Material Studenti

8/2/2019 Material Studenti

1/8


2/8

How would affect the cut of discount rate both lenders and investors? How can a central bank try to avoid recession? State the connection between recession and moral hazard?

When do consumers, firms, investors, borrowers take bigger risks? In recession orexpansion?

State the connection between interest rates, equity, mortgages, demand. Whose job is to prevent recession? Whose to benefit/whose not from slashing interest rates? Whose to benefit from recession? What about from expansion? State the economic

impact of both.

Whats the dotcom bubble burst business and how did this affect the Americaneconomy?

What would an expansion do in the American economy right now? What are the consequences of induced recession?

2. Mark the following statements as true or false; explain your choice:

The economic costs of recession are: unemployment, lower profits, bankruptcy. The consequences of recession are: lower interest rates and lower reserve

requirements.

Recession is sometimes a benefit to the economy: only well-run companies are still onthe market when the crisis passes on.

Zero interest rates assure companies more elasticity in case of a recession. Zero interest rates boost economic growth. A recession forces people to restrict their spending, borrow less, therefore it purges the

excess.

Recessions always reduce trade gaps.

3. Decide which of the two options is the right one:

A recession is preceded by a rise/fall in inflation. During a recession the National Bank has to increase/decrease interest rates. A very low/high interest rate drags an economy into recession. The subprime mortgage crisis affected only the American economy/the global

economy.


3/8


4/8

Task 1

How do aggregate demand and output fluctuate when a national government chooses to

borrow abroad and spend the money on necessities?

Task 2

Can a government choose to start up different public works during recessions?

Task 3

What phase of the business cycle is in your country right now? What is the current fiscal

policy? What tax and expenditure policies seem appropriate?


5/8

UNIT 3. FINANCIAL CRISIS

When times are hard, many people are tempted to let their credit cards take the strain

for a while. And when economies fall into recession, many governments are happy to let their

budget deficits widen, to tide the economy over.

Sensible as this may be, deficits in several countries have increased so much and sofast during the economic crisis of the past 18 months or so that it is generally agreed that

remedial action will be needed in the medium term. Deficits of 10% or more of GDP cannot

be sustained for long, especially when nervous markets drive up the cost of servicing the

growing debt.

Market pressure explains why deficits have come to the fore in southern Europe.

Greece and Portugal, in particular, have seen a sharp rise in their cost of finance and some

investors have questioned their ability to roll over their debt. But deficits will also be at the

centre of the forthcoming British election campaign, and in America the tea party

movement has launched a populist campaign against rising government spending.

There is no absolute rule on when deficits or public debts are too high relative to an

economys size. Prior to the crisis the general consensus was that rich countries could safelyhave public debts worth 60% of GDP. Yet although Japans debt has exceeded its GDP for

many years, the government has yet to suffer a financing crisis, perhaps because it has a large

number of willing domestic buyers of its bonds. But when the markets do lose confidence in a

governments fiscal rectitude, a crisis can arise quite quickly, forcing countries into painful

political decisions.Plainly, economic growth makes policymakers lives much easier. Growth reduces

deficits automatically by increasing tax revenues and cutting spending on unemployment

benefits and so forth. As the economy grows, deficits fall, debts become more sustainable,

lightening the adjustment burden and reassuring investors.

Nations have recovered from huge debt burdens in the past, often in the aftermath of

wars, when men and resources were released from conflict and put to more productive work.When politicians turn to todays deficit problems, it is vital that they choose policies that

enhance long-term growth prospects. They will not lack opportunities: in several countries,

for example, increases in statutory pension ages and other reforms that make labour markets

more flexible are anyway overdue.

So, short of debt default or implicit default via inflation, that leaves two other ways of

closing the deficit. Spending must be cut or taxpayers must pay more. Many political battles

of the next few years will be fought on these simple lines, with taxpayers on one side and the

beneficiaries of public spending on the other. One imminent battle will be between taxpayers

and public-sector workers. In some countries, one party can be seen as representing taxpayers

(the Conservatives in Britain and the Republicans in America) and the other the workers

(Labour and the Democrats, respectively).Another of these fights will be between generations. In America the biggest medium-

term budget busters are pensions and health care for the old. A big deficit may ease the

economic pain in the short term but risks saddling the next generation with a growth-sapping

burden of higher taxes and interest payments. The battles are also intertwined: taxpayers

finance the pensions of public employees which are, by and large, more generous and

predictable than in the private sector.

The outcome of these battles will vary from country to country. Both sides have potent

weapons. Many of the biggest taxpayers are political donors and have access to people in

power. If they are ignored, they may pack up and move to a more friendly jurisdiction. In

Europe especially, public employees, together with recipients of public services, probablyhave numbers on their side. They are certainly better organized, via their trade unions, and


6/8

they are political donors too. As French workers have often shown, public-sector unions can

intimidate governments with strikes and demonstrations. Their Greek brethren have been

trying to emulate them.

From The Economist, March 4th 2010

1. After reading the text, try answering to the following questions:

Why, during financial crisis, people are against rising government spending? What is the pressure markets exercise over budget deficits? May an economic crisis be determined by a political one? Before the crisis, rich countries could have a public debt higher than their GDP. What

does it mean a public debt and how could they manage this situation?

If the public debt is owed by international buyers, could this situation save a countryfrom a financial crisis?

What are the measures by which a deficit may be reduced? Does public spending have to be encouraged in order to put an end to a financial

crisis? What about social measures?

The young generation has to pay higher taxes and higher interests in order to sustainthe pension and health care systems. Does this create disputes between generations?

In a country there are usually two major parties, one representing the old generation(higher pension funds etc) and the other the young generation (protecting the

taxpayers rights). Is there the same picture in Romania?

2. Decide whether the following statements are true or false:

Governments should concentrate themselves on tax increases in order to stoprecession.

Cuts in public investments tend to put an end to recessions. The fall of inflation and of interest rates are slowing down the budget deficits. Cutting spending may encourage the boosting of the capital market. The end of the cold war changed substantially the spending policy in the Western

countries. Nowadays, they invest more in the social security system.

Governments depend on supporters, so they vote policies which encourageemployment rates.

The government should not always act in the interest of the population.


7/8

There is a difference between the interest of the population and the general interest ofthe economy.

If a country wants to repay its debts, it has to tighten its fiscal policy, thus damagingthe interest of the population.

A market controlled by domestic investors gets easier out of a financial crisis. By devaluing the national currency, the recession could be easier controlled and

surpassed.

Big tax increases can damage the economy. Countries are also afraid of increasing taxes, because of tax heavens such as

Switzerland etc.

Sales or VAT taxes are a solution to decrease the budget deficit, but they are often tobe paid by the rich.

3. In each case, which of the two statements is true:

a. Tax rises and freezing wages are a way of controlling recession.b. Tax rises and freezing wages are a way of controlling inflation

a. Tax evasion seems to be the problem of Eastern European countries.b. All the European countries confront with tax evasion.

a. The IMF dictates harsh measures for Eastern European countries, measures whichare not applicable by the governments being afraid of strikes and lost of votes.

b. The measures imposed by the IMF, in exchange for its loans, are strictly respected

by local governments.

a. Autocracies are better because they assure a low unemployment rate, subsidies forfactories, but limited property rights.

b. Democracy is still the most popular system worldwide.

a. A good proportion of the European population is in or nearing retirement, so thepublic pension system has to be supported by more and more taxes paid by the young

population.

b. A good proportion of the American population is in or nearing retirement, so the

public pension system has to be supported by more and more taxes paid by the young

population.

a. The population is divided into two classes: taxpayers and people benefiting frompublic pensions. Government usually supports the latter.


8/8

b. The population is divided into two classes: the taxpayers and the people benefiting

from public pensions. Government usually supports the former.

4. Choose the appropriate words in the following statements:

The capital markets are eager to restart their business especially in theEastern/Western European countries.

Greece/Romania recently announced an austerity package. Greece and/or Romania are considered to be the most corrupted countries in the

European Union.

Japan/America has high debt levels. The richest countries in the world are the United States, Japan and/or Germany. Who is to support the cost of the current recession? Taxpayers, retired people,

future generations/foreign investors.

Protectionism/free trade is the solution to solve out the economic crisis. More flexible labor markets may boost/damage to the economy. Spending cuts/tax rises do better to the European economy. Countries are tempted to diminish their debts through higher/lower inflation. Loose/tighten credits gave way to an era of austerity. The 2008 crisis was a banking crisis/pension crisis. Helping people to borrow money is not doing them any good/is making them a

service.

The American crisis in 2008 was/was not similar to the American crisis in the 1930s. The European continent is more/is less affected by the 2008 crisis than the American

one.

Material Studenti

Documents

Transcript of Material Studenti