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Assignment Brief

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The coursework for Economics 2 consists of one task you need to complete; a case study analysis.

 

Case Study Analysis (Total 80 marks)

 

“UK interest rates, inflation and the Monetary Policy Committee”

 

The Monetary Policy Committee (MPC) of the Bank of England is prepared to raise interest rates “in the near future” if inflation increases, one of its senior policymakers has warned.

 

Kristin Forbes, a member of the MPC, said a rise in borrowing costs would also be necessary should household debt reach unhealthy levels. However, she stressed that this was not yet a cause for concern.

 

With the UK’s base rate of interest at 0.5% and inflation at a record low and expected to be negative, the MPC is currently under no pressure to raise interest rates, despite Britain’s economic recovery.

 

UK inflation is being driven lower by the slump in global oil prices, which have roughly halved since summer 2014, and the Bank’s governor Mark Carney warned earlier this month that a strong domestic economy would translate into higher UK inflation over the medium term. “The most likely next move in monetary policy is an increase in interest rates. The message is clear,” Carney said.

 

Forbes said that “even the more lagged effects of the rise in the value of the pound will likely peak in the first part of this year and also gradually fade. Inflation will then most likely bounce back. “Since interest rates take well over a year to be fully effective, they should be adjusted to respond to inflationary risks at that time horizon – when all of these effects have diminished – rather than respond to today’s inflation.”

 

In the European Union (EU) in 2008, at the start of the financial crisis, there were fears of deflation but at that time central banks had the ability to cut interest rates by nearly 5 percentage points. Those fears may now be coming true, with the EU experiencing deflation of 0.5% in 2015.

 

This was driven primarily by declines in energy prices, but there was also deflation in non-energy industrial goods and telecommunications. The collapse in the cost of shipping goods potentially suggests something deeper is going on and may lead to a more persistent form of deflation than Mark Carney has currently claimed.

 

Source: Various news reports, 2015

 

 

 

 

 

Required:

 

You are required to study the above case and answer the following questions. Use diagrams and examples, and information from your own independent research and the case study itself to illustrate and support your points and arguments.

 

1. Explain the term “real interest rates”. (5 marks)

 

1. Evaluate whether the MPC has been successful in controlling the UK’s inflation rate since 2011 (20 marks)

 

iii. Examine and discuss whether the MPC should be concerned about the risk of deflation in the UK economy (15 marks)

 

1. Evaluate demand-side policy responses to the Global Financial Crisis of 2008 (10 marks)

 

1. Explain the likely effect of a rise in the value of the pound on aggregate demand (10 marks)

 

1. A conclusion based on your analysis and recommendations (10 marks)
2. A complete list of reference or bibliography (Harvard style) (10 marks)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

You must prepare your answers in a report format.

 

 Read the case study carefully and consider key information when

completing your answers.

 

 You must complete extensive research on the UK economy related to the

topics before writing your answers and preparing the final version of the

report.

 

 Information from other sources must be clearly referenced in the body

of the report to the original sources. You must provide a list of reference

or a bibliography at the end of the report.