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    (Original post by zxh800)
    Right thanks. I'm an A-level student but I'm just curious about this topic. What has me a little confused here is the relationship between interest rates and the money supply. Which determines which? Does a change in interest rates shift the money supply? Or does a shift in the money supply impact interest rates? In the scenario you mention, what would happen if the interest rates were kept constant anyway by the Bank of England even with the rise in the demand for money and no shift in the money supply? Also, how can the money supply be controlled? if at all.
    The money supply determines interest rates. The Bank of England controls interest rates by adjusting the money supply to keep the interest rate at the rate it wants, think of the Bank of England basically as setting the market rate by adjusting the money supply appropriately. Obviously individual lenders will set their own rates to lend at, but the baseline market rate will be set by the Bank of England. If there is no shift in the money supply and demand for money rises then interest rates will naturally rise because there will be less money available and so there will be more of a premium on holding money, hence the price of having money now (rather than saving for later) will rise.
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    (Original post by MagicNMedicine)
    The money supply determines interest rates. The Bank of England controls interest rates by adjusting the money supply to keep the interest rate at the rate it wants, think of the Bank of England basically as setting the market rate by adjusting the money supply appropriately. Obviously individual lenders will set their own rates to lend at, but the baseline market rate will be set by the Bank of England. If there is no shift in the money supply and demand for money rises then interest rates will naturally rise because there will be less money available and so there will be more of a premium on holding money, hence the price of having money now (rather than saving for later) will rise.
    Oh I see, I'm starting to understand now.

    What kind of things can the BoE do to influence the money supply? Quantitative easing is one of the methods right?
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    (Original post by zxh800)
    Oh I see, I'm starting to understand now.

    What kind of things can the BoE do to influence the money supply? Quantitative easing is one of the methods right?
    Yes open market operations (QE is a form of this), the bank buys bonds from banks and pays for them with cash that it has printed, and holds the bonds in its vaults, this changes the composition of whats on banks balance sheets, less illiquid assets like bonds, more liquid cash, so they are more 'cashed up' and able to lend more, that increases the money supply. They can decrease the money supply by selling bonds from their vault, to banks, taking the cash from the banks, then removing that cash from circulation, so banks balance sheets have less cash and more illiquid assets like bonds.

    Other tools, they could require banks to have a higher ratio of cash reserves to cover their overall liabilities, or they could use their role as 'lender of last resort' to banks, by charging higher interest rates and/or being less willing to lend to banks when they need liquidity (cash) at short notice, this makes banks more cautious about lending and hang on to cash more.
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    I have a question "Using an AD and AS diagram, explain why an increase in AD could have no impact on the real GDP of an economy"

    I've drawn a diagram with vertical LRAS line, but I'm not sure if this is right and I'm not sure about the explanation. I think I'm just getting confused, but if anyone can help explain I'd be really grateful!
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    (Original post by sianmay)
    I have a question "Using an AD and AS diagram, explain why an increase in AD could have no impact on the real GDP of an economy"

    I've drawn a diagram with vertical LRAS line, but I'm not sure if this is right and I'm not sure about the explanation. I think I'm just getting confused, but if anyone can help explain I'd be really grateful!
    I think what they are getting at is that the increase in AD will result in an increase in the price level.

    If you were drawing an upward sloping AS curve and downward sloping AD curve, then at first (in the short run) when you increase AD, you get an increase in output and an increase in the price level. But in the long run the output level will return to its natural level, the AS curve shifts up until you end up at the original level of output but at an even higher price level. What this is saying is that the increase in AD will have a short run increase in GDP but then this increase will get cancelled out by price rises until the real effect on GDP is 0.

    The reason the LRAS is vertical is to show this effect, in the long run the short run upward sloping AS would always rise up till you were at the same level of output as you started, just with higher prices.

    What is going on here is you are increasing demand but without a corresponding increase in supply. So whilst people are demanding more, there isn't the supply capacity (workers, technology) etc to support it so it just pushes costs up and prices up as firms fight each other for the scarce resources to produce the higher level of output. Those rising prices will then cause people to be able to afford less so they demand less and you return where you started.

    I answered a question last week on the ASAD with some diagrams in, look at the second and third diagrams in this post. That is what I mean by an upward sloping (short run) AS curve shifting back up till you get to the original level output, so because the short run AS curve always does that, the long run AS curve is vertical as its along that vertical line that you will always end up.
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    (Original post by MagicNMedicine)
    I think what they are getting at is that the increase in AD will result in an increase in the price level.

    If you were drawing an upward sloping AS curve and downward sloping AD curve, then at first (in the short run) when you increase AD, you get an increase in output and an increase in the price level. But in the long run the output level will return to its natural level, the AS curve shifts up until you end up at the original level of output but at an even higher price level. What this is saying is that the increase in AD will have a short run increase in GDP but then this increase will get cancelled out by price rises until the real effect on GDP is 0.

    The reason the LRAS is vertical is to show this effect, in the long run the short run upward sloping AS would always rise up till you were at the same level of output as you started, just with higher prices.

    What is going on here is you are increasing demand but without a corresponding increase in supply. So whilst people are demanding more, there isn't the supply capacity (workers, technology) etc to support it so it just pushes costs up and prices up as firms fight each other for the scarce resources to produce the higher level of output. Those rising prices will then cause people to be able to afford less so they demand less and you return where you started.

    I answered a question last week on the ASAD with some diagrams in, look at the second and third diagrams in this post. That is what I mean by an upward sloping (short run) AS curve shifting back up till you get to the original level output, so because the short run AS curve always does that, the long run AS curve is vertical as its along that vertical line that you will always end up.
    Thank you so much! It's making more sense now haha so would this diagram answer the question? (with an explanation about how AD increases but AS doesn't, then costs increase, demand decreases etc and in the long run GDP doesn't increase)?



    Thinking about it, I'm not sure that diagram explains it, will I need to use another one too? Thanks again!!
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    (Original post by sianmay)
    Thinking about it, I'm not sure that diagram explains it, will I need to use another one too? Thanks again!!
    I would not use that diagram. That diagram looks to me more like you have started off from a recession or something, where output is below the natural level of output in the economy. The LRAS will be vertical at this natural level of output. If the supply potential in the economy increases (eg you get better technology, better skills in the economy etc, so you can produce more stuff) then the LRAS will shift to the right.

    In the short run you can have output levels that are above or below the natural level of output due to changes in demand but the price level will adjust to take you back to the natural level. So I would say as the question says how could an increase in demand have no impact on real GDP, you have to be starting from a position at the natural level of output.

    Look at those two diagrams I was referring to in the post I linked to above. You can draw upward sloping short run AS curves. When you increase AD you move up the starting AS curve so you have higher output and higher price. Then the AS curve shifts back up so you intersect the new AD curve at the original output level (at an even higher price).
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    Hi! Can somebody explaine me the business process of HMV!?
    Thank you!
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    What's the difference between L3 and L4 on OCR paper? They ask to analyse, and then analyse again? Analyse what? Comment what? You can't not to comment while analysing.
    What we get L2 and L1 for?
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    What can the competition policy do:

    can they privatise , nationalise subsidise etc?

    aqa unit 3 economics
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    (Original post by falcon pluse)
    What can the competition policy do:

    can they privatise , nationalise subsidise etc?

    aqa unit 3 economics
    The Competition comitee, to my recollection, can force firms to sell of large parts of its buisness. In the case of BAA with it's airports.

    It can also prevent large mergers and aquisitions along the horizontal intergration chain, if they believe this will give the firm a "monopoly" type power, a price setting power.

    However, to my knowledge, they cannot stop vertical integration, in the supply chain.
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    (Original post by crazycake93)
    The Competition comitee, to my recollection, can force firms to sell of large parts of its buisness. In the case of BAA with it's airports.

    It can also prevent large mergers and aquisitions along the horizontal intergration chain, if they believe this will give the firm a "monopoly" type power, a price setting power.

    However, to my knowledge, they cannot stop vertical integration, in the supply chain.
    So they can't privatise , nationalise, subsidise new entrants?
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    Why are managers salaries related to revenue rather than profit?
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    (Original post by ronaldo__9)
    Why are managers salaries related to revenue rather than profit?
    Maybe its because salaries are an expenditure, a fixed cost on the profit and loss account, so they need to generate more turnover for a higher salary? Whereas profit goes to shareholders or re-invested into the business.

    Just a guess.
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    Just a quick question, if asked for 2 possible causes of the UK's structural deficit, could I say that; one cause is the interest burden on National debt. The other being fiscal indiscipline so, the government not being careful with how much it spends? Or, is that a little too vague?
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    (c) Consider the market for a given good:
    Market demand: Qd = 60 – 3Pc
    Market supply: Qs = 2Pp – 16

    where Pc is the consumer price and Pp is the producer price. The government is
    considering imposing a lump-sum tax (T) of £6 on the good. The relationship between consumer prices, producer prices, and the lump-sum tax is given as:

    Pc = Pp + T

    (i) Find the pre-tax equilibrium price and quantity in the market. [2 marks]
    (ii) Suppose that the government now imposes the the lump-sum tax of £6. Calculate the
    new equilibrium prices and quantity in the market following the imposition of the tax.
    [4 marks]
    (iii) Calculate the tax revenue generated by the government from the tax. [2 marks]
    (iv) Draw a fully labelled diagram to illustrate your results. [5 marks]


    How the hell do I do this O_o
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    (Original post by Teaddict)
    (c) Consider the market for a given good:
    Market demand: Qd = 60 – 3Pc
    Market supply: Qs = 2Pp – 16

    where Pc is the consumer price and Pp is the producer price. The government is
    considering imposing a lump-sum tax (T) of £6 on the good. The relationship between consumer prices, producer prices, and the lump-sum tax is given as:

    Pc = Pp + T

    (i) Find the pre-tax equilibrium price and quantity in the market. [2 marks]
    (ii) Suppose that the government now imposes the the lump-sum tax of £6. Calculate the
    new equilibrium prices and quantity in the market following the imposition of the tax.
    [4 marks]
    (iii) Calculate the tax revenue generated by the government from the tax. [2 marks]
    (iv) Draw a fully labelled diagram to illustrate your results. [5 marks]


    How the hell do I do this O_o
    How far have you got so far? I'm guessing you can do at least (i) [equate supply and demand for market equilibrium] and probably also (ii) [augment one of the equations]?
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    (Original post by don'tTRIP.)
    Just a quick question, if asked for 2 possible causes of the UK's structural deficit, could I say that; one cause is the interest burden on National debt. The other being fiscal indiscipline so, the government not being careful with how much it spends? Or, is that a little too vague?
    You can say fiscal indiscipline.

    You can also say that there may have been a negative effect on the UK's potential output, as a result of the financial crisis. For instance even if you had no structural deficit beforehands, and your tax revenues were sufficient to cover spending commitments when the economy was performing at its potential level of output, what happens if that potential level of output decreases....you then get a structural deficit.
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    Can anyone help me with this? Meant to be basic but I'm stumped...

    Suppose that n firms each produce a good which is divisible in production. All of the firms have the same cost function. It costs each firm q² to produce q units of the good. The good is indivisible in consumption, and valuations are uniformly distributed on (0,1), as in the lecture material. Market demand at a price of p is therefore 1-p. Find the competitive price, output and welfare.
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    Hello,

    Ive got an exam on monday and i cannot get my head around the IRR calculation.

    Ive got questions and answers from past exam papers and this is one of them:


    IRR = 20% + 64,712 * (25-20)%
    64,712-211

    IRR = 25.02%


    I know how to get the figures of 64,712/ 64712-211 etc, but how do i carry out the calculation to get an answer of 25.02 %?

    any help would be greatly appreciated!

    thanks
 
 
 
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