Major's economics

Question 1

what economic issues had Major inherited?

Answer 1

-in a bad state: high interest rates, decline in manufacturing output, steep rise in unemployment (increased by a million between 1991 and 1992) and a slump in prices

Question 2

what was one of the elements of Thatcher’s government that had caused economic issues for Major’s government?

Answer 2

-the lawson boom late 1980s
-there was increased property purchase as homeowners felt they were getting richer, however there was a fall in house prices due to negative equity
-negative equity = house prices are lower than when they were bought
-by end of 1992 900,000 homes were in negative equity
-by 1992 nearly 500,000 homes had been repossesed

Question 3

who did the recession of 1992 affect the most?

Answer 3

-middle class property owning people
-this meant the traditional tory voter base was suffering which made winning the 1992 election unlikely for the conservatives

Question 4

1992 election:

Answer 4

tories won

Question 5

what was the exchange rate mechanism?

Answer 5

-Britain had been a member since october 1990
-the value of the pound was tied to the value of the highest european currency which was the deutschmark
-in theory this provided currency stability and predictability

Question 6

what was the issue of ERM membership for Britain?

Answer 6

-the pound was overvalued as as it wasn’t as strong as the deutschmark

Question 7

describe the 1992 run on the pound:

Answer 7

-currency investors believed the pound was overvalued and would soon drop
-so investors rapidly sold their pounds to avoid making a loss
-money markets became flooded with pounds which made them cheaper, which in turn further devalued the pound

Question 8

describe black wednesday:

Answer 8

-the bank of england tried to avoid the run on the pound by increasing interest rages to 12% and then 15% (had been around 10%)
-BUT they were eventually forced to leave the ERM and devalue the pound

Question 9

what was the impact of black wednesday?

Answer 9

-it badly affected the gov.’s economic credibility
-approval ratings dropped whilst labour’s increased
-some see it as the beginning of the end
-chancellor Lamont resigned in 1993

Question 10

what was the economic situation like after black wednesday?

Answer 10

-value of the pound dropped which boosted british exports
-domestic goods were now cheaper which boosted the internal market
-house prices began to rise and unemployment decreased
-there were positive economic indicators by 1997 e.g. higher productivity, consumer spending higher, public spending lower
-but public didnt attribute this economic feel good factor to the conservatives