Do interest rate cuts work?

The MPC duly announced the much anticipated cut in base interest rates, though the 0.25% cut was much less than recent cuts by the US Federal Reserve. There is a good piece by Geoff Riley on the tutor2u website explaining the transmission mechanism of monetary policy, in particular the effects of interest rate changes. In addition, the comments in response to the article are worth reading.

http://www.tutor2u.net/blog/index.php/economics/comments/interest-rate-cuts-do-work/#extended

A reflection on falling prices

An interesting article by John Kay in today's FT. He considers the effect of falling prices in the light of fears of lower prices in the asset and housing markets. Should we welcome this situation rather than react in the way we have seen recently?

http://www.ft.com/cms/s/0/fff6244a-d406-11dc-a8c6-0000779fd2ac.html

House prices unchanged in January

House prices were unchanged in January compared to the previous month, according to the Halifax bank. However, the country's biggest mortgage lender said that house prices were rising at an annual rate of 4.5%. The gain in annual house price growth pushed the value of the average UK home to £197,244 - a rise of £7,628. The bank said that there were continuing signs of weakness in housing market activity and that the market would be flat during the year. The figures are the latest to highlight slowing house price growth.

http://news.bbc.co.uk/1/hi/business/7226907.stm

Australia raises interest rates

Whilst interest rates in the USA have been slashed and pressure grows for cuts in the UK, Australia has raised interest rates to an 11-year high of 7%, as part of efforts to control rising inflation. Australia's resource-rich economy has continued to expand due to a sustained rally in commodity prices. The Reserve Bank of Australia has raised the cost of borrowing 11 times since 2002. "Having both the international and domestic information available, the board concluded that a tighter monetary policy stance was needed now," said Glenn Stevens, the bank's governor. Inflation is running at an annual rate of 3.6%, above the bank's comfort zone of 2% to 3%.

http://news.bbc.co.uk/1/hi/business/7228153.stm

US recession would cause severe job losses

The Seattle Times highlights a report that suggests that 'up to 5.8 million additional workers in the United States could join the ranks of the unemployed by 2011 if the economy were to fall into a severe recession.' The report from the Center for Economic and Policy Research (CEPR) also shows the likely impact of both moderate and severe recessions, lasting two years, on the average household budget. reference is made to the psychological impact of unemployment.

http://seattletimes.nwsource.com/html/businesstechnology/2004164165_jobsoutlook05.html

Use to the article to:

1. Think about the key features of a recession and its effects.
2. Analyse the predicted situation using AD/AS analyisis.

Surge in coal prices

Coal prices have surged to record levels, according to BBC news. According to one trader, "supply is so tight at the moment that users just have to pay whatever producers are asking, and if they sit around and wait, they will either have to fork out even higher prices or be told there is no more tonnage available".

1. Read the article and think about why supply is so tight.
2. Draw a demand and supply diagram to show how the equlibrium price has changed.
3. Identify other markets that are likely to be affected by the increase in coal prices.

http://news.bbc.co.uk/1/hi/business/7225682.stm