Uk Economy Case Study

(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
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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

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