2) How can you explain that an increase in the growth rate of output may decrease the deficit and thus the debt?
The increase in activity leads companies to invest more, increase their businesses and therefore pay more taxes. By doing that, the deficit tends to reduce, or in other words, primary surplus should beincreased, causing the debt to be reduced over time. In order for that statement to be true, however, the government’s spending has to stain stable over time.
3) Explain, according to Sargent & Wallace - (1984; ‘Some Unpleasant Monetarist Arithmetic’) - why a contractionist monetary policy may lead to greater inflation in the near future, according to the fiscal policy instance.
4) Whatis the problem of a rising deficit and an increasing debt for the value of the dollar?
5) The ECB approach to the crisis has been distinct to the US one. Provide at least three differences between the policies adopted at the Euro level countries with the ones adopted in the US.
6) Explain why the system of credit default swap increases the overall systemic risk. Why does CDS differfrom regular insurance?
In one way, CDS only transfer risk from one place to the other. In reality, however, it ends up spreading the risk around, which implies that in a given shock, more parties will be affected, and therefore, the systemic risk is increased by the usage of such instruments.
A major difference between a CDS and insurance is that an insurance contract provides indemnityagainst the losses actually suffered by the policy holder while the CDS offers an equal payout to all holders. The payout in case of a CDS is calculated by using an agreed method.
While insurance contracts involve disclosure of all the risks involved, there is no such requirement in the case of a CDS resulting in many unknown risks. Another major difference is that unlike insurance companies, the CDSsellers are not required to maintain any capital reserves to guarantee the payment of claims.
7) The US Congress signed a bill on October 2011 stating that on January 1, 2013 the policy makers would start to increase taxes and cuts spending as a way of avoiding the debt path to become explosive and to decrease its current level. These actions would lead to a decrease in GDP up to 4% peryear for the next five years. It seems that the debt ceiling will be reached in the first week of December and if nothing is done, Federal offices will be closed till March.
It also seems that Obama might not promote the above fiscal adjustment. Explain the reasons for not promoting such adjustment until the economy is back on track. In other words, explain why a contractionist fiscal policyright now would make growth even lower and hence could even increase the debt.
8) In the Eurozone, it seems consensual that countries need to implement a fiscal consolidation as a way of decreasing the high debt/GDP ratios. Explain how an immense fiscal consolidation would decrease the debt/GDP ratio and improve the Eurozone economy.
9) The housing bubble burst in the US. However,the same process was going on in Ireland, Spain, Greece and Portugal. Relate the decrease in housing prices worldwide with the fact that these are the countries that might now implement a default in their debt.
When the EURO was launched in 1999, interest rates fell to historic lows. Since Spain and other countries did not have such low interest rates in history, the sudden opportunity raisedand, therefore, the population started going after loans and investing in the housing sector. Prices then started to skyrocket leading to an enormous property bubble. With that in mind, the government started borrowing in order to spend hugely in an effort to try to stop the economy from collapsing. Added to that, with the economy walking slowly, the Revenues for the government are also reduced...