ECB keeps rates unchanged at 0.75%

Tue, 12 Mar 2013 10:07:44 -0400

http://www.bbc.co.uk/news/business-21699928

This article outlines that the European Central Bank has kept the Eurozone interest rates unchanged for 8 months. They discussed cutting them, but the agreement was to leave them as they were. This was because they are already at their current record low and they are therefore already increasing spending and investments and decreasing saving. As saving is a withdrawal from the circular flow of income and investments are an injection, by keeping low interest rates they are reducing withdrawals, increasing injections and subsequently increasing the circular flow of income. This increased spending, otherwise expressed as consumption, leads to an increased Aggregate demand and a shift of the curve AD1 to the right to AD2. Aggregate demand is the total amount of goods and services demanded in the economy at a given time and price level. The change in the monetary policy, which is the regulation of the money supply and interest rates by a central bank, – i.e the lowered interest rates, means that the incentive to save is lowered and therefore encouraging consumption. Consumption is the total amount of money that is spent by households and firms on durable goods such as electronics and cars, non-durable goods like food and cosmetics, and services such as insurance. Its main determinant is the level of disposable income, otherwise known as wealth. There will be an increase in marginal propensity to consume (MPC) if there is a higher level of disposable income. This increase can also shift the AD1 curve to the right. Through the use of fiscal policy, the government policies using tax rates and spending programs, this amount of disposable income can be reduced. Interest rates previously spoken about are another of consumption level’s determinants. A further determinant is the consumer confidence. If unemployment levels fall then consumers are less afraid that they will lose their jobs, and therefore more confident to borrow money and this leads to an increase in consumer spending.

We are also told in this article that the latest figures for inflation show a fall from 2.2% to 2%. This fall in inflation means that the prices are still rising but at a slower rate. Inflation is a general increase in prices and fall in the purchasing value of money. This low inflation is beneficial for the economy. It encourages consumers to buy goods and services and essentially spend. Delaying will mean that they will have to pay more for the same product. Low inflation also makes it more appealing to borrow money, since interest rates are usually also low during periods of low inflation; which in this article is true. Maintaining low inflation is therefore an important aim for governments and central banks because of the economic benefits. This inflation has an effect on many stakeholders. Those saving money lose out as they earn little interest. More jobs are available though, due to increased demand and a need for increased labour. Low inflation is beneficial for businesses as they can invest at a low interest rate. Low interest rates combined with low inflation is therefore very effective for the economy.

Commentary on http://www.bbc.co.uk/news/world-europe-guernsey-20874316

Mon, 04 Feb 2013 16:04:13 -0500

This article outlines that Guernsey prison has put a ban on smoking within prison grounds. This is to prevent the negative effects of passive smoking. This passive smoking is the damaging effects to a third party due to an individual’s actions, economically known as a negative externality. This means that there is an external cost that must be added to the private cost of the producer or consumer to reflect the full cost to society. This is shown in diagram 1. With this negative consumption externality, the Marginal Private Benefit (MPB) is not reflecting the social benefit and thus the Marginal Social Benefit (MSB) lies below MPB. The vertical difference between MPB and MSB is the negative externality. The optimal level of consumption is where MSB=MSC i.e. Q. However the negative externality is being ignored and thus there is an over consumption of the goods at Q1. Due to this externality, market failure occurs and this means that there is an inefficient allocation of society’s resources. The government will act to reduce or eliminate the negative externality with the use of a ban.

Although this ban is within a small proximity, it would still have an effect upon the tobacco industry in terms of shareholders and employments. The ban would be highly beneficial to the environment and to society; it would reduce healthcare costs considerably. Governments however make a lot of revenue by taxing cigarettes, which have price inelastic demand, because they are habit forming. It must also be remembered that governments need votes and in the long run smokers are not likely to vote for a government that bans smoking.

The article also mentions that the use of electronic cigarettes is allowed as a substitute. This causes a shift of the demand curve for these electronic cigarettes. Shifts in the demand curve imply that the original demand relationship has changed, meaning that quantity demand is affected by a factor other than price. In this case it is because electronic cigarettes are the only type available for consumption. This substitute good is therefore increasingly demanded. As shown on Diagram 2, the original equilibrium of electronic cigarettes is at PQ. Increased demand results in a rightward shift of the demand curve. This results in an increased price and increased quantity output. The new equilibrium is set at P1Q1.

The increased demand causes a need for increased supply, meaning more jobs may be available in that industry. The more jobs provided may be to the advantage of some individuals, but is at the cost of those in the tobacco industry who face unemployment. Increased demand of electronic cigarettes is due to the decrease in demand of tobacco cigarettes, owing to their unattainability. This decrease in demand also has an effect on the tobacco industry in terms of shareholders and employments, but due to the small scale of the decrease, it’s a minimal effect. Therefore the ban would be effective but its negative effects outweigh the positive and wouldn’t be worth it in the long term.

Economics

ECB keeps rates unchanged at 0.75%

Commentary on http://www.bbc.co.uk/news/world-europe-guernsey-20874316