Economic situation, inflation and its consiquences

Economic situation, inflation and its consiquences

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  • Created on: 12-04-11 17:45
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Discuss the possible implications of rising inflation for the UK
(40 marks)
When the UK was in the recession banks were not willing to lend
cash unless people paid more in return (due to high interest rates).
The government needed to get people spending and that meant to
lower interest rates. The Bank OF England then expanded the
amount of money in their system by £200bn through a process
known as "quantitative easing". The Bank of England then wanted
to use that cash to increase spending and boost the economy, so it
spent it, mainly on buying government bonds from financial firms
such as banks, insurance companies and pension funds. The Bank
buying bonds makes them more expensive, so they are a less
attractive investment. That means companies that have sold bonds
may use the proceeds to invest in other companies or lend to
individuals. If banks, pension funds and insurance companies are
more enthusiastic about lending to companies and individuals, the
interest rates they charge should fall, so more money is spent and
the economy is boosted. This is what happened and the reason why
more people are borrowing money. Theoretically, when the
economy recovers, the Bank of England will sell the bonds it bought
and shall destroy the cash it receives. That means in the long term
there has been no extra cash created. But at the moment we have
only just come out of a recession and inflation is now rising and up
to 4% (still rising). Rising inflation has been caused due to low
interest rate meaning more people are tempted to borrow money
and spend. This means more money is flowing through the economy
and so more business' are profiting from these transactions.
There are many negative implications of a high interest rate. If the
UK has higher inflation than the rest of the world it will lose price
competitiveness in international markets. This means that other
countries will not want to use the UK as an importer for goods as it

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This means many businesses' will not get any
work and so go under. For us to import goods it would be very
good, and so imports would be cheap and so prices of products will
be cheaper due to the fall in the costs. This will mean even more
businesses would lose work and money, as they shall collapse. After
a while of doing this the exchange rate will become volatile and so it
shall not be a feasible option.…read more

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Bank of England
considering more Quantitative easing. This means even with
inflation being at a high for a short period of time it will cause
major problems very quickly with the unemployed and the working
class, who's money that they receive with become less of value and
they will then consequentially be the ones hit the hardest.…read more

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This then helps
them as they can lower their prices, this would mean more sales would be
needed to gain a profit overall, but unlike others they would be able to do this.
In an economic downturn, consumers have less disposable income
meaning they have to either buy fewer products than usually, or have the
choice of purchasing their products from cheap supermarket chains such as
Wal-Mart.…read more


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