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CIMA BA1 National income, The circular flow of income, Aggregate supply and demand
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So when governments are big borrowers, higher inflation becomes an incentive, as this means it costs them less in real terms on repayment of their debt. Futhermore, due to their huge debt… their ability to raise interest rates is limited i.e. higher interest rates means higher interest expense. Is that a fair observation?
Generally higher inflation means higher interest rates because borrowers have to be paid enough to keep up with inflation, so inflation is a ‘two-edged sword’. Yes, the real value of debt repayments goes down but the interest rate that has to be paid on new borrowing will go up.
If a Government has issued debt in the past (eg 2% Treasury Bonds) if interest rates are raised to 4%, the cash outflows to service that old debt do not change. The 2% is the coupon rate which means that if you hold $100 nominal of the bond you will get $2 per year. However, when it comes to issuing new debt the government would have to offer an interest rate that keep up with inflation and which offers a real return to lenders so higher interest cash outflows.
Thanks, that makes sense!
Great lecture. Very well explained- thank you.
Hi,
Can you please elaborate the point on increased government spending at the slide on 18:52 in the video?
How does increased government spending lead to a rightward shift in demand?
Thanks,
MD.
I didnt understand why increase in money supply contributes for inflation, can you expand further please?
Thank you,
Fernanda
If money supply is increased, for example by making borrowing easier, then both individuals and companies will have more money to spend and there will be greater demand for goods. Greater demand tends to push up prices because of competition for goods and just greater affluence.
Thank you very much. Just wanted to ask, how do you calculate inflation?
Various ways.
For a single item it is simply something like Price at a data in 2020/Price on the same date 2019.
For more general inflation rates a typical ‘basket’ of products is chosen eg 2kg potatoes, 1 litre milk, 2 kgs apples, 20 litres fuel…..etc.
The price if the basket is worked out for 2020 and for 2019 and the ratio gives an inflation rate. However, this is complicated by the fact that the typical ‘basket’ changes over time eg dairy milk might become less popular and soya milk more popular. A decision has to be made about which mix of goods is to be used in the calculation.
Thanks for the lecture was very helpful. I’ll always come back for more.
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