Category: Economics 10e: Ch 17

The financial crisis and economic downturn have started to impact on unemployment which, in the UK, has risen at the fastest rate for 17 years. A study by the International Labour Organisation (ILO) has said that the downturn may add 20 million to the global unemployment total bringing the figure to around 210 million.

Unemployment rises at fastest rate in 17 years Times Online (15/10/08)
Smoke clears to reveal the monster of rising unemployment Guardian (19/10/08)
Unemployment total may be more than 2 million by Christmas Guardian (16/10/08)
Back to the future? No, thanks Guardian (15/10/08)
White collar workers next victims as unemployment accelerates Times Online (16/10/08)
World jobless ‘to add 20 million’ BBC News Online (20/10/08)
UK recession is here to stay, experts warn Telegraph (26/10/08)
Recession Britain: Just how bad is it … and will it get much worse? The Independent (25/10/08)

Questions

1. Explain the likely impact of the economic downturn on the UK labour market.
2. Discuss the view that “Unemployment won’t be solved by labour market flexibility ……. “.
3. Assess policies that governments around the world can adopt to try to mitigate the likely impact of a 20 million rise in unemployment. 

Inflation has reached a 16-year high of 5.2% in September 2008 with rising energy bills leading to much of the increase. This puts inflation well outside the target rate for the Consumer Prices Index (CPI), but analysts are convinced that it will fall sharply in the coming months with some predicting inflation to be just 1% by autumn 2009. Even the Bank of England has now agreed that inflationary risks have moved “decisively to the downside” allowing them to cut the interest rate from 5% to 4.5% as part of a globally coordinated interest rate cut.

Rising gas bills send inflation to 16-year high Times Online (14/10/08)
Inflation high but fear of recession grows Guardian (14/10/08)
Inflation soars to 5.2% Guardian (14/10/08)
Fresh storm gathering as inflation surge adds £3bn to welfare bill Times Online (15/10/08)
Rising cost of living prompts further pay strike threats Times Online (15/10/08)
Where now for UK inflation? BBC News Online (14/10/08)
Consumer inflation reaches 5.2% BBC News Online (14/10/08)

Questions

1. Explain how the CPI is calculated.
2. What are the principal factors that have led to the rise in inflation to 5.2%?
3. Discuss whether, in the current financial crisis, it is appropriate for the Bank of England’s Monetary Policy Committee (MPC) to be targeting just inflation.
4. Explain the transmission mechanism whereby a cut in interest rates will affect inflation. Discuss whether this transmission mechanism will be as relevant in the current financial climate.

During his lifetime Galbraith warned extensively of the problems likely to be associated with financial excesses, and if alive today would almost certainly allow himself a ‘told you so’ moment. He was a lifelong liberal who argued that capitalism was inherently a fragile and unstable system. So what relevance does his work have to the current financial crash?

Galbraith saw this coming Guardian (15/10/08)
In praise of …The Great Crash 1929 Guardian (15/10/08)

Questions

1. Write a short paragraph summarising Galbraith’s life and work.
2. Assess the extent to which his arguments in relation to the fragility of the financial system are still relevant today.
3. Galbraith commented that all stockmarket bubbles exhibit seemingly imaginative, currently lucrative, and eventually disastrous innovation in financial structures“.¬†Discuss the extent to which this kind of innovation (e.g. derivatives and sub-prime mortgages) may have been responsible for the current financial crisis.

“‘Capitalism,’ Schumpeter wrote, ‘is by nature a form or method of economic change and not only never is but never can be stationary … This process of Creative Destruction is the essential fact about capitalism”. In the article below William Keegan looks at this process of creative destruction and relates it to the current financial crisis and the downturn in the business cycle.

Moral hazard? It’s just another danger along the capitalist way Guardian (5/10/08)
Time To Drop The Baggage That Comes With Moral Hazard Financial Times (4/10/08)

Questions

1. Explain what is meant by the term ‘Creative Destruction’.
2. Explain what is meant by the term ‘Moral Hazard’.
3. “In theory, enlightened economic policies can moderate the workings of the business cycle”. Discuss possible policies that can moderate the workings of the business cycle.
4. Discuss the extent to which the recent economic boom was an ‘asset-price boom’ rather than a ‘traditional one’.

The prospect of a severe recession in America has inevitably drawn parallels in the media with the Great Depression of 1929. The parallel may not be entirely appropriate in terms of scale and severity, but what lessons are there that can be learnt from the Great Depression?

Credit crunch: risk-taking
Times Online (23/3/08)
America gets depressed by thoughts of 1929 revisited Times Online (23/3/08)
Lessons learnt from Great Depression Times Online (25/3/08)

Questions

1. Explain the principal causes of the Great Depression of the 1930s.
2. Assess the parallels between the current economic situation in America and the situation preceding the Great Depression in 1929.
3. Discuss the extent to which the recent loosening of monetary and fiscal policy in America will help reduce the likelihood of recession.