Macroeconomics W1

What are recessions often triggered by?

Recessions are often triggered by imbalances in an economy, which have accumulated over a period.

What does the length of a recession depend on?

The length of a recession is dependend on how long it takes to correct the imbalances.

How are recessions caused by pandemic’s different?

They are caused by an exogenous and unexpected shock.

How did the 2020 pandemic effect the economy in three ways?

1. Shutdown of China lead to a break in the production chains as a lot of parts were sourced there

2. Economies put resctrictions on mobility of people, people who couldn’t work remotely had to stop working this led to a supply shock.

3. Family incomes fell which entailed a fall in consumption this led to a demand shock of lower consumption.

What sign was there that expension was ending in 2007. What was the worry of economists?

US housing prices, which doubled since 2000, had started to drop in value. Economist worried this may lead to lower spending.

Why coudnt lower interest rates by the FED help initial stages of housing price decline in 2008?

Many mortgages were of poor quality, they were given to those who could not meet the monthly repayments.

Why was the fell of housing prices in 2008 worrying?

As houses prices fell below the value of a mortgage it gave an incentive to default.

How was the fall of housing prices in 2008 deeper than just a fall in prices?

The mortgages and other securitites were bundeld and sold to other banks, which further bundled them and sold to other banks. It became hard to assess the value of these sucurities and banks became reluctant to lend to each other.

Why did the bankruptcy of the Lehman Brothers trouble other banks?

Banks were interwined and unable to borrow, this lead to many other banks on the risk of bankruptcy as well.

How were other economies than the US affected by the 2008 crisis?

Other countries were affected throught trade because consumption abroad was cut by US consumers, and finance as US lending from other contries created problems for them.

How do we asses the economic size of a country.

Output and output per person

What is output growth

The rate of change of output

What is unemployment rate?

The proportion of workers who are unemployed but actively searching for a job.

What is inflation rate?

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

What limits central banks in lowering interest rates?

The zero lower bound.

Why does the zero lower bound exist?

People prefer holding cash (0% interest) over negative-yield bonds.

What is the FED’s main tool to fight recessions?

Interest rate control (monetary policy).

What happens when productivity growth slows?

Concerns about rising inequality increase.

How does high productivity growth affect society?

Most people benefit, even if inequality rises.

Do poorer individuals benefit from productivity growth?

Yes, but less than the rich.

What was the purpose of the common European market?

Free movement of goods, services, and people.

Besides economics, what was another goal of the EU?

A symbolic project to maintain peace in Europe.

What are the two main current EU issues?

Unemployment and functioning of a common currency.

What is a key advantages of the euro.

No exchange rate uncertainty and stronger collective economic power.

What are the main disadvantages of the euro?

A common monetary policy means all countries have the same interest rate.

Countries cannot adjust exchange rates, so they lose a tool to improve international competitiveness.

As a result, countries must rely mainly on fiscal policy to respond to economic conditions.