The reasoning behind this would be to ensure that there were negative real interest rates.
If the Bank of England commits itself to producing significant inflation then real interest rates could become negative.
Thus people might borrow money (at 0% interest) and repay in their (devalued) pounds.
This would give people a significant incentive to borrow and spend.
A little more inflation might be preferable to rising unemployment or a series of fiscal measures that pile on debt bequeathed to future generations.
The idea of negative interest rates may strike some people as absurd, the concoction of some impractical theorist. Perhaps it is. But remember this: Early mathematicians thought that the idea of negative numbers was absurd. Today, these numbers are commonplace. Even children can be taught that some problems (such as 2x + 6 = 0) have no solution unless you are ready to invoke negative numbers.From 6.00 pm on 22nd April 2009, tobacco duty will increase by 2 per cent. The rates will be:
| Product | Duty | Effect of tax* on typical item (increase in pence) | Typical unit |
|---|---|---|---|
| Cigarettes | 24 per cent of the retail price plus £114.31 per thousand cigarettes | 7p | packet of 20 |
| Cigars | £173.13 per kilogram | 3p | packet of 5 |
| Hand-rolling tobacco | £124.45 per kilogram | 7p | 25g |
| Other smoking tobacco and chewing tobacco | £76.12 per kilogram | 4p | 25g of pipe tobacco |
* Tax refers to duty, plus VAT
This increases tobacco duty in line with inflation.
Here's a diagram showing tobacco tax.
The problem is that the cigarettes in my local tobacconist went up by the 7p i.e. the full amount of tax. This means the price rose by ALL the tax.
Does this mean that the demand is perfectly inelastic?
I think not.
Try drawing the diagram with the price rising by 7p i.e. the full amount of tax.
Then consider beer.
From Thursday 23 April 2009, alcohol duty rates will increase by 2 per cent above the rate of inflation.
Alcohol duties will increase by 2 per cent above the rate of inflation in each of the next four years.
| Product | Effect of tax* on typical item | Typical unit |
|---|---|---|
| Beer (4.2% abv) | 1p | pint of beer |
| Wine | 4p | 75cl bottle |
| Sparkling wine | 5p | 75cl bottle |
| Spirits (37.5% abv) | 13p | 70cl bottle |
| Spirits-based ready to drink | 1p | 275ml bottle |
| Cider and perry | 1p | litre |
* Tax refers to duty, plus VAT
Beer in my local went up by 1p - but demand is not perfectly inelastic.
So - what's happened?
Is the tax diagram rubbish?
"If the price of the inferior good rises then real income falls.
Thus as per above, more is demanded."
Not agree,about inferior goods,we're not considering about the price
It is widely believed that government intervention in industry can and does benefit consumers. But does regulation in practice have these desirable
We cut interest rates.
Money is the medium of exchange — it is the means through which individuals are more able to exchange efficiently and economically with one another, including transferring savings from lenders to borrowers. Creating more money does not create more capital goods. Creating more money merely means that people have more pieces of paper with which to bid against each other in the attempt to acquire control over resources and commodities in the market. In other words, the ultimate result of a monetary expansion, in an attempt to stimulate trade and jobs, is a rise in prices in general in the economy, i.e., price inflation.But in the intermediary stage between the time the supply of money is increased and prices in general in the economy have increased, there often appears the illusion of economic prosperity and productive investment. But it is a transitory prosperity and an unstable investment climate. The prosperity lasts only as long as the inflationary process keeps selling-prices rising sooner and faster than cost-prices. Artificial profit margins are the source of the appearance of prosperity, but inevitably cost increases catch up with rising sales prices, and the boom ends.
Furthermore, the lower rates of interest resulting from the monetary expansion made available for lending purposes in the banking system, induce a large number of additional investment projects to be undertaken that turn out to be unsustainable in the long run. Investment requires savings, i.e., the availability of resources for the construction and maintenance over time of new and improved capital goods. But some of these investment projects will have been started purely on the basis of the illusion of greater savings created by the availability of more money for lending purposes. When the inflation finally ends or slows down, these investments will be found to lack the necessary savings base to sustain them. Hence, the investment boom produced by the monetary expansion has within it the seeds of a future investment recession.
So -should we raise interest rates - or drop them?
At the same time, because European consumers must pay the higher prices charged by European producers, the standard of living of Europeans in general is lower than it could have been. This also means that the Euros that could have been saved if the less expensive foreign product had been bought are not available to European consumers to buy more of other products; as a consequence, jobs that would have come into existence to meet the demand for these other products never have a chance to materialize.
So we shouldn't have a Common External Tariff - and yet we do - why?
MANY COMMENTATORS LAMENT that Britain is running a deficit in the current account of the balance of payments. Some worry particularly about our deficit in goods - what is called the visible balance. The second concern is always misplaced. The first is slightly more complicated. It is therefore better to deal with the simple matter first. International trade is basically of two types - trade in goods and trade in services. Exports of either generate foreign earnings, so, from that point of view, it does not matter what is exported. Indeed, it is perfectly normal as countries develop for them to produce and trade in services. International trade in services has been in recent years the fastest-growing part of such trade.
Some people worry because manufactured goods have become a smaller part of our output. That is a separate concern. But it is worth remarking that the arguments and evidence do not support the claim that it is intrinsically better to produce manufactured goods rather than services.
Given that the composition of exports does not matter, what about their total? Does it matter if we are exporting fewer goods and services than we are importing?
The best way to answer this question is to start with another How are we paying for these goods and services?
Some of them are paid for by our export earnings. Others are paid for in one of two ways - by running down our savings or by borrowing. Like an individual or a company, more can be spent than is earned, provided savings are reduced or borrowing increased. There are many circumstances where such action is perfectly sensible. There can be favourable investment opportunities, a temporary drop in income, or a chance to buy something more cheaply than usual. There is nothing wrong with borrowing; what matters is what it is for. If spending is wasteful, it is wasteful whether current income or borrowed funds are used.
The same is true for a country. If individual decisions by residents, whether firms or individuals, lead to a current account deficit, then a decision has been taken to spend more than income. If the funds being borrowed to finance that spending are used wisely, there is no problem. If they are not used wisely, then it is foolish spending, not the act of borrowing, that is the problem.
A striking example occurred in the United States. On average, that country ran a deficit on current account from the last quarter of the 19th century into the first decade of the 20th. It did so because there was a tremendous demand for funds to invest. Population, industry, and agriculture were all expanding westwards. The funds were lent from the residents of European countries, where the expected rate of return on investment was on average lower than in the United States. No one - at any rate, no one I know of - has claimed that the decline of the US set in with that foreign borrowing. It was used productively. The balance-of-payments deficit it engendered was in no way symptomatic of a problem.
Sometimes such deficits can be symptoms of problems (though not problems in themselves). For example, the symptom can be of 'excess demand'. Easy monetary policy may have over-stimulated demand, leading not just to rising prices, but also (as goods become harder to obtain or more expensive at home) to more purchases from abroad. If the exchange rate is floating, it will be driven down. And if it is pegged, there will be pressure to devalue.
Before summing up, one point remains. If a country is borrowing abroad, it is not necessarily increasing net overseas indebtedness. That may seem surprising - if a person borrows, his or her debts increase. But even in that case, if he or she has assets, they may be increasing in value more rapidly than the new debts. The same can be true of a country. The value of Britain's overseas assets has in recent years increased more rapidly than her overseas debts; increasing borrowing need not, and in this case did not, bring increased indebtedness.
Now to conclude.
If the price for inferior good rises the difference between inferior good and normal good will get less and because of that more people will switch to the normal good.
Yes but not everyone. I am referring to the people that do NOT switch!
In addition to that if the price of an inferior good rises it doesn't mean that the real income of all people becomes less. It will become less only for those who buy only that good.
I think the answer could be :
If the real income falls because of people spent more on inferior goods, therefore the inferior goods wont be demanded more because they bought inferior goods already.
But if the good is a consumer non-durable then there may be regular puchases
Rise in price of inferior goods will depend on how much demand response to the change in prise, it does not depend on the YED.