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!!!