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detailed explanation of different cycles。 The Centre for Growth and Business
Cycle Research based at the School of Social Sciences； The University of
Manchester （socialsciences。manchester。ac。uk/cgbcr）； provides details
of current research； recent publications and downloadable discussion
papers on all aspects of business cycles。
Robert Wright； a former mercial pilot； started his first business；
Connectair； while on the MBA programme at Cranfield。 His aim was to
start a small feeder airline bringing passengers into the main UK airport
hubs such as Heathrow and Gatwick； where they would connect
with the major carriers’ flights。 He started out at the tail…end of the UK
recession in 1982； so to keep costs low； as well as being the MD he was
at times the pilot； steward and baggage handler as well as greeting
passengers at check…in。
Over the next few years he built the business up to the point where it
employed 60 people and made a modest profit。 He sold it at the height
of the Lawson boom in 1989 to Harry Goodman’s International Leisure
Group； which collapsed spectacularly in the 1991 economic downturn；
leaving crippling debts and thousands of people without jobs。
Wright bought the pany back for a nominal ￡1； financing working
capital with backing from 3i； the venture capital firm。 Over the next 8
years he and his team built the business up； now renamed City Flyer
Express； selling out in 1999； just ahead of the dot stock market
collapse； to British Airways for ￡75 million。
INFLATION
Inflation is defined as too much money chasing too few goods and if it
gets out of control it can devastate an economy。 Not all goods and services
have to experience price increases。 The inflation rate itself is measured
by defining a basket of goods and services used by a ‘typical’ consumer
Economics 205
and then keeping track of the cost of that basket using such indices as the
retail price index。 During the upswing stage of a business cycle there is a
tendency to overshoot； which can lead to the economy ‘overheating’。 As
there is usually a lag while production struggles to catch up with demand；
prices rise to ‘ration’ goods and services。 Inflation is generally seen being a
problem for a number of reasons：
。 ‘Inflation makes fools of us all’ is a truism about the misleading signals
sent by rapid changes in price。 Consumers and businesses like certainty；
and fluctuating rates of inflation make planning more difficult； which
in turns leads to a loss of confidence。
。 Inflation redistributes wealth in a haphazard and o。。en unfair manner。
For example； savers will find their purchasing power diminish as
their fixed sum saved will buy fewer goods and services in the future。
Borrowers will benefit as they are effectively paying back a capital sum
that is being eroded in value by inflation。
。 If the inflation rate is greater than that of other countries； domestic
products bee less petitive； so exports will be reduced and economic
growth will slow。
。 High inflation can lead to high wage demands； which can in turn lead
to an upward spiral in costs and so feed further inflationary pressures。
Current economic wisdom has it that a modest degree of inflation is healthy
provided that everyone knows what it will be and can factor it into their
decision making。 That is why central banks have as one of their functions
monitoring inflation rates and taking action to keep below a certain figure
– in the UK this is 2 per cent。 Three further aspects of inflation that need to
be considered are：
。 Deflation is the opposite of inflation and occurs when the general level
of prices is falling。 This can occur a。。er a major bubble collapses and
will lead to people pu。。ing off purchasing decisions in the expectation
of being able to buy later at even lower prices。
。 Hyperinflation is unusually rapid self…feeding inflation； in extreme
cases； this can lead to the collapse of a country’s monetary system。 This
occurred in Germany in 1923； when prices rose 2；500％ in one month
and in Zimbabwe in April 2008 when the annual inflation rate hit
165；000％。
。 Stagflation is the bination of high economic stagnation with inflation；
such as happened in industrialized countries during the 1970s；
when OPEC raised oil prices。
206 The Thirty…Day MBA
INTEREST RATES
Around half the money used to finance businesses is borrowed and private
individuals use mortgages； hire purchase and credit cards to fund many
of their purchases。 Governments too have to use debt through the sale of
bonds； when taxes are insufficient to meet their spending plans。 The ‘price’
of borrowed money is the interest paid。 Governments can stimulate both
business and consumer expenditure by lowering interest rates or choke off
demand （see ‘Micro vs macroeconomics’； above） by raising it。 Interest rates
are the favourite tool of central banks to control inflation as it can be used
to bring supply and demand back into balance。
Interest rates also have a direct bearing on a country’s exchange rate。 If
it is higher than that in other parable economies it will tend to support
the exchange rate at a higher rate； and if lower； the currency will tend to be
weaker （see also ‘The exchange rate’）。 There are； however； several different
interest rates and governments do not directly control them all：
。 Bank Base Rate： This is the interest set by governments； for example
by the Bank of England’s monetary mi。。ee； the US Federal Reserve
and the European Central Bank。 It is a reference point from which other
interest rates are set； but is not the actual interest rate charged by clearing
banks to their many and varied clients。
。 Libor （London Inter…bank Offered Rate）： This is the rate of interest at
which banks borrow funds from each other； an essential activity to
facilitate global trade and to se。。le contracts on futures and options
exchanges。 As such； it is the primary benchmark for short…term interest
rates globally。 The rate is set by a panel representing around 500 banks
and depends on a number of factors； including local interest rates；
expectations of future rate movements and the prevailing banking
climate。 Usually the Libor rate is lower than the rate set by central
banks to allow banks a small margin。 But if banks lose confidence in
their peers’ ability to repay then either they stop lending or they charge
a premium over the Bank Base Rate。 This was the case during the subprime
crisis in 2007/08。 Libor is both sensitive and plex。 Rates are set
in 10 currencies and for 15 different maturity dates； from an ‘overnight’
rate maturing tomorrow； a ‘spot/next’ rate that covers the period to the
day a。。er tomorrow； through weeks and months out as far as （but never
further than） one year。
。 Lending Rate： This is the rate at which banks will lend to businesses
and private individuals。 It can be anything from a fraction of a percent
above either Bank Base Rate or Libor （whichever is the higher） for blue
chip firms； a percent or two above for mortgages； and up to 15％ above
for credit card loans； the higher the perceive