong the impact of the global economic slowdown and then when the economy picks up naturally because of the trade cycle by 2015, they'll try and take all the credit for it.

Oh, sorry... that's me being biased again. Whoops...

Amos36

Thanks for your explanation. This is the reason why I love economics. You understand what these politicians are doing to the country.

[dan94adibi]

(Original post by Flinders87)
We are in a sticky situation of being in a huge amount of debt and also in a recession. The government is trying to stimulate growth with QE by keeping the economy liquid so banks don't stop lending, but also by using various measures to reduce our debt. Like increased indirect tax.

Government bonds, more commonly known as gilts, they are effectively a loan to the government. An investor can buy a gilt for eg £100. That means the investor will give the government £100, on the promise that he will get that £100 back after a predetermined amount of time. for eg 5 years. The reason people buy gilts is because the government will promise to pay interest on the money that has been leant to the government each year.

So...

An investor buys 1 gilt for £100, the government will agree to pay him 5% a year, for 5 years, and at the end of the time period the government will give back the £100. So the investor will make a total of £25 profit over the 5 years.

Ok so what happens if the Government is unable to pay the investors? and do the investors have to be domestic residents? Does the government bonds also affect the national debt?
And with QE. As money supply is increasing wouldn't that decrease the value of pounds and make it harder for UK firms to be internationally competitive? But on the other hand it would improve our exports and current account.

[dan94adibi]

(Original post by Amos36)
Hey there Dan!

Good questions! In terms of why Mervyn King is pursuing expansionary monetary policy at the moment, remember that there is almost always a conflict of objectives. Remember that usually sustainable economic growth and minimal unemployment frequently come at the cost of high inflation and a worsening situation with the BOP CA/C.

The reason why inflation is so high at the moment is because of cost-push factors (such as rising oil prices and increasing wage rates in the economy). Considering that there is currently a UK recession (two last quarters of GDP growth were -0.3%), there is no chance of demand-pull inflation in the economy.

Because of contractionary fiscal policy by George Osborne, Mervyn King has decided to pursue expansionary monetary policy in order to cushion the blow of severe public sector cuts to try and combat the UK budget deficit of £126bn per annum.

Remember that the BOE is completely independent of the Chancellor. The BOE is responsible for monetary policy and the Chancellor, Treasury and OBR are responsible for fiscal policy. The decision to raise VAT from 17.5% to 20% was a fiscal decision by George Osborne.

The Conservatives traditionally favour indirect taxes (e.g. VAT) because they are regressive and hit the poorest income groups hardest and the current Tory cabinet is made up almost exclusively of multi-millionaires who are only concerned about themselves and their garishly large mansions in the country.

They may blame the Labour government perhaps rightly for only taking a short-term approach to the economy, but the Conservatives are no better. Their economic and electoral strategy is simple: get all the austerity out the way in the first few years and prolong the impact of the global economic slowdown and then when the economy picks up naturally because of the trade cycle by 2015, they'll try and take all the credit for it.

Oh, sorry... that's me being biased again. Whoops...

Amos36

Are you voting for the Labour government during the next election. George Osborn does seem to have it wrong I must admit.

[Amos36]

(Original post by dan94adibi)
Are you voting for the Labour government during the next election. George Osborn does seem to have it wrong I must admit.

It will be the first election when I will be able to vote; hurrah! Haha, in case you hadn't guessed I study Government and Politics (Edexcel), so I've been wanting to vote for quite some time.

I am most likely to vote Labour, but in an area where a Liberal Democrat or Green candidate is quite likely to get in I would probably vote LD/Green due to FPTP, but only if they aren't an "Orange-Book" Liberal and a tuition fees traitor, i.e. Clegg, Huhne, Danny Alexander. I mean proper old-school Liberals on the left wing following after Lloyd George and early Winston Churchill type ideology.

Of course Labour made mistakes whilst in government, but at least most of them had their hearts in the right place most of the time. Hence why I'm not a fanatic Labour supporter, but I am very much a left-winger. It's up to you to judge how left-wing I am.

[Flinders87]

Gilts are seen as generally very safe investments (with some exceptions), as governments like the UK can always print more money to pay off debt (kind of why we have such a huge national debt). Our credit rating is still AAA which means we are still in a very manageable position with our debt and we are a very safe investment (meaning we will pay back money that is leant to us). You do not have to be a British citizen to buy a British gilt. #

In the case a government is unable to afford the payments, it must declare itself bankrupt and will need a bailout, Greece is a current example of an economy going tits up due to unmanageable debt. Credit rating of Greece is CCC which is also known as 'junk' AKA the gilts are worthless and seen as very high risk gilts.

Gilts are part of the national debt, because they are technically loans the country has taken.

QE does dilute the value of the currency, because there is new money entering the economic cycle. This should drive down the value of the £ and this means our exports will be more competitive. However QE does create inflationary pressure...




Why vote when the choice is between a turd sandwich and a giant douche?

[Amos36]

(Original post by Flinders87)
Why vote when the choice is between a turd sandwich and a giant douche?

I understand your views, especially what with the countless wasted votes associated with the First-Past-The-Post (FPTP) voting system, but I disagree with you. I think that it is my right and duty to vote. Considering how lucky we all are to live in a democratic country, regardless of what we think of our politicians, I would never choose not to vote.

Of course I acknowledge that no government is perfect but I do believe that some governments are preferable to others.

Then again, ye have a right not to vote and I wouldn't change that for the world, except by means of my persuasive skills and undeniable charm. :L

[Flinders87]

Your words are wise...yet i shall choose to ignore the advice out of shear ignorance and disinterest in politics.

[Amos36]

(Original post by Flinders87)
Your words are wise...yet i shall choose to ignore the advice out of shear ignorance and disinterest in politics.

Yet you seem to have an interest in economics? For me the two loves go hand in hand like horse and carriage or love and marriage... if we ignore arranged marriages and the shamefully high divorce and family breakup rates.

Just out of curiosity - what're you interested in doing in the future? Also, how would you describe yourself economically-speaking if your self-description politically-speaking is to be taken as "apathetic"?

[Flinders87]

Well, i work in Financial Services and i am hoping my career is going to continue down the route of finance for the next 45 years. I have a keen interest in investing via shares and over the last year i've sort of been introduced to the world of economics and all its wonderful concepts...understanding economics, i am hoping, will give me greater clarity and understanding when investing and also benefit my career for the long term.

I started learning the A level course in March, i'm not sure if i have developed my understanding to the point where i side with a particular view of economical thinking.

I understand that politics goes well with economics. My gripe about politics, or more accurately put, politicians, is that government parties top priority is to remain in power and not economic stability.

EDIT: Typo

[dan94adibi]

(Original post by Flinders87)
Gilts are seen as generally very safe investments (with some exceptions), as governments like the UK can always print more money to pay off debt (kind of why we have such a huge national debt). Our credit rating is still AAA which means we are still in a very manageable position with our debt and we are a very safe investment (meaning we will pay back money that is leant to us). You do not have to be a British citizen to buy a British gilt. #

In the case a government is unable to afford the payments, it must declare itself bankrupt and will need a bailout, Greece is a current example of an economy going tits up due to unmanageable debt. Credit rating of Greece is CCC which is also known as 'junk' AKA the gilts are worthless and seen as very high risk gilts.

Gilts are part of the national debt, because they are technically loans the country has taken.

QE does dilute the value of the currency, because there is new money entering the economic cycle. This should drive down the value of the £ and this means our exports will be more competitive. However QE does create inflationary pressure...




Why vote when the choice is between a turd sandwich and a giant douche?

Thank you so much for making this clear. Hopefully the exam tomorrow is nice and smooth.
Cheers!

[sweetascandy]

(Original post by Amos36)
x

You sound like you know your stuff, could you please tell me exactly what QE is?
I've been told too many times that it's NOT increasing the money supply, but I get confused with the whole bonds stuff :l
Many thanks!

[Amos36]

(Original post by sweetascandy)
You sound like you know your stuff, could you please tell me exactly what QE is?
I've been told too many times that it's NOT increasing the money supply, but I get confused with the whole bonds stuff :l
Many thanks!

I think the BBC explains it better than I could:

http://www.bbc.co.uk/news/business-15198789

I would say that Quantative Easing (QE) is the process where the Central Bank (e.g. BOE) prints more money to purchase financial assets. This essentially is the same as increasing the rate of growth of the money supply, or at least that's how I understand it unless someone is good enough to correct me.

In any case, to a monetarist, QE will only cause dreaded demand-pull inflation through an increase in Aggregate Demand (AD). To our beloved Keynesian friends, this would only happen if the economy is approaching Full Employment (YF) and the UK currently has 8.2% unemployment rate. If the economy is nowhere near YF, then you will get only an increase in output in the short-run.

Good luck all for tomorrow - let's hope AQA doesn't screw us over with Macro, seeing as I did badly at Micro and really need that A...