Category: Essential Economics for Business: Ch 11
The G20 Leaders Summit on Financial Markets and the World Economy took place on November 14–15, 2008, in Washington DC. Many commentators dubbed this meeting ‘Bretton Woods II’. Bretton Woods – Mark I was a meeting in the summer of 1944 that set out the foundations for the post World War II economic order. It set up a system of semi-fixed exchange rates and led to the establishment of the International Bank for Reconstruction and Development (IBRD) and the International Monetary Fund (IMF). Bretton Woods Mark II was perhaps less historically significant, but the world leaders agreed a plan to boost the world economy through tax cuts, higher public expenditure and lower interest rates; something Lord Keynes, the principal negotiator for the UK at Bretton Woods Mark I, would have wholeheartedly approved of!
G20 to back global tax cuts Times Online (16/11/08)
This week, our leaders have a chance to make the world anew Guardian (9/11/08)
A dangerous free-for-all Guardian (11/11/08)
Bretton Woods II – five key points on the road to a new global financial deal Guardian (14/11/08)
G20 summit: ‘The world economy is broken and they need to reflate’ Guardian (14/11/08) Podcast
Doubts raised over prospects of success for ‘hasty summit’ Guardian (15/11/08)
Our chance for a working regulatory regime Guardian (15/11/08)
Questions
- Write a short paragraph summarising the outcomes of Bretton Woods II.
- Assess the extent to which the fiscal and monetary stimulus agreed by the G20 leaders will be successful at minimising the depth of the global recession.
- Discuss the need for regulatory reform of the world financial system (as considered at Bretton Woods II).
- The G20 “signalled a determination to press on with the completion of the Doha world trade round”. Assess the extent towhich this is likely to be successful.
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
- Explain what is meant by “deflation”.
- Examine the link between deflation and depression.
- Explain why deflation requires a different policy response from inflation.
- Discuss the likely success of a policy of “printing money” in preventing deflation.
- Assess the impact of financing tax cuts through the sale of government bonds in a deflationary situation.
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.
The current financial crisis has led many to wonder whether this may mark the ‘death of capitalism’. While this may almost certainly be an over-statement, it may mark a fundamental sea change in the way in which we oversee and manage a capitalist system. The articles below look at some of the implication of this possible change in approach.
Positive thinking Guardian (18/10/08)
A category error Guardian (10/10/08)
History can guide, yet there are new limits of the possible Guardian (10/10/08)
I’ve watched the economy for 30 years. Now I’m truly scared Guardian (28/10/08)
The new New Dealers Guardian (26/9/08)
Europe and America in the shadows as a new era dawns Telegraph (26/10/08)
Questions
| 1. |
Explain what is meant by a capitalist system of economic organisation. |
| 2. |
Assess the extent to which a ‘soft-touch’ regulatory approach can be blamed for the current financial crisis. |
| 3. |
Discuss the extent to which greater levels of government intervention and economic regulation are likely to result from the current financial crisis. |
| 4. |
Are we witnessing the death of capitalism? |
The potential relevance of Keynesian economic theory has been sharply brought back into focus as governments struggle to find an appropriate mix of policies to try to avoid or mitigate the impact of recession on their economy. Chancellor Alistair Darling has relaxed fiscal rules to allow spending to rise in an attempt to boost aggregate demand and compensate for falling consumer demand.
How to kick start a faltering economy the Keynes way BBC Magazine (22/10/08)
Situation vacant: a theorist is sought to succeed Mr Keynes Guardian (11/10/08)
In praise of ….. John Maynard Keynes Guardian (9/10/08)
Spend, spend, spend: Alistair Darling adopts John Maynard Keynes doctrine Times Online (20/10/08)
Darling invokes Keynes as he eases spending rules to fight recession Guardian (20/10/08)
Follow Gordon Brown again and spend out of recession Times Online (14/10/08)
Economists condemn Chancellor Alistair Darling’s spending plan Telegraph (26/10/08)
Keynes, the man to get the Government out of a crisis The Independent (20/10/08)
Questions
| 1. |
Explain briefly the Keynesian approach to the management of the level of aggregate demand. |
| 2. |
Using diagrams as appropriate, show the impact of the relaxation of fiscal spending rules on the UK economy. |
| 3. |
Discuss the extent to which a Keynesian approach to economic policy is likely to help the government avoid a recession in the UK. Is leaving the control of interest rates in the hands of an independent Bank of England a constraint on the effectiveness of this policy approach? |
