The recent credit crunch has resulted in a lot of criticism of the banks and other financial institutions. Many commentators have argued for reforms to the financial system with greater controls on lending and restrictions on banks’ ability to create credit. The articles below have a common theme – assessing the actions that politicians and policy makers need to consider as a result of the recent credit crunch.
After excess comes fear – and then socialism, at least for the bankers Guardian (23/3/08)
Capitalism’s too important to be left to capitalists Observer (23/3/08)
If the City won’t put its house in order, politicians must Observer (23/3/08)
Podcast
How to stop the market mayhem Guardian (19/3/08)
Questions
| 1. |
Explain what is meant by the ‘liberalisation of financial markets’. |
| 2. |
“If the City won’t put its house in order, the politicians must”. Examine the validity of Will Hutton’s argument. |
| 3. |
Discuss the extent to which the freedom of banks to lend has been the cause of the recent credit crunch. |
Late March saw the auctioning by the Bank of England of £10.9bn to boost liquidity in financial markets. This was £5bn more than had been expected and so should help ease the liquidity position for cash-strapped banks and other financial institutions.
When the rivers run dry The Economist (6/3/08)
Bank of England answers pleas with £5bn injections Times Online (21/3/08)
Questions
| 1. |
Explain what is meant by liquidity. |
| 2. |
Assess the main factors that have resulted in a shortage of liquidity in financial markets. |
| 3. |
Discuss the extent to which this extra liquidity is likely to help reduce the likelihood of recession in the UK. |
The principal measure of inflation, the consumer prices index, is calculated from price changes in a basket of goods. The composition of this basket is changed each year to reflect changes in consumer spending patterns. 2008 sees smoothies, USB storage devices and muffins coming into the basket, while ready meals and 35mm camera film have had their day and leave the basket of goods.
What’s in and what’s out in 2008 Guardian (17/3/08)
Fruit smoothies in, ready meals out Guardian (17/3/08)
Smoothie pour into cost of living basket Guardian (17/3/08)
Let them eat sourdough bread, olives and sun-dried tomatoes Guardian (17/3/08)
Smoothies join basket of goods used to calculate inflation Times Online (18/3/08)
Questions
| 1. |
Explain what is meant by a weighted index. Why does the consumer prices index (CPI) need to be a weighted index? |
| 2. |
Explain how the CPI is calculated. |
| 3. |
Discuss why annual percentage changes in the CPI may not be an appropriate measure of inflation for all groups in society. |
One of the key Budget measures was a change in the car tax regime. The Chancellor, Alistair Darling, introduced a new banded system annual vehicle excise duty (VED) based on the level of emissions of the vehicle. The cars with the lowest levels of emissions will be exempt from VED, but at the other end of the spectrum, the highest polluting vehicles will face an annual VED of around £440. However, this will be substantially higher in the year of purchase of the vehicle and this so-called ‘showroom tax’ will raise the tax level to £950 in the first year of purchase.
Gas guzzlers hit with higher taxes Guardian (12/03/08)
New taxes on gas-guzzlers will raise an extra £1.2bn Guardian (13/03/08)
Spared at the pumps – but hit in the showroom Guardian (16/03/08)
Q&A: Showroom tax BBC News Online (12/03/08)
Gas guzzlers set to face £950 tax BBC News Online (12/03/08)
Questions
| 1. |
Explain how the highest polluting vehicles affect the socially optimal equilibrium in the market for car travel. |
| 2. |
Using supply and demand diagrams as appropriate, illustrate the likely impact of the new car tax regime in 2009-10 on the equilibrium in the market for car travel. What is the significance of the concepts of price elasticity of demand and consumer surplus in your analysis? |
| 3. |
Discuss the likely effectiveness of the new banded car tax regime at reducing the average level of emissions from cars. Would raising the tax on petrol and diesel be a more efficient method of achieving the same goal? |
The euro has climbed during March to a record high against both the dollar and the pound. The reluctance of the ECB to cut interest rates has simply served to strengthen this trend and it looks set to continue for a while.
Euro hits record highs Times Online (6/3/08)
Euro hits new highs as ECB rejects early cut in rates Times Online (7/3/08)
Sterling hits new low against euro Guardian (5/3/08)
Dollar slides to fresh euro low BBC News Online (14/3/08)
Questions
| 1. |
Explain the principal factors that have led to the appreciation of the euro against the dollar.
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| 2. |
Discuss the likely impact of this appreciation on firms in (a) the eurozone and (b) America. |
| 3. |
Examine whether the appreciation of the euro strengthens or weakens the case for those in the UK wanting to join the euro. |