Category: Economics: Ch 20

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Need some money – why not print it?

Some economists believe that deflation is now a more serious threat than inflation. If this is the case then conventional monetary policy may not be enough to prevent deflation. In the article below, Gavyn Davies argues that the solution is to start thinking like South American dictators and print more money!

We must start thinking like South American dictators Guardian (13/11/08)

Questions

  1. Explain what is meant by “deflation”.
  2. Examine the link between deflation and depression.
  3. Explain why deflation requires a different policy response from inflation.
  4. Discuss the likely success of a policy of “printing money” in preventing deflation.
  5. Assess the impact of financing tax cuts through the sale of government bonds in a deflationary situation.
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Recession – are we sliding inexorably towards it?

The possibility of recession in the UK, the USA and Europe has attracted a great deal of media attention and in this podcast Andy Beharrell considers whether there is any real evidence of recession. The podcast considers the definition of recession, the causes of recession and the different approaches taken by governments to try to keep their economies out of recession. While the UK and Europe have adopted essentially rules-based policy approaches, the USA has taken a more interventionist and discretionary approach with a significant loosening of both monetary and fiscal policy.

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The rise and rise of unemployment

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. 
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Demanding exports

The article below is an economic briefing from The Times, published to support the Bank of England’s Target 2.0 competition. It considers the importance of the exchange rate in determining the demand for imports and exports and therefore the impact that exchange rate changes are likely to have on aggregate demand.

Economic briefing: exchange rate is crucial to export demand and influences inflation Times Online (20/10/08)

Questions

1. Explain how import prices and export prices change in response to a fall in the value of sterling.
2. Define the terms (a) price elasticity of demand for imports and (b) price elasticity of demand for exports.
3. With reference to your answers to questions 1 and 2, assess how the balance of payments will change in response to a fall in the value of sterling. What is the relevance of the Marshall-Lerner condition to these changes?
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Inflation tops 5%

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.