Economic boom and effects.

Some
solutions of the UK government
1. What is “economic boom”?

A boom is a period of rapid economic expansion resulting in higher GDP,

lower unemployment, a higher inflation rate and rising asset prices.

Booms usually suggest the economy is overheating creating a positive

output gap and inflationary pressures.

A boom suggests the economy is growing at a faster rate than the long-run
trend rate of economic growth.

Economic booms tend to be unsustainable and are often followed by a bust

– an economic recession or downturn. Hence the phrase “Boom and Bust”.

Monetary policy tries to avoid boom and busts by moderating the economic
cycle – e.g. if growth is too fast, the Central bank will increase interest
rates to moderate inflationary pressures.

2. Causes of economic boom -> Solution

- Expansionary monetary policy: If the economy is growing close to the

long-run trend rate and monetary policy is loosened (cut in interest rates).
This will further increase demand in the economy. The lower costs of
borrowing will encourage investment and consumer spending. This will
cause a further rise in aggregate demand. Lower interest rates will also
make it more attractive to take out a mortgage and buy a house.

- Expansionary fiscal policy: If the economy is getting close to full

capacity and the government cut taxes – financed by higher borrowing,
then this will have the effect of boosting consumer spending and aggregate
demand.

- Confidence. If consumers and firms are confident – then they are more
likely to borrow to finance investment and spending. This can cause a fall
in the savings ratio and encourage a higher percentage of income to be
spent.

- Rising asset prices. Rising asset prices, such as housing and stocks create
a positive wealth effect. This increases confidence and also the ability to
remortgage to gain equity withdrawal. Higher growth, rising prices and
high confidence also causes a feedback loop to put upward pressure on
asset prices to continue to rise. This enthusiasm for buying assets which are
rising in value – can become divorced from an underlying valuation. It is
something economists can refer to as irrational exuberance.
3. Economic boom in the UK

The 1980s was another period of relatively fast growth ( Sometimes known
as the Lawson boom). Towards the end of the 1980s, UK growth started to
exceed its long-term trend rate (typically around 2.5%). Quarterly growth
of 1% means annualise growth of 4%. In this period of economic boom, the
UK saw

- A rapid rise in house prices.

- Widening of current account deficit (if domestic demand rises faster
than domestic supply – the economy will tend to import more goods
from overseas.)
- Fall in the savings ratio
- Rising in the inflation rate

As economic growth increased, we also saw a rise in inflation.

Source: www.economicshelp.org