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EC4004 Economics for Business
TUTORIAL OUTLINE Week 1
Week 2 ~Tutorials Begin~ Outline of tutorials, case study guidelines, book review guidelines, referencing.
Week 3 Demand & Supply; Wii Console Case Study or Banking Crisis ResoluGon
Week 4 Dot.com bubble case study or Worgl Experiment 1932-‐1933
Week 5 QE; Sweden 1990s or Currency Crisis 1992
Week 6 ~Book Reviews Due~ Arbitrage – Free Lunch or Savings; South Korea 1950-‐2000
Week 7 ~Book Reviews Feedback~ ArgenGna 1890s or Bank Collapse Great Britain 1772
Week 8 HyperinflaGon Yugoslavia 1992-‐1994 or Unemployment Trinidad & Tobago
Week 9 Fiscal Policy Canada or Income Inequality Armenia
Week 10 Sample Exam Paper
Week 11
OBJECTIVES
¢ Week 5; ¢ QuanGtaGve Easing: Sweden 1990s or Currency Crisis Britain 1992
Good Discussion……………
QUANTITATIVE EASING CASE STUDY QUESTIONS: ¢ 1. What is credit deregulation? Explain using the case in Sweden. Can
you think of another example? ¢ 2. The objective of monetary policy is usually set out by the central bank.
What was the Swedish Central Bank’s policy objective at the time? ¢ 3. Draw some comparisons between the Swedish bank guarantee and the
September 2008 Irish bank guarantee. Which guarantee by a success? Explain your reasoning.
¢ 4. What is the monetary base? Explain in your words with 2 examples. ¢ 5. What do you think is meant by the author in the last paragraph “when
the conventional policy toolbox is empty”? ¢ 6. What about the current crisis? Give your opinion on whether the ECB
(or the Federal Bank) should print money? Explain why it might be easier for the Fed to print money?
QUESTION 1
Credit deregulation is the removal of government rules and regulations that constrain the operation of market forces within the credit market.
It reduces government control on how financial institutions operate, thereby moving toward a more laissez-faire, free market.
In Sweden the financial institutions were subjected to Lending ceilings Strict liquidity ratios Interest regulations − cap on lending rates Bank actions are continuously scrutinized These regulations were abolished in 1983
QUESTION 2
¢ Swedish Central Bank’s policy: ¢ Quantitative easing - shift from price of money to
quantity of money. ¢ Objective: ¢ Increasing monetary base for a rescue operation ¢ Liquidity support to banks
QUESTION 3
Swedish Irish 1. Gvt guaranteed all bank debt Gvt guaranteed all bank debt
2. Banks obtained unlimited liquidity freely collateral was not required loans
Banks were subject to specific terms and conditions. The covered institutions paid charge for the guarantee
3. Gvt and banks set up special companies to manage bad loans Gvt set up NAMA to manage bad loans
4. No external financial support Received external financial support
Nationalisation of banks i.e. Anglo Irish Bank
Gained control of some banks via preference shares i.e. AIB and the Bank of Ireland
5. Scheme worth 4% of GDP Scheme worth at least 45% of GDP
QUESTION 3
Swedish Irish 1. Gvt guaranteed all bank debt Gvt guaranteed all bank debt
2. Banks obtained unlimited liquidity freely collateral was not required loans
Banks were subject to specific terms and conditions. The covered institutions paid charge for the guarantee
3. Gvt and banks set up special companies to manage bad loans Gvt set up NAMA to manage bad loans
4. No external financial support Received external financial support
Nationalisation of banks i.e. Anglo Irish Bank
Gained control of some banks via preference shares i.e. AIB and the Bank of Ireland
5. Scheme worth 4% of GDP Scheme worth at least 45% of GDP
WHICH DO YOU THINK IS
SUCESSFUL? DISCUSSION!
QUESTION 4
¢ Monetary base is the amount of money in the economy
¢ It is highly liquid money that consists of coins, paper money and commercial banks reserves
QUESTION 5
¢ QE is an unconventional monetary policy (MP) used by central banks to stimulate the national economy when conventional MP has become ineffective.
¢ Conventional MP: involves raising or lowering interest rates via open market operations or lending facilities.
Central bank conventional tool box
QUESTION 6
¢ Why is it easy for Fed to print money?? ¢ Should the Fed print money?
DISCUSSION!!!
CURRENCY CRISIS BRITAIN: CASE STUDY QUESTIONS: ¢ 1. What are exchange rates? Watch the news (Bloomberg)
or go to an exchange rate website (http://www.xe.com/currency/eur-euro) and find the exchange rate between the Euro and three main currencies. What do these rates tell you about the strength of the Euro?
¢ 2. Explain the terms ‘appreciate’ and ‘depreciate’ in terms
of exchange rates. Can you pick out moments in the case study where the British pound appreciated or depreciated?
¢ 3. Briefly compare and contrast floating exchange rates
and fixed exchange rates giving one example for each.
¢ 4. It is mentioned above that Bundesbank interest rates were too high for Britain to remain competitive. What is the connection with high interest rates and the rate of growth of an economy? Can you see any similarities within the Euro zone presently?
¢ 5. The author states that “Europe learned from the
crisis”. Do you agree with this statement? What is your opinion on the Euro zone and its effectiveness today?
QUESTION 1
¢ exchange rate is the price of one currency in terms of another
¢ Examples????
QUESTION 2 ¢ Appreciation is an increase in the value of a currency relative to
another currency.
¢ Example; €1.00 = $1.00 → €1.00 = $0.9 ¢ the dollar has appreciated relative to the euro
¢ Depreciation: is a decrease in the value of currency relative to another currency.
¢ Example; €1.00 = $1.36 → €1.00 = $1.50 ¢ The dollar has depreciated relative to the euro
QUESTION 3
Fixed exchange rate Floating exchange rate
• When governments keep the value of their currencies constant against one another
• a currency's value is allowed to fluctuate according to the foreign exchange market
• Automatic adjustment to market forces (supply and demand)
• Managed -vs- free floating exchange rates
• Example: when Britain joined the ERM in 1990, the pound was fixed at £1: 2.95DM
• Example: In 1992 when Britain left the EMU the sterling was now on the free market….
QUESTION 4 ¢ High interest( HI): ¢ high cost of borrowing→ low consumption, investment (C,I) ¢ Reduction in disposable income for debtors ¢ Encourage savings rather than investment & consumption v A fall in C,I → fall in Aggregate Demand → reduces the rate of
economic growth ¢ HI may cause “hot money flows” → appreciation in the exchange
rate → exports more expensive and imports cheaper
QUESTION 5
¢ Did Europe learn from the crisis? ¢ What is your opinion on Euro zone and its
effectiveness?
¢ DISCUSSION!!!