Question

Assignment 8: Crisis Essay

Goal

Write a 500-word essay that critically analyzes the macroeconomic impact of the Great Recession in a country of your choice. In a previous module, you analyzed the United States. Even though the great recession originated in the US, it had world-wide repercussions for years to come, for this reason often also called the Global Financial Crisis (GFC). Like that previous module, you should discuss the antecedents in the country/case of your choice and the policies that the public sector, business leaders, and individuals can follow to avoid or prevent such crises from happening again in the future. Also, you should discuss the implications for individuals, businesses, and (if appropriate) you personally.

Case Choice and Background

• This assignment provides you an opportunity to apply and what you have learned in this course to a case study of your choosing. The discussion of the US financial crisis case during the Global Financial Crisis (GFC) in different parts of the course provides you with a template for the essay. However, do not focus on the US: you must examine the experience of another country during that time frame.

• Since September 2008, we have seen other many other countries outside the US faced challenges in coping with impacts, both immediate and longer-term, of the crisis that originated in the US – which we already discussed in Module 5. Each of these country cases has its own unique features – no macroeconomic crisis or shock is identical to any other. You need to research and discuss the specifics of the case you choose. These include the antecedents: what policies or other factors which helped precipitate the situation in the foreign country.

• While each country case is different, macroeconomic crisis or shock episodes can be fit into (at least) one of the open-economy models you learned in this course. As in previous modules, you must use a model to describe your case study. It is your job to pick the specific model that is appropriate to the case you choose.

• Try to be original in your case selection, but make sure you have enough information to defend your choice of case study and enough time to thoroughly examine the case, including applying one of the models presented in the course. Your grade will depend more on the quality of the analysis than which case you choose. Also, be mindful this is an individual assignment and you are bound by the honor code.

• In many cases, including among the Euro zone periphery (Portugal, Greece, Ireland) and emerging market countries, default on public or private debt and increases in the risk premium / net capital outflows are part of the story. Some discussion of these issues is found in chapter 13 of Mankiw’s Textbook, and some supplementary explanatory material may be posted during the course. Instances of positive shocks triggered by capital inflows associated with the US quantitative easing policies can be considered, even though will be harder to analyze.

• You should dedicate only a small amount of time to selecting and researching the country case – 1- to 2 hours maximum. Most of your time should be devoted to analyzing the facts of the case in the context of one of our models as summarized in a diagram, as you did in your group assignments, and then on the presentation of the case in the final essay.

• Summarize your data-based empirical evidence with at least one chart and a table in addition to the model diagram that is needed to analyze the evidence you report.

• Case approval by the instructor is not required, but you are encouraged to share your ideas in the discussion board where you can get feedback from your classmates and the instructional team. (This last discussion board is not graded, but previous experience indicates that monitoring and participating in it will significantly facilitate completing the assignment with appropriate effort and good results).

Requirements (see the grading rubric for more details)

1. Identify a country/case you want to analyze and elaborate very briefly on the specific aspects of the event that you are going to examine (as discussed above). Assemble your facts and your evidence, complementing what is supplied in the course resources (if you use any) with your own limited research effort.

2. Map the event into a “shock” using one of the models covered in this course and trace the shock in one of the model diagrams you learned, discussing its macroeconomic consequences within the framework chosen. You may assume that the economy starts off in both short-run and long-run equilibrium.
   
3. Assess the government policy response, showing what the end impact was. Describe briefly what was actually done in practice, then represent it on a diagram. (Step 1 – Place the macroeconomy in short- and long-run equilibrium. Step 2 – Demonstrate the impact of the macroeconomic shock on the economy in the short run. Step 3 – Demonstrate the impact of the policy response on the macroeconomy in the short-run. Step 4 – Show the long run equilibrium of the economy after the initial shock and the policy response. You are expected to trace and explain this path on a diagram summarizing one of the models studied in the course.)
   
4. Discuss the implications of the crisis for one set of individuals (for instance, households in that situation, a certain age group of the population, etc., certain groups of workers) and businesses (a specific firm or sector, your business sector or firm, etc.). Please note that this dimension of the assignment is important and will have a significant weight in the grading of this final. You have received repeated feedback on the reflections in your group assignments. Try your best to illustrate your learning of the importance of the macroeconomic environment for businesses and people.   

Answer 1

The great recession (2008) refers to the economic crisis between 2008 & 2013. The recession started after a worldwide credit crunch & led to a lengthy period of low growth & escalating unemployment. Particularly, the great recession highlighted issues within the Eurozone that saw a double dip recession & heavy unemployment

1. Credit crunch led to a diminishing of bank lending, due to a lack of liquidity.
2. Fall in customer & corporate confidence stemming from financial instability.
3. Decline in exports from the worldwide recession.
4. Decline in housing prices leading to adverse wealth effects.
5. Fiscal restriction compounded the initial decline in GDP.
6. In Europe, the single currency generated additional issues due to the over-valued rates of exchange & high bond yields.

Reaction to the economic crisis-

• Bank rescues- Governments felt it was necessary to intervene in the banking industry to avert banks going bust. In the United Kingdom, the government intervened to bailout out main banks, like Lloyds TSB.
• Cutbacks in interest rates- Towards the second half of 2008 Central Banks cutback interest rates very low levels. The UK cutback base rates from 5 per cent to 0.5 per cent. Normally, a significant cutback in interest rates would render borrowing cheaper & stimulate consumption & investment. However, cutbacks in interest rates were less effectual in this period.
• Expansionary fiscal policy- The severe recession saw a sharp increase in budgetary deficits because governmental tax revenues vanished. This was particularly noticeable for nations which relied upon stamp duties & tax from the financial sector. However, in the UK , there was a moderate level of fiscal expansion. The UK announced a temporary cutback in VAT.