Thursday, March 05, 2009

Economics exam

Question 1.

In December 2005 I took out a loan of £4,000 to buy a car. Base rates were 4.5% and the APR for the loan was 6.93%. If I was to take out a £4,000 loan today from the same bank now that base rates have dropped to 0.5% I would pay an APR of 17.9%.

Explain without resorting to foul language and incitement to violence (very hard I know).


Shuggy said...

Explain without resorting to foul language and incitement to violence (very hard I know).

Your bank is shit - if you need to, borrow from one that will lend cheaper. Failing that, get a balaclava and shotgun and take an interest free - indeed repayment free - withdrawal.

Base rates only have to do with the rate at which banks pay bank to the Bank of England as the lender of last resort - but no bank has had to do this for donkeys - until Northern Rock. It's the rate at which banks lend to each other that's the crucial variable here.

Will said...

It is explained by the definete fact that the banks are engaging in a witty philosophical conceit that illustrates how arbitrary the concept of money is. It's that, or it's what happens when you give a black marker pen to an idiot.

Now back to watching Red Riding on the telly and that.

Anonymous said...

If the only variable is the interest rate, then since LIBOR is now half what it was in December 2005, the explanation is that the bank thinks people are so desperate to buy cars that they will pay mad interest rates to the few banks which are willing to lend.

People are not that desperate, so the car industry closes down, presumably causing small business in the car industry supply chain to default on their bank loans etc (continued page 94).

Raise less corn and more hell.

DorsetDipper said...

it's a market? Supply and demand?

I guess what you think of this rate depends whether you need a car, or a reasonable income from your pension?

john problem said...

It's like this. And it's really simple. What you are doing is being involved in a double layered credit derivative quantitatively eased financial instrument which is designed to con you. Right? Do you think that things have changed recently? That the financial world has got struck by a sudden influx of hubris and apology statements. Nah. Best buy an old banger for cash.

Anonymous said...

The pension depends on asset values and bond yields. Neither will be up to much in an economy which has melted down.

It may come to a point at which there is insufficient confidence to borrow, let alone lend.

Furthermore, quantitative easing is like giving laxatives to a man with diarhhoea.