Category: Essential Economics for Business: Ch 13
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.
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? |
A key determinant of the credit crunch was a shortage of liquidity and a breakdown of the interbank lending market. In an attempt to ease the credit situation and restart the interbank lending market, the Bank of England auctioned over £40bn of credit at the end of September. The aim of this was to boost the liquidity position of the banks.
Central banks pump billions into system Guardian (27/9/08)
Bank of England pumps £55bn into credit markets Times Online (26/9/08)
Where has all the money gone? BBC Magazine (15/10/08)
Questions
| 1. |
Explain why the Bank of England needed to boost liquidity in the money markets. |
| 2. |
Using diagrams as appropriate, show the impact of this increase in credit on the money markets. What constraints does the Bank of England face in ensuring that it achieves the desired outcome? |
| 3. |
Discuss whether the approach of raising liquidity is likely to be more or less effective than a change in the regulatory framework. |
Commentators and policy makers are casting far and wide to try to find policies that may offer solutions to the banking crisis and the financial situation it has caused. One proposal (considered in two articles below) is the introduction of a Tobin tax. A Tobin tax is a levy on currency transactions and the argument is that this will act as a disincentive for short-term speculation and therefore force traders in financial and currency markets to look more at medium- to long-term rather than short-term gain.
Tobin’s nice little earner Guardian (15/10/08)
Make state capitalism pay its way Guardian (26/9/08)
Questions
| 1. |
Explain what is meant by a Tobin tax. |
| 2. |
Assess the arguments for and against the imposition of a Tobin tax on currency transactions. |
| 3. |
Discuss whether changes to the regulatory structure of currency markets may be more effective than the introduction of a Tobin tax. |
As well as old theorists being brought out to help frame the financial crisis in a new context, old theories and policies seem to be getting a new airing as well. In the articles below various commentators consider whether joining the euro may offer a solution to our economic situation.
How the euro is gaining currency Guardian (6/10/08)
Contagion could fracture the eurozone Guardian (6/10/08)
Dithering Britain needs its own plan and it may hinge on joining the euro Guardian (1/10/08)
Questions
| 1. |
Explain how interest rates are set in the eurozone. To what extent might this act as a constraint on policy making in times of economic downturn? |
| 2. |
Discuss the arguments for and against the UK joining the euro. |
| 3. |
Assess reasons why joining the euro may be more appropriate for the UK now than a decade ago. |