BMAN24431 Economic Analysis I Revision Questions III Macroeconomic Topics
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Economic Analysis I
Revision Questions III
Macroeconomic Topics
1. In early 2007, U.S. house prices began to decline, followed by a sharp decline in stock prices. These events triggered the 2007– 2009 credit crunch, which caused a deep recession that affected many countries around the world. Use the IS-LM framework to explain how these triggers led to the recession.
2. Using the Mundell-Fleming model, explain how a fallin the world’s interest rate may affect a small open economy’s exchange rate, trade balance, investment, and inflation.
3. Using the Mundell-Fleming model, explain how an increase in the world’s interest rate may affect a small open economy’s exchange rate, trade balance, investment, and inflation.
4. Define stagflation. Why has it historically proved hard for central banks or the government to end stagflations?
5. Using an intuitive macroeconomic framework, explain why a contractionary fiscal policy may lead to a recession, increase public debt, and increase the risk of government default.
6. Explain key factors that contribute to the depth and length of recessions in mature, industrialised countries such as the UK or the US.
7. Explain why a fall in house prices could give rise to a systemic failure of the banking system. Your answer should refer to key concepts such as leverage, fire-sale, and systemic risk.
8. Explain non-conventional monetary policies that central banks could use to counter deep recessions due to financial crises.
9. Explain how extreme pessimism during deep recessions can limit the effectiveness of monetary policy and deepen the recession.
10. Explain how financial frictions arising from imperfect information can cause financial cycles.
11. Explain how backward-looking expectations, coupled with flawed risk attitudes, can contribute to credit market booms and busts.
12. Explain the life-cycle and permanent income theories of consumptions and highlight key implications of these theories. Do these theories have any implications for the effect of asset prices on household consumption? Further explain why house prices and household consumption move closely and are strongly associated with each other.
13. Explain how securitization (the originate and distribute business model) has transformed the financial sector and how this transformation has led to an entirely different concept of risk. Can you think of any data that could be used to measure the risk of the financial system ceasing to operate?
14. Explain how, in the presence of positive economic shocks, securitisation can give rise to lower interest rates and higher household debt.
15. Explain how small adverse economic shocks can cause enormous financial harm, significantly slowdown the financial sector, and cause a deep recession.
16. Why do financial crises often lead to higher commodity prices, including oil prices, and higher government bond prices, cause a redirection of international saving gluts, and lead to lower inflation? Support your analysis using relevant evidence from the literature.
17. Suppose the conditions in the Chines real estate market deteriorate, a notable fraction of mortgage holders become unable to pay their mortgages, and the growth in the real estate market stagnates. How might such events affect the availability of credit in markets such as the UK, UK house prices, UK corporate investment, and global commodity prices including oil prices?
18. Highlight key differences between the 2007-9 credit crunch and the Covid-19 pandemic recession. Why may the Covid-19 pandemic recession be shorter and less devastating?
19. In what ways does Knightian uncertainty lead to economic paralysis and a decline in investment,consumption, and employment, ultimately resulting in twin recessions?
20. In what ways does a decline in liquidity impair the ability of businesses and households to meet their financial obligations, leading to widespread defaults and a downward economic spiral?
21. Describe the liquidity trap, explain its causes, and explore its effect on the economy. How can a central bank deal with the trap?
22. During recessions, some firms default on their loans and fail to repay their debts. Explain how arise incorporate delinquencies may increase bankruptcies in the banking sector, lead to lower corporate investment and deepen recessions.
23. Explain why nations required by their constitutions to balance their budgets are likely to experience more severe fluctuations than nations not held to that requirement. How should firms in such states adjust their financial decisions.
24. Using a relevant economic model, explain how a contractionary fiscal policy like austerity can make it more likely that a government defaults on its debt.
25. If an economy finds itself in a liquidity trap, what implications does this have for the conduct of monetary policy? Provide a graph to support your analysis.
2024-01-26