EC4004. Economics for Business
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1 EC4004 Economics for Business
2 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 Week 5 QE; Sweden 1990s or Currency Crisis 1992 Week 6 Week 7 Week 8 ~Book Reviews Due~ Arbitrage Free Lunch or Savings; South Korea ~Book Reviews Feedback~ ArgenGna 1890s or Bank Collapse Great Britain 1772 HyperinflaGon Yugoslavia or Unemployment Trinidad & Tobago Week 9 Fiscal Policy Canada or Income Inequality Armenia Week 10 Sample Exam Paper Week 11
3 OBJECTIVES Week 5; QuanGtaGve Easing: Sweden 1990s or Currency Crisis Britain 1992 Good Discussion
4 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?
5 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
6 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
7 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
8 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 WHICH DO YOU THINK IS SUCESSFUL? DISCUSSION! 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
9 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
10 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
11 QUESTION 6 Why is it easy for Fed to print money?? Should the Fed print money? DISCUSSION!!!
12 CURRENCY CRISIS BRITAIN: CASE STUDY QUESTIONS: 1. What are exchange rates? Watch the news (Bloomberg) or go to an exchange rate website ( 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.
13 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?
14 QUESTION 1 exchange rate is the price of one currency in terms of another Examples????
15 QUESTION 2 Appreciation is an increase in the value of a currency relative to another currency. Example; 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 = $ = $1.50 The dollar has depreciated relative to the euro
16 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.
17 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
18 QUESTION 5 Did Europe learn from the crisis? What is your opinion on Euro zone and its effectiveness? DISCUSSION!!!
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LECTURE 20 LAST TIME Aggregate Demand & Aggregate Supply together again for the first time. Aww. NEWS. TODAY. Aggregate Demand & Supply in a Crisis
Aggregate Demand & Supply in a Crisis LECTURE 20 LT TIME Aggregate Demand & Aggregate Supply together again for the first time. Aww. NEWS. TODAY. Aggregate Supply & Aggregate Demand Effects. Fiscal Policy;