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Economics bank
Teacher's Guide - List of all theories
Below is a list of all the theories that are covered in the Virtual Bank of Biz/ed site.
Section 1 - Europe
European Central Bank
The euro
Section 2 - Markets
Foreign exchange market
- Exchange rates - what determines the rate at which sterling exchanges for other currencies?
- Fixed and floating rates - exchange rates can be fixed to another currency or free to find their own level in the market. What is the difference between these systems, and why might we choose one or the other?
- Market intervention - if they wanted to intervene to influence the level of the exchange rate, how would a central bank actually do it?
- Effects of exchange rate changes - if the exchange rate does change, what effects might this have on the rest of the economy?
- Exchange rate jargon - a jargon-busting guide to exchange rates. What are spot and forward rates? What is the effective exchange rate? What is meant by purchasing power parity (PPP)?
Money markets
- Equilibrium interest rates - what determines the equilibrium rate of interest in the money markets?
- The 'shortage' - how does the Bank of England create a shortage of liquidity every day and why do they bother?
- Repo operations - the daily routine for repo operations, and how this helps maintain the level of interest rates.
- Interest rates and security prices - the price of gilts is inversely related to the rate of interest. This theory explains why.
Section 3 - Money
- Money - what is money? What functions does money fulfil, and what makes 'good' money?
- Liquidity - the closer to cash it is, the more liquid money is. How do we measure liquidity?
- Demand for money - what determines how much money is demanded in the economy?
- The supply of money - measuring the amount of money in the economy is more complex that it might seem at first, and there are a number of different measures.
Section 4 - Monetary policy
Inflation - causes
- Demand-pull inflation - demand-pull inflation happens where there is 'too much money chasing too few goods'. Excessive growth in demand literally pulls prices up.
- Cost-push inflation - if costs rise too fast, companies will need to put prices up to maintain their margins. This will cause inflation.
- Quantity theory of money - excessive money supply growth can also be a cause of inflation. The quantity theory of money explains why this happens.
- Phillips curve - there is often considered to be a trade-off between unemployment and inflation. The Phillips curve shows this relationship.
- Price expectations and inflation - there is a definite link between people's price expectations and the level of inflation, but there is a lot of debate among economists on the exact nature of the link!
- Wage-price spiral - cost-push and demand-pull inflation can interact to cause a wage-price spiral.
Inflation - costs
- Anticipated inflation - if inflation is anticipated (expected), then the effects will be less serious than if it is unexpected.
- Unanticipated inflation - unanticipated inflation has more serious effects as people haven't allowed for the inflation in their behaviour.
Inflation - cures
- Monetary and other targets - targets can be set for various variables to help setting policy.
- Control of the money supply - a variety of techniques are available to try to control money supply growth, though they are not currently used by the Bank.
- Demand-side policies - if the level of demand is growing, then it will be necessary to use policies that control it. These are known as demand-side policies.
- Supply-side policies - if the economy is constantly coming up against supply constraints, then supply-side policies to boost capacity may be necessary.
Monetary Policy Committee
- Monetary Transmission Mechanism - the monetary transmission mechanism shows how interest rate changes affect inflation.
- Inflation targeting - since leaving the ERM in 1992 we have had an inflation target, but how do they work, and what is the exact nature of the target?
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