Reflections on the Causes and Consequences of the Debt Crisis of 2008
Microeconomics
Article- La Follette Policy Report- Reflections on the Causes and Consequences of the Debt Crisis of 2008
By Robert M. La Follette School of Public Affairs, University of Wisconsin-Madison
The assignment should be answered from the readings that the article and not by using outside information unless it is necessary. But for the most part, use the reading for each question to answer the question.
Question 1
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1. Read Chinn and Frieden’s “Reflections on the causes and Consequences of the Debt Crisis of 2008” (attached below)
a) Based on this paper, discuss the role of the budget deficit and government debt in causing our financial crisis. What are the mechanisms through which budget deficits were a major cause of the financial crisis according to the authors?
b) Two other causes have been proposed as major culprits: “the savings glut” and “loose monetary policy” (a.k.a., Blame Greenspan!). Describeboth of these and discuss why the authors think that neither one of them was the principal cause of the crisis.
c) Use large open economy diagrams show how a budget deficit would affect the interest rate, capital flows, the exchange rate and the trade balance. Also, explain how each of these variables is affected using economic intuition
FOR PART C, INCLUDE THE DIAGRAM IN THE PAPER OR ATTACHED TO ANOTHER SHEET
Questions 2
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2. Read Easterly’s chapter 11 (attached below), “Governments Can Kill Growth.” Governments sometimes create high inflation, high black market premiums, high government deficits, restrictions on free trade, and excessive red tape.
a)According to the chapter, why do governments sometimes create high inflation? Provide a couple of examples.
b) According to the chapter, what is “the black market premium”? How does it affect growth negatively? Explain.
c)According to the chapter, governments sometimes “kill banks.” Describe how they would do that and why they would do that.
d)Evaluate the following statement, “If the country imposes protectionist policies like high tariffs on foreign goods, then more domestic jobs will be created and the country will grow.” How has this worked according to the chapter? Explain and cite some evidence form the chapter.
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– Identifying the issue(s): Clearly identifying the problem(s), question(s) or issue(s). Providing background for the problem(s), question(s) or issue(s).
– Analytics: Applying economic concepts to the questions. Developing logical arguments. Drawing substantiated conclusions. Drawing connections between economic concepts and real world applications.
– Communication and Structural Organization: Language clearly and effectively communicates ideas. Assignment is organized with an introduction, body, discussion, conclusion and reference section, if applicable. Grammar, syntax and appropriate style.
