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. [...]

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. [...]

Oxbridge Interview Questions

The Oxbridge Interviews are coming up soon (Mine with Gonville and Caius is on the 5th!) and below are some Economic Interview Questions I have found, I’ll be answering some of them in future posts!

Why Economics?

Why Cambridge, or more specifically why this College?

Are large or small companies more successful?

Explain how the Phillip Curve arises. (Lesson here)

What are the effects of currency speculation? (Hot money is discussed here)

Compare Keynesian and Classical Macroeconomics.

Discuss the interaction between fiscal and monetary policy. (Lesson here)

Would it be feasible to have an economy entirely based on the service sector? [...]