Category: Essentials of Economics: 8e Ch 13

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.

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.

Rapid economic growth in China has pushed inflation to an 11-year high of 8.7% in February 2008. This was driven significantly by higher food prices, with the price of pork rising by nearly 64%. This higher level of inflation has led to concerns that policy may need to be tightened.

Sweet and sour pork The Economist (13/3/08)
China inflation hits fresh high BBC News Online (11/3/08)
Chinese inflation alarms authorities Guardian (11/3/08)
Chinese warn on decade-high inflation Times Online (5/3/08)
Chinese inflation shoots to 11-year high Times Online (11/3/07)
China tries to apply brakes to economy Guardian (4/3/08)

Questions

1. What are the main causes of rising inflation in China?
2. Assess the extent to which policy needs to be tightened to counter the rising level of inflation in China. What would be the possible downsides of such a policy?
3. Discuss possible policy changes that could be implemented by the Chinese government to reduce the level of inflation.

The Budget 2008 was quite an under-stated affair, but was the first delivered by Alistair Darling as Chancellor. As ever, many of the changes had been announced well in advance, reducing the element of surprise. But the Budget remains an important event. Note that the Budget websites can also be useful reference sources for economic policy changes.

Budget 2008 Guardian Budget Special
Interactive: Budget 2008 Guardian (11/03/08)
What to tell us on Budget day: where our money is going and how it can be stopped Guardian (10/03/08)
Budget 2008 BBC News Online Budget Special

Videos and podcasts

Old Mother Hubbard Guardian (13/03/08)
Budget speech in full (Video) BBC News Online (12/03/08)

For details of the Budget measures, you may want to look at:
Budget 2008 HM Treasury Budget pages HM Treasury Budget microsite HM Treasury (March 08)

Questions

1. What are the key changes in the Budget? What effects are they likely to have on the economy?
2. Assess the extent to which this Budget can be considered a ‘Green Budget’.
3. How has the Budget changed the overall fiscal position of the government?
4. Discuss the likely impact of the Budget on small and large businesses.