While the Bank of England is considering the option to limit the borrowing of Britain’s major banks and investors in the Euro zone are wondering how much the inflation rate will continue to drop, it makes more sense than ever to clarify how central banks can influence the economy through their policies. Central banks such as the Federal Reserve System (Fed), the European System of Central Banks...
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Bank-Based vs. Market-Based Economies
Can We Still Define Banks Nowadays? According to literature in the field, the following definition is widely accepted: “a bank is a financial intermediary that offers loans and deposits, and payment services” (Casu, 2006) However, nowadays banks have diversified the range of services they offer and their operating methods, to such an extent that this definition, although quite recent, does not...
Kinked Demand Theory of Oligopoly
Forms of Oligopoly There are two forms of oligopoly structure; i. Collusive Oligopoly: In such oligopoly few firms unite together through a formal or informal agreement. The example for formal agreement is cartels and the example for informal agreement is price leadership model. ii. Non-Collusive Oligopoly: If the firm takes its decision of price setting and output level independently without...
Economic Inefficiencies of Monopoly
The economic inefficiencies of monopoly can also be regarded as demerits or disadvantages of monopoly. Monopoly is definitely a harmful element of an economy as a single firm rules over the economy and sets the prices of commodity, which has no substitute in the market, according to his wishes. And do not let any other firm to enter in industry to carry on its business and earn profit. These all...
Cartel Theory of Oligopoly
Background Oligopoly is the kind of market structure in function in which few firms, nearly from three to fifteen or more firms compete with each other for homogeneous products on the basis of product differentiation. If the products are homogeneous then it is called perfect oligopoly. Perfect oligopoly is found in industries such as sugar and petroleum etc. And where there is product...
Central Banks: Functions, Monetary Policy Tools, Independence and Credibility (Complete Guide)
In July 2012 the euro was days from breaking apart. Three words from the ECB President ended the crisis without a euro being spent. The complete guide to central banks: Bagehot and the lender of last resort, how money is really created, the Taylor principle, Kydland-Prescott time inconsistency, Volcker’s costly credibility and Draghi’s free credibility — with worked calculations and three practice questions.
Consumer Price Index (CPI): Construction, Bias, and Its Impact on Interest Rates
A single monthly number sets pensions, interest rates, and the real value of national debt — built from a basket nobody buys, weighted by an out-of-date survey, using a formula known to be biased since 1922. The complete guide to the CPI: construction, the four Boskin biases, hedonic adjustment, RPI’s formula effect, Argentina’s statistical scandal, the Fisher equation and the Taylor principle. With worked calculations and four practice questions.
Monopolistic Competition: Introduction
Definition Monopolistic competition is a type of market structure characterized by a large number of firms or producers competing to produce a great variety of similar products that they constantly try to differentiate. In monopolistic competition there are many different producers manufacturing similar products. This generates many substitutes of each product or commodity on the market....
Measuring Living Standards by GNI
By Valeria Popa: Let us first distinguish between GNI, GDP and GNP to understand how is GNI different from these two measuring indicators. GNI compared to GDP and GNP While Gross Domestic Product (GDP) and Gross National Product (GNP) measure the output of an economy, Gross National Income (GNI) is an indicator for the income realized by the residents of a country. According to the World’s Bank...
Consumer Price Index and its Influence on the long-term interest rate
Valeria Popa In previous articles you have learned about macroeconomic indicator like GDP which is highly important for understanding business cycles and economic performances and GNI which can offer a perspective on the living standards of a country’s residents. We are now going to have a look at the Consumer Price Index (CPI), a macroeconomic indicator with a significant impact on interest...
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