Category: Economics: Ch 22

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China – keeping more in reserve

To try to help reduce inflation, the People’s Bank of China (the central bank of China) has ordered banks to hold a greater proportion of their assets as cash. These higher reserve requirements will limit the ability of the banks to create deposits and is a form of monetary policy intended to support the fight against inflation. However, how successful is this likely to be given the rapid economic growth being experienced by China?

China lifts reserve requirements for banks Times Online (12/5/08)

Questions

1. Explain how a higher reserve requirements helps reduce inflation.
2. Evaluate two policies that the central bank could adopt, other than raising reserve requirements to help control inflation in China.
3. “As underlying inflationary pressures remain undiminished, it is vital for the government to keep its tightening policy stance to anchor inflationary expectations.” Discuss the extent to which a tightening policy stance will influence inflationary and other expectations.
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Brown damned by his Faustian pact

In recent years Labour has taken what might be described as a light-touch on regulation of City firms and financial institutions. In the article below the economics editor of the Guardian, Larry Elliott, argues that this ‘pact with the devil’ might have come back to haunt Gordon Brown as the impact of the global credit crunch continues to dominate economic news.

Brown damned by his Faustian pact Guardian (12/5/08)

Questions

1. What form has regulation of the financial sector taken under the Labour government?
2. Assess the extent to which this regulatory approach could be considered a ‘Faustian bargain’.
3. Discuss the extent to which tighter regulation of financial markets might have helped the UK economy avoid the impact of the global credit crunch.
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Lessons from the Great Depression

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.
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The credit crunch – is capitalism too important to be left to capitalists?

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.
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Financial markets – flush with cash?

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.