The Expansionary Fiscal Contraction Hypothesis

Read this essay ( about the theory of expansionary fiscal contraction. In a nutshell the theory proposes that austerity (fiscal contraction) can lead to economic growth as consumers might anticipate smaller taxes tomorrow, and hence increase their spending today, thus boosting the economy. It also proposes that austerity would reduce the effects of crowding out, but this point is only really relevant when the economy is at full-employment, and so can be ignored regarding the current situation we are in.

The introduction of the essay is extremely good at explaining this point.

UPDATE: A follow-up of this issue is available to read here. [...]

Why does the UK Government have such low interest rates on its debt?

Like the US the UK is facing low interest rates, despite having a high budget deficit and public debt. Why is this?

The UK Government issues its debt in the form of Guilts, currently the interest rate the government has to pay on a year guilt is 0.32%. This is lower even than the base rate, surely investors would be better off just putting their money in a bank account? Well to start with large financial institutions and investors can’t simply put all their money in a bank account, if the bank collapses they will loose all their money (and the government only insures £85,000). [...]

The importance of confidence to the economy

Keynes talks a lot about confidence and the animal spirits of firms and people when making decisions. So how important is confidence to the economy?

Without confidence businesses wouldn’t invest. This can be seen in the present climate, many firms have a lot of spare cash on their balance sheets, which could potentially lead to high investment which would be a massive boost to the economy and would provide thousands of jobs. So why aren’t they doing so, they aren’t making any returns leaving their money in a bank account (in fact they may be receiving a negative real interest rate on their savings), the alternatives to saving money for firms is to either return it to shareholders in the form of dividends (which would result in the government gaining capital tax gains as well as stamp duty, and the investors are likely to either spend it or invest this money in other assets thus increasing their value) or to spend. [...]

Discuss whether a concentrated market is necessarily anti-competitive

Here is an essay we were set for class. As always feel free to leave any feedback below.

A concentrated market (one in which there is a high value for the n-concentration ratio) is a market in which there are few firms which possess a relatively large market share. This fulfils one of the criterion of an oligopolistic market.

Because the market consists of only a few firms we may assume that there are economies of scale to be had by producing a large output. Due to this a few large firms will be able to exploit these economies of scale and hence will be operating a lower point on their average cost curve. [...]

Are large or small companies more successful?

This was a previous Interview Question for Oxbridge Economic Applicants. Here is a sample answer I came up with.

To start with to answer this question it depends on how we are measuring size and successfulness. If we measure both in terms of profit then obviously a large firm (one which has larger profits) will be more successful when we say that large profits = successfulness. Similarly if we measure size in terms of output, labour force or number of shops/factories and successfulness by revenues then we would expect larger firms to have larger revenues (and thus be more successful) because they have the ability to sell more through their stores (which we are assuming they have more of to be considered large) and will be able to produce more due to their larger workforce. [...]

Commuters or Pensioners

Two trains are about to crash. One contains pensioners and the other containers commuters. There is a fault on both lines but you can save one group. Which do you save and why?

This was a previous question asked at an Oxbridge interview. It is more of a philosophical question than it is economic and rather than give a conclusion I will present some points below as to the advantages of saving one group over the other. Please note that the argument isn’t intended to cause offence and I completely understand that each life is very precious and no-one should be prioritised (this is completely hypothetical!!!). [...]

Can addiction be rational?

I would define a rational being as someone that aimed to maximise the utility whilst trying to minimise the costs. Addiction is something that people do because, a. they enjoy doing it, and b. there may be psychological or chemical reactions occurring that increase the cost of not consuming the good/service.

Therefore I would believe addiction to be rational because people generally do it because they enjoy doing it and thus it maximises their utility. However because they are addicted to it perhaps they are doing it many times, and this may result in the marginal utility gained decreasing over time. [...]

Evaluate macroeconomic policies which may be used to reduce the level of unemployment in the UK

This is an exam question from the Edexcel Unit 2 June 2012 Paper. Have a go at it yourself and then compare with the essay below (you can also check out the mark scheme). I was awarded 30/30 for the essay below, feel free to add any further suggestions in the comment box. I don’t seem to like paragraphs much!!

One macroeconomic policy currently being employed is the use of monetary policy. Monetary policy is the manipulation of interest rates and more recently quantitative easing to control the economy. it is run by the Monetary Policy Committee at the Bank of England. [...]

Discuss the view that the Internet is creating markets that are nearer to the model of Perfect Competition

This was a recent essay title we were given in class (Edexcel Unit 3: Business Economics) which I thought was quite an interesting topic. Below is my essay, where I have mainly focused on 3/4 points as to why I think the internet is creating markets near to the model of perfect competition and them some evaluative points. Please add a comment in you have any other suggestions or evaluation points.

Perfect competition is a market type which meets certain criterion. This criteria is that there are many buyers and sellers, sellers are price takers, there is perfect information known by consumers, there are no barriers to entry, the product is homogeneous  firms are profit maximisers and there are no externalities. [...]