Firstly, a debt crisis could imply both government debt and household debt. The UK is facing a combination of both (see: total UK debt)

Since the financial crisis started in 2007, UK house prices have fallen. One of the main reasons for the initial fall of 20% was the drying up of mortgage finance. After the credit crisis, banks became short of liquidity and so reduced the amount of available mortgages. The number of approved mortgages fell rapidly leaving lower demand for housing, pushing down prices.

After the credit crunch, banks required homeowners to save a bigger deposit. (Remember before the crash 100% mortgages were available. Now, many banks require a 25% or 10% deposit). This deposit requirement meant that many first time buyers were priced out of the market and unable to buy. In 2008, the UK savings ratio was very low. This indicates that households had taken on more debt and had low levels of savings for a deposit. This was a factor in depressing house prices.

In the aftermath of the financial crisis, both financial institutions and households have been seeking to reduce debt levels and improve their reserves. This is why banks are more reluctant to lend and why households have increased their savings ratio.

Sharp increase in savings after 2008.

In addition the economic recession also reduced demand for buying. This was due to the rise in unemployment, decline in consumer confidence and threat of losing your job.

Government debt levels have caused the government to announce spending cuts. Since 2010, the economy has stalled due to austerity measures and problems in Europe. This second recession could cause further problems for the housing market.

House Price Falls Limited

The most recent data, suggests house prices have fallen by less than we might expect. UK house prices have fallen by less than countries, such as Spain and the US. House price to income ratios are still above long term trends. There has been a stagnation in house prices since 2009. Despite the economic recession, house prices have not fallen. This is because

• Low interest rates have cushioned the impact of recession and debt levels. Mortgages may be scarce, but at least mortgage payments are relatively low, unlike the 1990s. Interest rates are likely to remain low as economic growth is as fragile as it is at the moment.
• Limited supply keeping prices high. Unlike other countries, the UK has not had a housing building boom. The financial and economic crisis have curtailed further house building schemes and helped prevent excess supply

Could Debt Crisis Cause Second Fall in House Prices?

Some analysts fear that if the Eurozone breaks up and Europe enters a deep recession, the UK could see further falls in house prices. The UK has already entered a double dip recession and a further rise in unemployment could lead to less demand. If banks lose money from debt default in Eurozone, mortgage availability could dry up again.

It is ironic that amidst all the talk of austerity, the ONS state.

“The decline would have been steeper were it not for a 1.6pc quarterly rise in government spending, which was the biggest increase in four years and contributed 0.4 percentage points to GDP.”

“The ONS said the downward revision to the Q1 data was the result of a sharp drop in construction output, which fell by 4.8pc on the quarter, its steepest decline since Q1 2009.”

Unfortunately, the government’s spending cuts will mean that as well as falling private sector investment and spending, we will also be having falling government spending.

It is not clear, whether another round of quantitative easing will really stimulate economic activity, given all the downward pressures on the economy.

2012 Q1 now -0.3%

For the past several months, the governor of the Bank of England has had to write a letter to the Chancellor explaining why UK inflation has been above the government’s target of 1-3%. April 2012 gives the first on target inflation figure (1-3%) since Dec 2009.

• Core inflation which strips out energy and food has fallen from 2.5% to 2.1%
• CPI-T = 2.8% (CPI – indirect taxes)
• RPI = 3.5% (wider measure of inflation, including mortgage interest payments)

In the past year, the Governor of the Bank of England has been saying that inflation was above target, due to temporary cost-push factors, such as:

• imported inflation following devaluation in 2009
• Increase in taxes
• Increase in commodity prices, e.g. oil

However, despite these temporary factors, core inflation remained low. Wage growth has been particularly depressed. In other words, CPI and RPI were given a misleading guide to underlying inflationary pressures.

Given the state of the economy and the slide back into recession, it is unsurprising that inflation has fallen so rapidly. The Bank’s decision to tolerate inflation above target has been criticised by savers, who felt they were being ignored. It was also criticised by some economists who feared inflation of 4%  would allow inflationary expectations to set in leading to future inflation.

In this case, I feel the Bank of England made the right decision. The problem since 2008 has never been inflation, but the fact we are in the longest recession on record (longer thanfGreat depression). To religiously target inflation in the middle of a deep recession amidst rising unemployment would have been irresponsible.

Given the recent strength of the pound, the on-going Euro crisis and continued weakness in consumer spending and consumer confidence, inflation is likely to continue to fall. Stripping away taxes and volatile energy prices, the Bank could still face inflation slipping below the 1% target in the not too distant fuure..

What is the Importance of this Inflation Figure?

The ECB by contrast have pursued the wrong approach, e.g. when the EU experienced a smaller increase in cost-push inflation in 2011, they panicked and increased interest rates. But, due to religiously targeting inflation (and several other factors) the EU is returning to recession. The ECB should have more flexibility and tolerate higher inflation. Given the depth of crisis in southern Europe, there is a strong case for actually raising the ECB inflation rate, and make targeting higher growth and lower unemployment as the primary macro-objective.

See: Optimal inflation rate

Source: ONS

Related

More on Bank of England Inflation Target

Between the late 1940s and 2000, government spending as a % of GDP stays around 40%.

But, actual GDP triples from £100bn to £300bn

Government spending in real terms

(at 1995 prices means the actual spending is adjusted for inflation since 1995.

This is due to an increase in GDP. A similar tripling of real GDP from £4,000 per capita to over £12,000

Government Spending since 2000

Since 2000, UK government spending has increased to 47% of GDP (list of government spending) This rise in government spending as a % of GDP since 2000 is due to

• Extra spending commitments of mid 2000s (e.g. on health)
• Rising welfare bill
• Cyclical impact of recession, (e.g. higher unemployment benefits)
• Fall in GDP since 2008

Why is this important now?

In the current climate indebted countries like Portugal, Greece and Spain are experiencing significant falls in real GDP. Therefore, despite spending cuts, debt to GDP ratio are continuing to rise.

In a recent post – how much has government spending been cut? a city firm complained that the UK government had only cut spending by 1.5% in 2011-12 – but compared to the post-war increase in real government spending, this is quite remarkable cut.

• EU government spending as % of GDP

Source: BBC

But, when I look at this. Everything has already happened.

• Greece is already in recession. It has been in recession for past 5 years.
• Greece already has bank runs. Multinationals are not keeping money in Greek banks
• Due to unemployment of 23% and youth unemployment of 53%, there already is a political backlash, with growth of extremism on both left and right of political spectrum
• The Markets are already in turmoil with bond yields very high, and stock markets falling.
• Greece has already partially defaulted. It already has a sovereign debt crisis.

What Would be Different if Greece did leave the Euro?

In the Short Term

• Devaluation of around 25-50%. This would lead to a significant rise in import prices. This would cause (imported) inflation and rising living costs.
• Greek goods and services would become much cheaper. It would create some very cheap Greek holidays.
• Greece wouldn’t get flows of EU bailout money (though IMF and EU may agree a different type of fund to help deal with crisis)
• Capital Outflows. The biggest problem is that in lead up to devaluation, Greeks would try to withdraw money from Greece and retain the value of their Euros. These capital outflows and bank withdrawals could be very damaging to the economy. It depends on the extent to which the Government is able to restrict capital flows. But, it could cause tremendous damage to (an already battered) banking sector.
• Greek default. Rather than partial default, we would see a full default as Greece had insufficient funds to meet interest payments.

In Long Term

• Domestic demand could benefit. In the long-term, Greece will see an improvement in domestic demand. Demand for imports would fall due to higher cost. Greece would benefit from higher exports and (if political situation stabilises) an inflow of tourism.
• Greece would no longer feel it is following dictates of EU (Germany) and would have greater economic and political independence.
• Countries can recover from default and devaluation
• It depends what happens in rest of Eurozone. If the rest of the Eurozone survive and see economic recovery, this would help Greece also recover. However, if the whole Eurozone fails, it would be much more difficult to develop a bigger export sector and recover.
• With a full default, it may be possible to end crippling spending cuts, though it would have a smaller tax base due to smaller size of economy.

Related

• Questions on Greek Exit

Classical economic theory suggests firms will seek to maximise profits. The benefits of maximising profit include:

• Profit can be used to pay higher wages to owners and workers. (though if firm has monopsony power, the profit may not be shared equally amongst workers)
• Profit can be used to invest in research & development. This investment can potentially benefit consumer. For example, without large profits, drug companies would have less ability to develop new drugs. High profit is often a justification for pharmaceuticals to have a degree of monopoly power (e.g. patents) because ultimately it is essential for creating the incentive to develop new treatments. However, this argument about research & development may depend on the industry. For example, it is now clear how much supernormal profit supermarkets need to be able to invest in research & development.
• Profit enables the firm to build up savings, which could help the firm survive an economic downturn. For example, in a recession, a firm could see a temporary loss, but if the firm has a reasonable level of savings and history of profitability, the bank will be more willing to keep lending. However, profitable firms don’t necessarily save this profit for an economic downturn. Profit is often paid to shareholders in the form of dividends or used to finance expansion, such as mergers or takeovers. For example, commercial banks were very profitable in the boom years, leading upto 2007. But, when the credit crunch hit, they had very little resources to ride out the financial crisis.
• For firms listed on the stockmarket, high levels of profit will make the firm less susceptible to takeoevers. If profit is low, sharedholders may be dissappointed in the low level of dividends and willing to sell to a takeover bid. You could argue this incentive to be profitable is good for consumers because the firm has incentives to be efficient and cut costs, which can lead to lower prices for consumers. However, you could argue, that the pursuit of short-term profit has drawbacks because the firm may not invest sufficiently in the long-term development of products and services. For example, train operating companies listed on stock market may go for short-term profit, and ignore long-term investment for industry.

Benefits of Pursuing Revenue Maximisation

Some firms don’t make profit maximisation as their ultimate goal. They seek to maximise revenue or market share. Seeking to increase market share and sales will lead to lower profit, but can have advantages for firms, consumers and workers.

• Increased brand loyalty. If a firms is able to cut prices and gain more customers, it will gain bigger exposure and brand loyalty. This enables the firm to be more prominent in the market. For example, in supermarkets, price is very important and getting a reputation of being cheapest supermarket can help attract customers.
• Put competitors out of business. Pursuing sales maximisation may enable large firms to push rivals out of business. For example, a large supermarket with economies of scale could sell goods so cheaply, smaller rival firms can’t compete and go out of business. This enables the firm to have more market share and profit in the long-term. Consumers could benefit from lower prices in the short-term, but if firms do go out of business, then they will have lower choice and face prospect of less competition in the long-run.
• Economies of scale. Lower price and higher sales can help firms with high fixed costs gain economies of scale (lower average costs). This could lead to lower prices for consumers.
• Pursuing revenue maximisation may be a clever way to increase long-term profit. By gaining market share, firms enable economies of scale, greater sales and more market share. Therefore, in future, they will have greater ability to increase prices.
• However, in theory consumers are protected from firms which seek to pursue ‘unfair competition’ i.e. selling below cost. Firms are not allowed to pursue ‘predatory pricing’ – which is the deliberate setting of prices below cost to force rivals out of business. The OFT investigated supermarkets because they were concerned about growth of monopoly power. However, apart from some minor cases, like price fixing in cheese, the supermarkets were largely cleared by the OFT. OFT probe shelved
• Greater influence. Some firms are not motivated by profit, but exposure and influence in society. For example in the newspaper market, the newspaper may have a political agenda to promote. They may be happy to accept more political influence (due to cheap newspapers)  rather than higher profit.

By pursuing sales maximisation, the firm may have more incentive to cut costs leading to lower wages for workers, but on the other hand expansion could create new jobs.

Conclusion

It depends on the industry in question. For some industries, profit maximisation is necessary to finance investment and development. In other industries, pursuing short-term profit maximisation may lead to a big loss of market share and harm the firms prospects in the long run. For consumers, they should benefit if firms cut prices to increase sales. However, if price cuts are so large that other firms are forced out of business, this could harm them in the long run. Also, a degree of profit may help consumers if the firm uses it to improve quality of product. But, there is no guarantee profit is used for re-investment.

Related

• Business objectives

Yes. I believe they should leave the Euro. I put some arguments for and against here – Should Greece leave the Euro. Leaving the Euro will cause economic turmoil, especially in the short-term and it is hard to predict exactly how bad it will be. But:

1. At least the Greeks will no longer feel their disastrous situation is being imposed by other countries (i.e. Germany)
2. Fundamentally, Greece is completely unsuited to being in a single currency with other Eurozone countries. Even if they struggled on for the next few years, the structural problems would remain. At least leaving gives them a better structural situation in the long term.
3. Countries forced to devalue often do less badly than expected – i.e. Argentina, Iceland spring to mind.
4. Things are already so bad, in Greece why fight to keep that?

The Greek public apparently want to keep the euro but they don’t want to pay for it.

Yes. They wanted benefits of Euro, but lacked both competitiveness and fiscal discipline.  They also don’t wont the austerity, job losses and continued depression which is a consequence of being in the Euro. If I was Greek, I would be angry that we ever joined the Euro. The Euro has made all of Greece’s problems worse.

Wouldn’t it just be easier to default on their debts and reinstate the drachma at a lower value than the euro ? This would boost exports and invite Tourism though I’m not sure what manufacturing Greece has to export.

Yes, Greek exports are relatively limited. But, a significant devaluation would create new opportunities. If nothing else, a devaluation would encourage foreign holidays, which would be now cheaper. For Greeks, it would make foreign goods less attractive and boost domestic demand instead. Don’t forget Greece has had a current account deficit of over 10% of GDP for a few years (currently around 9% of GDP) – This indicates a massive misalignment of currency. (UK is 2-3% of GDP by comparison)

Leaving the Euro, would help realign Greek competitiveness and boost domestic demand – even if they don’t have significant export industries.

If they defaulted could they be made to repay their debts at some point anyway or could they just declare themselves bankrupt like an individual and pay back little or nothing ? How does it work ?

They have already partially defaulted. If they leave the Euro and replace with a new currency, they would repay part of the debt, but it would be in the new currency. Therefore, after the devaluation, people holding Greek bonds would see a fall in the value because of the devaluation. Countries have defaulted on debt before, but have been able to regain some kind of prosperity, e.g. Argentina.

If an individual goes bankrupt they generally cant have a bank account or credit for years but surely that wouldn’t apply to a nation.

People would be much more reluctant to buy bonds from a country with history of default. They can expect higher interest rates. But, who wants to lend to Greece at moment anyway? Again, Argentina defaulted in the past, but it is now borrowing again. If the fundamentals of the economy are sound, then some investors will be willing to lend, at least for a risk premium.

Readers Question: I here of large withdrawals of euro by Greeks from their banks in panic but whats the point in that if they are not actually going to leave Greece ? They would still have to convert to drachma anyway.

If Greece leaves the Euro, it will see a 40-50% devaluation in the currency. Therefore, if you have Euros in Greek bank account, these savings will be worth a lot less after the devaluation. Therefore, people would rather keep the Euros.

If they are afraid the banks will run out of money they are themselves hastening it.

Related

• Will The Eurozone breakup?

Demand Side Policies

Demand side policies aim to increase aggregate demand. This needs to be done during a recession or a period of below trend growth. If there is spare capacity (negative output gap) then demand side policies can play a role in increasing the rate of economic growth. However, if the economy is already close to full capacity (trend rate of growth) a further increase in AD will mainly cause inflation.

1. Monetary Policy. Monetary policy is the most common tool for influencing economic activity. To boost AD, the Central Bank (or government) can cut interest rates. Lower interest rates reduce the cost of borrowing, encouraging investment and consumer spending. Lower interest rates also reduce the incentive to save, making spending more attractive instead. Lower interest rates will also reduce mortgage interest payments, increasing disposable income for consumers.

Evaluation of Monetary Policy. Lower interest rates may not always boost spending. In a liquidity trap, lower interest rates may not boost spending because people are trying to pay back debts. In 2009, UK interest rates were cut to 0.5% but spending remained low. Banks were unwilling to lend because of liquidity shortages. Therefore, although in theory, it was cheap to borrow, it was hard to actually create credit. Therefore, this shows monetary policy can be ineffective in boosting economic growth

Another criticism of monetary policy, is that cutting interest rates very low could distort future economic activity. For example, the US cut interest rates following the economic uncertainty of 9/11. These low interest rates encouraged people to take on ambitious loans and mortgages; this was a factor behind the US housing bubble. Therefore cutting interest rates, at the wrong time, can contribute to a future housing and asset bubble which will destabilise economic growth. However, in 2009-12, the depth of the financial crisis means there is no immediate danger of a housing bubble, so it was appropriate to keep interest rates at zero.

2. Quantitative Easing. In a liquidity trap, where lower interest rates fail to boost demand, the Central Bank may need to pursue more unconventional types of monetary policy. Quantitative easing involves increasing the money supply and buying bonds to keep bond rates low. The hope is that the increase in the money supply and lower interest rates will boost investment and economic activity. The fear is that increasing the money supply could cause inflation. Though evidence from 2009-12 suggests that the inflationary impact was minimal. Without quantitative easing, the recession was likely to be deeper, though QE alone failed to return the economy back to a normal growth projectory.

3. Fiscal Policy. The government can boost demand by cutting tax and increasing government spending. Lower income tax will increase disposable income, encouraging consumer spending. Higher government spending will create jobs and provide an economic stimulus.

The problem with expansionary fiscal policy is that it leads to an increase in government borrowing. To finance this extra spending, the government have to borrow from the private sector. If the economy is already growing, then higher government borrowing can crowd out the private sector. Expansionary fiscal policy is also criticised by those who fear it is an excuse to permanently increase the size of the government sector.

However, if the economy sees a rapid fall in private spending, and rise in the saving ratio, expansionary fiscal policy can help provide a boost to demand in the economy without causing crowding out.

This graph shows a large rise in private saving after recession of 2008. A rise in saving means that there is likely to be a deficiency of aggregate demand (UK had longer recession than 1930s) It also means there will be higher demand for government bonds. In 2012, the UK could borrow at very low interest rates. Therefore, expansionary fiscal policy could have been used to boost spending rather than the opposite.

The aim of expansionary fiscal policy is for the government to offset the fall in private sector spending. Similarly, during a period of economic expansion, the government may need to do the opposite of higher taxes and lower spending to create a budget surplus.

3. Devaluation

For countries stuck in a fixed exchange rate. Devaluation can help restore competitiveness and boost domestic demand. A fall in the exchange rate makes exports cheaper and imports more expensive.

For example, Argentina and Iceland both had rapid devaluations, which in the medium term helped their economic recovery. The UK also benefited from leaving the exchange rate mechanism in 1992.

The disadvantage of devaluation is that it can lead to short-term economic pain. Rising import prices increase inflation and reduce standards of living. Devaluation is also seen as a sign of economic and political weakness.

In the case of Eruozone countries, devaluation is needed (see: competitiveness in Europe), but it is much harder to devalue and leave the exchange rate because of the likelihood of capital flight.

Limitations of Demand Side Policies

Demand side policies cannot increase the rate of growth above the long run trend rate without causing unsustainable boom and bust.

For example, in 1972, the UK chancellor, Anthony Barber announced a ‘dash for growth’. Taxes were cut against a backdrop of rising house prices and inflation. This led to the Barber boom – rapid economic growth. However, it also caused a spike in inflation and the growth proved unsustainable.

In the 1980s, we repeated this mistake by loosening monetary and fiscal policy. This led to very high growth and inflation. This growth proved unsustainable, leading to the recession of 1991-92.

In some cases, demand side policies need to be used to limit the growth of aggregate demand. It is necessary to avoid an economic boom, where growth proves unsustainable and inflationary. Managing AD to avoid boom and bust cycles can help provide a longer period of economic expansion.

Supply Side Policies

The alternative strategy for improving economic growth is to use supply side policies. These attempt to increase productivity and efficiency of the economy.

Lower Income Taxes. It is argued lower income tax can boost the incentive to work and increase labour supply. It is possible, if income taxes were excessive, then cutting them may encourage people to work more. However, this argument is often exaggerated. Reducing basic rate of income tax from 23% to 22%, would have very minimal impact on labour supply. With a tax cut, there is both an income and substitution effect. The income effect states that higher taxes make people work longer hours to achieve their target income. (economics of tax cuts)

Flexible labour markets. Highly regulated labour markets, with excessive regulation may discourage firms from employing workers and setting up in the first place. It is argued that countries such as France have too much labour market restrictions, such as cost of firing workers, maximum working week and minimum wages. More flexible labour markets can thus provide a long term boost to investment. However, there is a trade off. More flexible labour markets could increase job insecurity and lead to harmful effects on labour productivity.

Better Union relationships. In the 1970s, the UK economy suffered because of poor industrial relations. There were frequent strikes which stopped production. With an adversarial attitude it was difficult to promote more labour efficient production processes. Reducing the power of trades unions can help to improve labour productivity.

Privatisation and deregulation.  Privatizing industries can increase efficiency as private firms have a greater profit incentives to cut costs and boost productivity.

Limitations of Supply Side Policies

Supply side policies can take considerable time. For example, if you invested in better education and training, it could take several years for this to lead to higher labour productivity.

In a recession, supply side policies are not going to solve the fundamental problem of deficiency of aggregate demand. In a recession increasing flexibility of labour markets and encouraging investment may help to some extent. But, unless there is sufficient demand, firms will be reluctant to increase production and set up new business ventures. For example, in how to deal with youth unemployment, the ECB president mentioned a ‘growth pact’. But, this growth pact is only considering supply side policies and not the lack of demand in countries with high unemployment.

Politicians often over-estimate the potential for supply side policies to improve the long term growth rate. For example, in the 1980s, the UK pursued several relatively successful supply side policies (privatisation, reduce power of unions, lower income tax). But, there was no economic miracle, when growth went above the long run trend rate of 2.5% – it proved unsustainable and led to boom and bust.

More on supply side policies here.

BTW: George Bush is writing a book on policies to promote economic growth. So if you want to spend $25 on learning how he achieved one of most disappointing post war periods of economic growth and job creation, check it out. Coming this summer – George Bush economic growth

Related

• Causes of economic growth

In response to the economic crisis of 2008, many economies faced large budget deficits – due to cyclical factors (e.g. falling tax revenue in recession) and also underlying structural deficits (e.g. growing welfare bills). Some countries in the Eurozone also experienced rapidly rising bond yields as markets feared there was risk of default.

Therefore, many economists suggested it was necessary for the government to cut spending and target deficit reduction. The argument was that cutting government spending would reassure markets because it shows governments have a clear strategy for reducing debt levels and avoiding default. With a rapid cut in government spending and deficit reduction, it should help bond yields remain low. These low interest rates and strong action would encourage business to invest. Therefore, the private sector should take over the role of the public sector.

However, critics (notably Paul Krugman) argue that cutting spending in a recession does not improve consumer or business confidence. In fact, it can actually make things worse. Cutting government spending leads to a further fall in demand, lower growth, higher unemployment and actually a decline in confidence.

Furthermore, in a serious balance sheet recession and liquidity trap, some economists argue there is little risk of rising bond yields in the short term. (The Eurozone has separate issues because no lender of last resort)

This is because in a liquidity trap, there is a rise in private sector saving and strong demand for government bonds. The Keynesian approach is therefore to increase government spending to offset the rise in private sector saving. This enables economic recovery and an improved cyclical deficit. When the economy has recovered and is showing signs of private sector growth, only then should the government should tackle its budget deficit.

Confidence Fairy in UK

In June and October, 2010, the chancellor announced spending cuts of up to £81bn over the next 4 years. In particular, this raised prospect of public sector job cuts.

Up to 500,000 public sector jobs could go by 2014-15 as a result of the cuts programme, according to the Office for Budgetary Responsibility. (Spending Review 2)

What Happened to Consumer Confidence in the UK

UK Consumer Confidence

After recovering from worst of 2008, consumer confidence  fell to record low by start of 2012.

UK business confidence also fell from +12 in 2010, to -7.5 in 2011. Though it was more resilient than consumer spending.

What Happened to Economic Growth?

After brief recovery 2009 Q3 to 2010 Q3. The spending review co-incided with an end to the recovery and subsequent double dip recession at the start of 2012.

In other countries, Ireland, Greece and Spain, have also pursued austerity policies. This has led to similar falls in economic output, and has also failed to reassure bond markets. Despite spending cuts, bond yields have continued to rise because of fears over long term growth prospects in Eurozone.

Related

• Death of a fairy tale – Krugman NY Times
• Budget deficits and bond yields
• Is austerity self-defeating?

• C= Consumer spending (Household consumption)
• I = Investment (gross fixed capital formation)
• G= Government  spending (Government investment and Government consumption)
• X-M = Net Exports.

Components of Aggregate Demand

A graph showing components of AD as a %

In the above charts, I left out 2 minor factors NPISH and change in inventories to make it simpler.

Source: HM Treasury Data

Aggregate Demand curve

AD slopes downwards because:

• At a lower price level people are able to consume more goods and services, because there Real income is higher
• At a lower price level interest rates usually fall causing increased spending.
• At a lower price level, exports are relatively more competitive than imports.

Notes

 Related

• What does the UK produce?
• Aggregate Demand