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Macroeconomics In Context: A European Perspective 1st Edition Sebastian Dullien, Neva Goodwin, Jonathan M. Harris, Julie A. Nelson, Brian Roach, Mariano Torras - Solutions
1. 2. What have European policy makers done to solve the euro crisis? Which reforms of the euro-area structures have they initiated and implemented?
1.1. What was the main concern during the euro crisis? What were the main causes of the euro crisis?
1. 2. Do you think it is a good idea to have a proper euro-area government with its own budget? What about having common debt for the euro area?
1.1. To what extent would you agree that austerity was inevitable during the euro crisis?
1. 2. Do you think it was right that Mario Draghi promised to do “whatever it takes” to save the euro? Why or why not?
1.1. Which policies did European policy makers introduce in order to deal with the crisis? Which were successful? Which were not? Do you think the more successful policies would have worked in isolation (that is, without the other policies implemented)?
1. 2. To what extent do you believe stricter fiscal rules (for example, with automatic sanctions for countries that violate the Stability and Growth Pact) would have prevented the euro crisis?
1.1. Which of the possible causes of the euro crisis do you think was the most relevant?
1. 2. Would you say the benefits of the euro were worth the costs of the crisis? Is this a relevant question to ask at this point in time?
1.1. In what respects would you say that European policy makers did a good job in fighting the euro crisis? Would you say they acted in a timely fashion?
1. 2. What were the initial benefits from the euro received by countries with historically high inflation? Did low-inflation countries also benefit?How?
1.1. Why did European countries decide to move toward a common currency? Do you think the arguments for a common currency in Europe are convincing?
1. 6. Match each concept in Column A with a definition or example in Column B.Column A Column Ba. Debt 1. The portion of the gross government debt that is owed to individuals or groups within the countryb. Deficit 2. European rules limiting government deficitsc. Gross public debt 3. The portion of
1. 5. The chapter is very clear that it’s dangerous to assume that “government debt is never a concern.” Which of the following are reasons articulated in the chapter for why debt can be a concern?a. Foreign holders of government debt may decide to sell their bonds.b. A larger share of future
1. 4. The chapter identifies and explains several reasons government deficits in the euro area have repeatedly been above the threshold of 3 percent of GDP. Which of these explanations is consistent with the chapter’s presentation?a. Interest rates for countries having joined the euro were much
1. 3. The chapter identifies and explains several reasons it is inappropriate to compare the government debt to the debt of a private citizen. Which of these explanations are consistent with the presentation in the chapter?a. Governments have the ability to “roll over” their debt more or less
1. 2. Use the AMECO database and construct a table of Eurozone members and their debt/GDP ratios and the deficit-to-GDP figures. Review the convergence criteria for participation in the euro zone presented in the chapter. What did you discover in this exercise? Explain your answer.
1.1. Go to the European Commission’s AMECO database(http://ec.europa.eu/economy_finance/db_indicators/ameco/index_en.htm and look for recent data on government debt as a percentage of GDP and recent figures on budget deficits for the euro area and your home country. What does this tell you about
1. 11. What are arguments for strict rules limiting budget deficits? What are arguments against such rules?
1. 10. What were the original rules for government debt and deficits in the euro area at the time of the introduction of the euro? What were the problems with these rules?
1. 9. What does it mean to monetize the debt?
1. 8. To what extent do potential problems with government debt mean that governments should not borrow at all?
1. 7. To what extent is government debt a burden for future generations? To what extent is it not?
1. 6. Summarize some of the potential problems with government debt.
1. 5. What factors contributed to the increase in government debt in the 1970s? Which factors to the increase since 2000?
1. 4. How did the national debt picture change with World War II in the countries discussed in this chapter?
1. 3. What was the role of the national debt in Britain in the sixteenth to nineteenth centuries?
1. 2. What years during the twentieth century were debt/GDP levels the highest in Britain, France, Germany, the United States, and Italy? What years were the lowest?
1.1. What is the difference between the national debt and a deficit?
1. 2. After multiple reforms to the euro area’s debt and deficit rules, what are the current rules for government borrowing?
1.1. How did European countries try to make sure that only countries with sound public finances joined the euro area? What were problems with the initial approach?
1. 2. What options has a government when it finds itself faced with excessive public debt? Why might one say that there are no good options for dealing with excessive public debt?
1.1. What are possible problems with excessive public debt?
1. 2. To what extent is deflation a problem for public debt reduction?
1.1. In historical periods of falling debt-to-GDP-ratios, what has been the predominant mechanism behind the reduction of debt?
1. 2. Some people say that government debt never falls. To what extent is this statement historically correct?
1.1. What have been the main causes of the increase of debt-to-GDP-levels in the past?
1. 2. “The national debt is a huge burden on our economy.” How would you evaluate this statement?
1.1. What is the difference between the deficit and the national debt? How are they related?
1. 2. A loan that permits a borrower to offer his or her home (or their equity stake in it) as collateral in case of failure to repay the loanc. Credit default swapd. Subprime buyer 3. A security that is effectively an insurance policy against defaults related to MBSsand CDOs 4. A would-be
1. 1. When a company grows so large that its failure would cause widespread economic harm in terms of lost jobs and diminished asset values b.Collateralized debt obligation
1. 5. Match each concept in Column A with a definition or example in Column B.Column A Column Ba. Mortgage backed security
1. 4. What is the meaning of moral hazard? Give some examples of moral hazard, as discussed in the text, or others that you can think of.
1. 3. The chapter identifies a series of contributing factors in its exploration of the underlying causes of the financial crisis. Identify the major factors and state which you think were most important.
1. 2. How does the Great Recession compare to recent economic downturns for the United States of America? To explore this question in further detail, begin at the National Bureau of Economic Research Web site(www.nber.org).a. Select “Business Cycle Dates” from the “Data” tab at the NBER
1.1. For this exercise, you need to locate housing price index data for different countries. Go to the Web site of the Bank for International Settlements and locate residential(www.bis.org/statistics/pp_detailed.htm).real estate prices Select three industrialized countries (make sure at least one
1. 13. What is the Tobin tax? What would be its effect on financial transactions?
1. 12. What is the purpose of the financial reregulation such as the Dodd-Frank bill and European initiatives? What were its main measures taken to reregulate the financial sector after the crisis? Have they been favorably received?
1. 11. What have been the principal fiscal and monetary responses to the recession to date? What have been the results thus far?
1. 10. In what ways did globalization contribute to the financial crisis?
1. 9. Are short-term individual incentives for corporate officers consistent or in conflict with long-run interests of their companies and the economy as a whole?
1. 8. Explain “too big to fail” and why it is a potential economic problem in any economic setting. How is “too big to fail” related to moral hazard?
1. 7. What is financial deregulation? How important is it in explaining the financial crisis?
1. 6. Did social inequality play a part in inflating the bubble that led to the 2007 financial crisis? If so, how?
1. 5. What are mortgage-backed securities? Collateralized debt obligations?Credit default swaps? Are these “investments” in the traditional sense?
1. 4. How is the recent economic downturn similar to the Great Depression?How is it different?
1. 3. How can a collapse of the U.S. housing market and weakness in the banking system cause an economic recession and unemployment? How is it possible that the impact spreads around the world?
1. 2. What is “subprime” lending? How did it contribute to the bubble and the subsequent financial crisis?
1.1. What was the nature of the housing bubble experienced in the early to mid-2000s? What were its main causes?
1. 2. What would you think about a proposal to tax financial transactions?Would you prefer it to an income or a sales tax? Why or why not?
1.1. What is “quantitative easing”? Can you think of anything you learned earlier in the book to which it is related? What do you think are the main advantages and disadvantages of such a policy?
1. 2. Did the financial crisis mostly have to do with banks? Homebuyers?International economics? What do you think is the most important factor that explains it?
1.1. Have you seen anything in the news in recent weeks or months about the regulation of banking and finance? Do you think, in general, that it is a good idea to allow banks and financial institutions to conduct their business with minimal government interference? Why or why not?
1. 2. Do you think that the Great Recession is nearly as bad as the Great Depression was? In what ways is it similar to it? In what ways was it different? Do you know any stories of family members who lived through the Great Depression? Do you know anyone who lost their job during the Great
1.1. Do you think changes in the value of “paper assets” like stocks and bonds, or even of homes, should have real economic effects? Why? Why do you think that employment suffered from the disappearance of so much financial wealth following the financial crisis?
1. 2. Would you prefer interest rates in the economy to be high or low? On what does it depend? Who benefited from low interest rates during the inflation of the housing bubble in the U.S., Ireland, and Spain? How did the low interest rates create problems?
1.1. People often refer to the housing “bubble” and even the housing “crisis.”Is an increase in the average price of homes not a good thing? What if prices are rising more rapidly than in the past? Explain.
1. 5. Match each concept in Column A with a definition or example in Column B.Column A Column Ba. Tariff 1. Makes international incomes comparable by accounting for differences in the cost of livingb. Current account 2. A rise in the value of a currency in a floating exchange rate systemc. Currency
1.4. Determine, for each of the following, whether it would appear in the current account or financial account section of the euro-area balance-of payments accounts and whether it would represent an inflow or an outflow.a. Payments are received for airplanes made in the euro area and sold to
1. 3. Suppose that, due to rising interest rates in the euro area, the Japanese increase their purchases of European securities.a. Illustrate in a carefully labeled supply-and-demand diagram how this would affect the foreign exchange market and the exchange rate expressed in terms of yen per
1. 2. Classify each of the following as a trade flow, income flow, or asset transaction:a. A U.S. software company sells its products to European consumersb. A Saudi investor buys real estate in Europec. A British retailer imports Chinese-made appliancesd. A worker in the UK sends some of her wages
1.1. Singapore is a natural-resource-poor country that has built its economy on the basis of massive imports of commodities and raw materials and similarly massive exports of refined and manufactured goods and services. In Singapore, exports are 178 percent of GDP! But how can a country export more
1. 17. What reforms have been suggested for the international financial system?
1. 16. What is the “Washington Consensus”?
1. 15. How and why might a central bank “intervene” on a foreign exchange market?
1.14. Distinguish between floating and fixed exchange rate systems.
1.13. What is the effect of an open economy on fiscal policy?
1. 12. Does having an open economy make monetary policy stronger or weaker? Why?
1. 11. How and why is an imbalance (surplus or deficit) in the current account related to an imbalance in the capital account?
1. 10. What are the two main accounts in the balance-of-payment account, and what do they reflect?
1. 9. Draw a carefully labeled graph illustrating a depreciation of the euro against the dollar.
1. 8. Who creates the supply of a currency on the foreign exchange market?Who creates the demand?
1. 7. What is the theory of “purchasing power parity”?
1. 6. List six reasons why countries often limit trade.
1. 5. What are some international organizations and agreements dealing with trade relations?
1. 4. Briefly describe the recent history of the EU and world trade, and list the major European trading partners.
1. 3. List two policies related to international capital transactions.
1. 2. List four policies related to international trade.
1.1. In what seven ways are economies connected internationally?
1. 2. Have international trade or financial imbalances or actions of the IMF been in the news lately? What are the current controversies?
1.1. To check your understanding of international linkages, consider the following hypothetical scenario. Suppose that people overseas become less interested in buying euro-area government bonds (perhaps because they start to think of them as less secure). What would be the effect on:a. The BOP
1. 2. Savings, imports, and taxes are all considered “leakages” from aggregate demand. Are they bad for the economy? Or is there an important function for each? How are their levels related to equilibrium GDP, income, and employment?
1.1. What will be the likely effect of increased imports on euro-area GDP?Do imported goods undercut employment in the euro area? What other developments in the economy might counteract this effect?
1. 2. Production of apparel has been widely globalized in recent years. Before going to class, check the labels on a number of items of clothing that you own. Which countries are represented?
1.1. How do international linkages affect your own life? Can you give examples of the sorts of linkages listed in Section 1.1 effects on you or your family?that have had direct
1.7. Match each concept in Column A with a definition or example in Column B.Column Aa. Aggregate supply Column B 1. A rightward shift in the AD curveb. Real depreciationc. Increase in autonomous consumption 2. A suggested relationship between inflation and unemployment 3. People’s feelings about
1. 6. Empirical data on the macroeconomy for the euro area as well as other EU countries can be found on the European Commission’s Web site. Go to http://ec.europa.eu/economy_finance/eu/forecasts/index_en.htm and locate the statistical appendix. Jot down data on the unemployment rate and the
1. 5. Check recent inflation rates at www.ecb.europa.eu/. What do you think explains the recent pattern of inflation? How does this relate to AS/AD analysis, and to the debate among different schools of thought, as discussed in Box 13.2?
1. 4. Suppose that an economy is in a deep recession.a. Draw and carefully label an AS/AD diagram that illustrates this case. Label the point representing the state of this economy E0.b. If no policy action is taken, what will happen to the economy over time? Show on your graph, labeling some new
1.3. Suppose that an economy is currently experiencing full employment, and inflation is only slightly higher than had been expected.a. Draw and carefully label an AS/AD diagram that illustrates this case. Label the point representing the state of this economy E(a).b. Suppose that investors’
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