Uk Economy Case Study

Improved Essays
(i) The UK economy overall has outperformed the EU economy. In light of this the UK government is of the opinion that interest rate should be raised higher to stop the run-away inflation. How should the UK government proceed in convincing the Bank of England to raise interest rates?
The overall Uk economy could be explained as the aggregate performance of various factors of production (land, labour, capital, entrepreneurship) to realize goods and services. These include total performance of both micro and macroeconomics (Marchant and snell, 1997) elements that’s drives issues of growth, inflation, and unemployment, taxation other national economic matters. It is also considering significant fields of economic general equilibrium; asymmetric
…show more content…
This is because a higher interest attracts investment from individual, business environment and other countries. The currency becomes stronger depending on the demand for it due increased interest to earn higher yield from their investment. The prices of imported products like consumer goods, food and energy will be reduced because of higher currency values. Buyers of UK government bonds and treasury certificates do strengthen the currency because foreign buyers of the country 's bonds must first buy the GBP (£) in order to complete the purchase transaction. The currency rises in value relative to other nation currencies because of the places in demand on it by …show more content…
The behavior of the UK economy when interest rate is raised? When interest rate is increased it affects the economy in several ways ,in UK interest rates will affect the UK economy both positively and negatively. Most, sectors in the economy will benefit Higher Unemployment.
When interest rate is increased the growth rate of UK economy will slow down, this is as a result of the reactionary steps businesses, consumers, even governments react to developments in the economy. Rise in interest rate lead to increase in firms cost capital, because companies will have to borrow money at a higher interest rate. This implies that firms need to work harder to generate higher profits; otherwise the high interest rate will eat away its profits. According to (McClure, 2004) ‘‘ if interest rate costs shoot up to such a level that the company has problems paying off its debts, then its survival may be threatened’’. When firms find it had to meet up with their debt obligations, banks will raise the rate they lend to investors since they may default and more risk is involved this will discourage lots of investors from investing in the UK. Also, firms will like to reduce the cost of their business inputs by either reducing its work force or by producing

Related Documents

  • Great Essays

    It occurs whenever businesses in general decide to boost their prices to increase their profit margins. This does not occur normally in recessions, but when the economy is booming and sales are strong. It might be call oligopolistic inflation because it is oligopolies that have the power to set their own prices and raise them when they decide the time is right. One can at such times read in the newspaper that business is just waiting a bit to see how soon they might raise prices. An oligopolistic firm often realises that if that if it raises prices, the other major firms in the industry will likely see it as a good to widen their profit margins too without suffering much from the few other firms in the industry  Sectorial inflation The term implies whenever any of the other three factors hits a basic industry causing inflation there and since the industry hit is a major supplier of many other industries, as for example steel is or oil is, that raises costs of the industries using say steel or oil and forces up prices there also, so inflation becomes more widespread throughout the economy, although it originated in just one basic sector.…

    • 1838 Words
    • 8 Pages
    Great Essays
  • Improved Essays

    Rolls Royce

    • 876 Words
    • 4 Pages

    So, a question about the exchange rate arises. Operating Exposure: Operating exposure emerges because currency fluctuations can change a company’s future costs and revenue as well as its operating cash flows. Currency value is affected by inflation so Rolls Royce’s costs and revenues will surely be affected. Considering this case, The Company’s operating costs were hugely incurred in sterling. Taking future into consideration, Rolls Royce’s operating costs will be gradually rising if the inflation is increasing.…

    • 876 Words
    • 4 Pages
    Improved Essays
  • Improved Essays

    “A multiplier effect is a shift in the aggregate demand that results when expansionary fiscal policy, increasing income and thereby increase consumer spending”. As the workers earn higher wages the firms also notice higher earnings. The higher demand of spending means higher demand for supplies. For example sense the firms are making more money they need to hire more employees to make more supplies to equal the demand for the product. “The multiplier is an important part concept in macroeconomics because it shows how the economy can amplify the changes of spending Pg410”.…

    • 765 Words
    • 4 Pages
    Improved Essays
  • Improved Essays

    But, if the US increases the value of its dollar, the exchange rate would increase and it would cost more Pounds to buy a dollar. An increase in the exchange rate would affect the net exports. Higher exchange rates increase prices of the goods and services, the US products would be more expensive for the British consumer and these, in turn, would reduce the US Exports. The Exchange rates vary…

    • 958 Words
    • 4 Pages
    Improved Essays
  • Superior Essays

    This therefore helps the country’s economy to have more employment (Rebelo and Végh Gramont, 2006). Another thing for developing countries is that they may have to deal with high levels of inflation (Cowen 2013). This is because they have been poorly managed such as through money printing or they have a high level of economic growth which causes wages to increase. By having a fixed currency rate, they would not necessarily have high levels of inflation because the rate of inflation would be more similar to the country they fixed the currency too (Asici, Ivanova and Wyplosz,…

    • 1997 Words
    • 8 Pages
    Superior Essays
  • Improved Essays

    Raising the minimum wage increases unemployment, decreasing the productivity of businesses, and increases inflation, which can possibly lead to hyperinflation. Minimum wage increases one’s power to afford goods and services. This…

    • 1320 Words
    • 6 Pages
    Improved Essays
  • Improved Essays

    1: What is Trickle-down economics Trickle- down economics is the idea that the money that the “Super Rich” spend circulates and promotes growth in the economy and benefits others. It is the theory that the drivers of economic growth are people that are successful in the economy and that from the tax cuts they receive they will spend more of their money in the economy and invest in business’s which will supposedly generate more jobs. Yet if this is in fact true then why is it that the living conditions are still bad and jobs are at an all-time low. It is promoting inequality and creating a bigger divide between the working class citizen and the super-rich. According to research done by (YouTube video) Britain is the only economy that has grown…

    • 851 Words
    • 4 Pages
    Improved Essays
  • Improved Essays

    Aggregate Demand

    • 1467 Words
    • 6 Pages

    The economists have three theories that are affected by aggregate demand, wealth effect, interest rates and foreign exchange. The wealth effect is affected because the supply in demand increases which means the people are spending more money in the ecomony. The interest rates are lowered and people are saving more money and also borrowing more money from banks to stimulate an investiment. The foreign exchange rate is affected because of the rapid increase in the eceomny and more people will want to convert to the Amercian dollar becasue it will appear more attractive and inreturn more Amercin goods are purchased. All of these theories create a supply in demand for Amercian made goods and products.…

    • 1467 Words
    • 6 Pages
    Improved Essays
  • Superior Essays

    This could be in the expansionary fiscal policy, contracting fiscal policy. Expansionary fiscal policy: this is laws passed by the legislative and executive branches to increase government spending or lower taxes, which increases the money supply in an economy. For example, when taxes reduce, the government is trying to increase the level of consumers in other to help businesses and the economy. This raise would shift the aggregate demand curve to the right; therefore, a change in policy would lead to short-term fluctuations in production and prices. That is to say, the more money in the economy the more customers would buy Aveeno Eczema Therapy.…

    • 1251 Words
    • 5 Pages
    Superior Essays
  • Improved Essays

    When government spending occurs employment tends to increase. This is because as producers respond to government demand production from firms increase; leading to a requirement of more labour. This effect is multiplied as those newly employed start spending money their wages and therefore more demand is created and therefore producers respond by providing more goods and services leading to a multiplying cycle. Regarding the price level of the macroeconomic policy we can determine that due to the government spending an increase in the aggregate demand occurs which increases the price of the goods and services sold. See Figure…

    • 1576 Words
    • 7 Pages
    Improved Essays

Related Topics