Economic Sessions and Concepts Quiz

Questions and Answers

What is the key difference between the Stagnation and Secular Stagnation (SSH) and the Balance Sheet Recession (BSR)?

BSR is caused by burst of asset bubbles and deleveraging, while SSH is caused by advanced economies being 'pursued' with investment moving abroad.

What is the main reason for the downward trend in real interest rates during the Secular Stagnation (SSH) phase?

All of the above.

What is the defining characteristic of the Maturing Phase in the Capitalist Cycle?

Workers have more bargaining power and narrower income inequality.

What is the main driver of the 'Pursued Phase' in the Capitalist Cycle?

Wages are high in the country, and foreign competition is stronger. Signup and view all the answers

What is the key characteristic of the Stagflationary situation during the Secular Stagnation (SSH) phase?

Low inflation and high unemployment. Signup and view all the answers

What is the main driver of excessive growth in finance during the Secular Stagnation (SSH) phase?

Low inflation and low interest rates (Zero Lower Bound). Signup and view all the answers

In a balance sheet recession, what is the main reason why monetary policy is ineffective?

Private sector does not want to borrow Signup and view all the answers

What is a characteristic of a balance sheet recession that differentiates it from other types of recessions?

Companies focus on debt minimization instead of profit maximization Signup and view all the answers

During a balance sheet recession, why do borrowers tend to disappear and private spending shrinks?

Lack of access to credit Signup and view all the answers

What is a key characteristic of a deflation threat in a debt-loaded world with zero lower bound interest rates?

Private sector prioritizes debt repayment over spending Signup and view all the answers

Why does fiscal policy become crucial during a balance sheet recession when monetary policy proves ineffective?

To compensate for the ineffectiveness of monetary policy Signup and view all the answers

What is one reason why governments find it beneficial to borrow during a balance sheet recession?

Access to cheap funds for long-term projects Signup and view all the answers

What is the main reason why expansionary fiscal policy is not recommended in the current context according to the passage?

It will exacerbate inflation as public debts and deficits are already at high levels. Signup and view all the answers

What is the main characteristic of a Balance Sheet Recession (BSR) according to the passage?

Private sector deleveraging and reluctance to borrow despite low interest rates. Signup and view all the answers

What is the key difference between the long-term impact of the Great Recession and the Great Depression according to the passage?

The Great Recession had a smaller short-term impact but a more profound long-term impact. Signup and view all the answers

What were the main factors that contributed to the asset bubble in the early 2000s according to the passage?

All of the above. Signup and view all the answers

What was the main response of the public sector to the private sector deleveraging during the post-Great Recession period?

Compensating with large borrowing and spending, including through automatic stabilizers and bailouts. Signup and view all the answers

According to the passage, what is the key difference between the long-term impact of the Great Recession and the COVID-19 pandemic?

The COVID-19 pandemic had a stronger short-term impact, but its longer-term impact may not be as large as the Great Recession. Signup and view all the answers

Study Notes

Fiscal Policy and Recession

Voluntary expansion of fiscal position to stimulate economy
Deflation threat due to debt-loaded world and zero-lower bound interest rates
- Private sector wants to pay off debt rather than spend
- Central Banks can't lower interest rates to stimulate economy
Different kinds of recession, including Balance Sheet Recession (BSR)
- Credit-fueled asset bubble burst, companies insolvent due to loss of asset value
- Private sector focuses on debt minimization, not profit maximization
- Borrowers disappear, private spending shrinks
- Monetary Policy doesn't work, need Fiscal Policy to compensate

Balance Sheet Recession (BSR)

Caused by credit-fueled asset bubble burst
Companies and families deleveraging, leading to private sector debt minimization
Monetary Policy ineffective, need Fiscal Policy to stimulate economy
Good for Governments to borrow to finance long-term projects during BSR
- Access to cheap funds
- No crowding out effect, fiscal multipliers are larger

Secular Stagnation Hypothesis (SSH)

Advanced economies get "pursued" after sometime
Capitalist gains the most due to investment and low labor costs
High inequality, labor supply is perfectly elastic
Phase 2: Maturing Phase, labor supply curve slopes upwards, workers have more bargaining power
Phase 3: Pursued phase, only those with advanced ideas prosper, wages are high, investment moves abroad
SSH different from BSR, due to advanced economies being "pursued", not asset bubble burst

Characteristics of SSH

Long periods of low inflation, inequality, and ultra-low interest rates (ZLB)
Encourages excessive growth in finance, helps explain credit bubbles
Real interest rates trend downwards during SSH due to
- Lower investment: better opportunities abroad, lower costs, declining population growth, less competition
- Increase in savings: regulations, deleveraging, and Zero-Lower Bound Constraint

Great Financial Crisis and Great Recession

Led to permanent loss in output (growth of countries didn't go back to original path)
Partial explanation is hysteresis
Great Recession had a long-term profound impact, trend since 1990s
COVID-19 has a stronger short-term impact, but longer-term impact may not be as large

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