MacroEconomics: European Perspective

What is the main trigger for a recession?

Imblances that have been accumulated over a period.

What was the main cause for the economic crises of 2008.

Over-investment in real estate

What determines the length of recessions?

The length of recessions are dependent on how long it takes to correct the imbalances.

What are sub-prime mortgages?

Sub-prime mortgages are home loans granted to borrowers with poor credit histories or lower credit scores.

How was the covid recession different?

The covid recession was different because, it was not caused by imbalances, but by exogenous and unexpected shock.

How did the covid shock affect the economy in three ways.

Firstly a break in the production chains as a lot of parts were sourced from China. Secondly restrictions on mobility leading to people not being able to work. Third familiy incomes fell wich entailed a fall in consumption.

What did the restricions on mobility in the covid pandemic lead to? Explain the term.

The restricions on mobility lead to a supply shock and people losing there jobs lead to a demand shock of lower consumption.

What marked the turning point in the global economy in 2007?

The end of sustained expansion and the start of declining US housing prices.

Why was the decline in housing prices in 2008 problematic?

It reduced household wealth and risked lowering consumer spending.

What are poor-quality (subprime) mortgages?

Loans given to borrowers who could not meet monthly repayment requirements.

What happens when house prices fall below mortgage value?

Homeowners have an incentive to default.

Why couldn’t low interest rates initially stop the 2008 crisis?

The problem was poor loan quality and falling asset values, not just borrowing costs.

In the 2008 financial crisis, what does it mean that mortgages were “bundled”?

Mortgages were packaged into securities and sold to other banks/investors.

In the 2008 financial crisis, why did bundling increase risk?

It made it difficult to assess the true value of assets.

In the 2008 financial crisis, what is meant by banks being “highly leveraged”?

They used large amounts of borrowed money relative to their own capital.

In the 2008 financial crisis, why did banks stop lending to each other?

Uncertainty about asset values made them distrust each other.

In the 2008 financial crisis, what triggered widespread panic in the banking system?

The bankruptcy of Lehman Brothers.

In the 2008 financial crisis, why did one bank failure affect others?

Banks were financially interconnected (intertwined).

In the 2008 financial crisis, what key problem did banks face?

They were unable to borrow funds.

In the 2008 financial crisis, what happened to stock prices globally?

They dropped across the US, Eurozone, and developing countries.

In the 2008 financial crisis, why did consumption fall?

Falling house and stock prices reduced wealth.

In the 2008 financial crisis, how did firms respond?

They reduced investment.

In the 2008 financial crisis, through which two channels did the crisis spread internationally?

Trade and finance.

In the 2008 financial crisis, how did the trade channel spread the crisis?

Reduced US consumption lowered demand for foreign goods.

In the 2008 financial crisis, how did the financial channel spread the crisis?

US banks reduced lending to other countries.

In the 2008 financial crisis, why were EU countries particularly vulnerable?

High government debt.

In the 2008 financial crisis, what was the consequence of high debt in the EU?

Investors demanded higher interest rates.

In the 2008 financial crisis, what policies worsened the Euro Crisis?

Lower deficits and higher taxes (austerity), reducing demand.

After the 2008 financial crisis, what helped stabilize the financial system?

Strong monetary and fiscal policies.

After the 2008 financial crisis, until when did recovery continue?

Until the pandemic of 2020.

What two indicators are used to assess economic size and living standards?

Output and output per person.

What is the unemployment rate?

The proportion of unemployed workers who are actively seeking work.

What is inflation rate?

The rate at which the average price of goods increases over time.

In the US economy, what is the Federal Reserve’s main tool to fight recessions?

Interest rate control.

In the US economy, what is the zero lower bound?

Interest rates cannot go below zero because people would hold cash instead.

In the US economy, what happens when productivity growth slows?

Concerns about rising inequality increase.

In the US economy, who benefits when productivity is high?

Most people benefit, even if inequality increases.

In the US economy, do poorer individuals benefit from productivity growth?

Yes, but less than the rich; their standard of living still rises.

Why was the European common market created in 1957?

To allow free movement of people, goods, and services and promote economic cooperation and peace.

What is the euro area?

A group of EU countries sharing a common currency (the euro).

What major political change happened in 2016?

The UK voted to leave the EU (Brexit).

What are the two main economic issues facing the EU today?

Unemployment and functioning of a common currency.

Why is EU unemployment uneven?

Large differences between countries (e.g., very high in Greece/Spain vs low in Germany).

What are two explanations for high unemployment in some EU countries?

Strict labor laws and generous social security systems.

What is a key benefit of having the euro for consumers and firms?

No exchange rate uncertainty.

What is a broader economic advantage of the euro?

Increased global economic power.

What is the main limitation of the euro common monetary policy?

One interest rate must fit all countries, even if their economies differ.

Why is euro common monetary policy problematic during recessions or booms?

Countries cannot adjust interest rates to their specific needs.

What policy remains available to countries in the euro area?

Fiscal policy.

What is the downside of having no exchange rates?

Countries cannot adjust competitiveness via currency depreciation.

What was a key reason people voted for Brexit?

Concerns about immigration and pressure on social services.

What is the expected future relationship between the EU and UK since brexit?

Free trade plus cooperation in areas like transport, energy, and security.

What factors were linked to higher pro-Brexit voting?

Lower education, lower income, higher unemployment, and reliance on manufacturing.

Why is PPP important when comparing China to the US?

It accounts for lower prices in China, giving a more accurate standard of living.

Why do some economists question China’s growth data?

Because the government may have incentives to overstate performance.

What is the general conclusion about China’s data reliability?

Most economists find it broadly credible.

What are the two main drivers of China’s growth?

Technological progress and high investment rates.

How has China encouraged further growth internationally?

By promoting joint ventures with foreign firms.

What is China’s main economic challenge today? And why is this transition difficult?

Transitioning from investment-driven growth to consumption-driven growth. It requires restructuring the economy and reducing reliance on investment.

What does GDP measure?

The value of all final goods and services produced in an economy over a period.

Why are only final goods counted in GDP?

To avoid double counting intermediate goods.

What is the production approach to GDP?

Sum of final goods and services produced.

What is the value-added approach to GDP?

Sum of value added (output minus intermediate goods).

What is the income approach to GDP?

Sum of all incomes in the economy.

What is nominal GDP?

Output valued at current prices.

Why does nominal GDP increase over time?

Due to both higher production and rising prices.

What is real GDP?

Output valued at constant prices (adjusted for inflation).

Why is real GDP preferred for measuring growth?

It isolates changes in actual production.

How is real GDP calculated in practice?

Using a weighted average of goods with constant (base-year) prices.

What are “chained dollars”?

Real GDP measured using continuously updated relative prices.

What is a base year in GDP measurement?

A year where real GDP equals nominal GDP.

What does real GDP per person measure?

Average standard of living.

What do economists focus on more than GDP level?

Growth rate of real GDP.

What is a positive vs negative GDP growth called?

Expansion vs recession.