Tuesday, July 31, 2012

What is the impact of interest rate on investment?

Overall, businesses invest less when interest rates increase, because the value of borrowing cash will increase. Much business investment is funded wholly or partially by credit. Moreover, a rise in interest rates means companies usually have to devote more resources to paying interest on their existing debts, which lowers the quantity offered for investment. This is often a serious reason why the stock market tends to say no on news of rate will increase -- lower investment equals lower potential growth for businesses in the near future.

As for the British Pound, it depends on whose rates we tend to are talking regarding. In general, when a rustic raises the interest rate for its currency, we'd expect that currency to achieve in price relative to alternative currencies. This is often because a rise during a currency's interest rate makes it more valuable to hold as an investment, attributable to the upper rates that banks pay on deposits, borrowers pay on bonds/loans, etc. When the currency becomes more valuable, demand for it ought to increase, and thus its price (price) ought to go up. In real life, these relationships aren't thus clear cut; values usually do shift in response to interest rate changes, however the value shifts usually lag behind the rate changes (sometimes for many years), and alternative complicating factors can 'distort' the value that we'd expect purely from interest rate effects

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Whether or not inflation is always bad? Justify your answer

Inflation isn't an unmixed blessing. It’s both sensible & bad result.

The goods effects are:

• People with versatile income (producers, traders etc.) sometimes gain.

• The entrepreneurs earn higher profit.

• Debtors are gainer.

• New employment opportunity rise.

• Purchasing power rises

• Unemployment reduces.

Bad effects of inflation are:

• People with fixed income lose.

• Creditors losers

• Inflation encourages, hoarding & develops a synthetic scarcity of in the market.

• Declining price of cash in inflation makes some folks careless in spending.

From the above discussion it is proved that though inflation has some bad result but it stimulates economic growth & creates employment opportunity, raises purchasing power. We should keep inflation in tolerable position to promote economic growth and living standard. Therefore inflation isn't always bad.

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Friday, July 27, 2012

How to manage inflation without affecting economic growth?

Hyperinflation is very bad for economic growth. But low inflation has some positive effect on economy & we know  ‘If we don't want to increase interest rate, we could reduce inflation through reducing consumption but this will affects economic growth as demand will decrease.’ In this case, a country takes some selective measures to manage inflation within single digit concerning economic growth:-
a)   Open market operation: During inflation, the central bank sells govt. securities and price bonds in the open market in order to contract the supply of money. This policy should not affect economic growth.
b)   Increase the supply of goods and services: When the supply of goods and services is increased, the prices will come down.
c)   Reduction unnecessary expenditure: the govt. should reduce unnecessary non-development expenditure to curb inflation.
d)   Reducing import duty: To increase the supply of goods within the country in low price, the government should reduce import duties.
e)    Price Control: Price control and rationing is another measure of direct control to check inflation. Price control means fixing an upper limit for the prices of essential consumer goods by law.
f)     Selective credit control: selective controls are designed to influence specific sectors of the economy which are most vulnerable to fluctuations and require to be controlled without affecting the economy as a whole. The aim of selective controls is to restrict the use of credit for such forms of activity as are regarded to be relatively unessential or less desirable.

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Thursday, July 26, 2012

Differentiate between demand-pull and cost pull inflation.

Demand-pull inflation: which is a situation when aggregate demand largely exceeds available supply of resources & the price are pulled upward due to excessive demand cause by-
·       Increased supply of money
·       Increased marginal efficiency of capital
·       Increased propensity to consume
·       Massive government expenditure
·       Large export surplus.
 Cost-push inflation: cost-push inflation depicting a situation when rising prices of factors of production increase cost of production, which in turn cause rise in prices of the output.

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