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Questions and Answers
What is the primary focus of fiscal policy as described?
What is the primary focus of fiscal policy as described?
Which entity is primarily responsible for monetary policy?
Which entity is primarily responsible for monetary policy?
In the context of economic policy, what is a significant role of government spending?
In the context of economic policy, what is a significant role of government spending?
What does monetary policy primarily control?
What does monetary policy primarily control?
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Which component is NOT typically associated with fiscal policy?
Which component is NOT typically associated with fiscal policy?
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What is one primary function of the government in relation to market competition?
What is one primary function of the government in relation to market competition?
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Which of the following is a key component considered in public budget expenditures?
Which of the following is a key component considered in public budget expenditures?
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Why is excessive public debt considered unsustainable?
Why is excessive public debt considered unsustainable?
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What is the role of the central bank concerning government public debt?
What is the role of the central bank concerning government public debt?
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What happens to the public budget balance (PBB) when public debts are issued?
What happens to the public budget balance (PBB) when public debts are issued?
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What is a primary way the government aims to stimulate the economy during recessions?
What is a primary way the government aims to stimulate the economy during recessions?
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Which of the following statements about public sector debt in developed countries is true?
Which of the following statements about public sector debt in developed countries is true?
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What underlying issue might suboptimal market outcomes lead to?
What underlying issue might suboptimal market outcomes lead to?
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What happens to borrowing costs when the base interest rate is lowered?
What happens to borrowing costs when the base interest rate is lowered?
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What is the effect of lower interest rates on the market?
What is the effect of lower interest rates on the market?
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Which tool is commonly used for influencing money supply in the economy?
Which tool is commonly used for influencing money supply in the economy?
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What does a minimal reserve coefficient imply for banks?
What does a minimal reserve coefficient imply for banks?
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What is a potential consequence of lowering the base interest rate?
What is a potential consequence of lowering the base interest rate?
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Which of the following is NOT a result of decreasing the base interest rate?
Which of the following is NOT a result of decreasing the base interest rate?
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In which situation would one expect a reduction in the minimum reserve coefficient?
In which situation would one expect a reduction in the minimum reserve coefficient?
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What is a likely outcome of conducting Open Market Operations?
What is a likely outcome of conducting Open Market Operations?
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What is the relationship between reserves and deposits in a banking system?
What is the relationship between reserves and deposits in a banking system?
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Which monetary policy tool is used to control the money supply through interest rates?
Which monetary policy tool is used to control the money supply through interest rates?
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Why can an expansionary monetary policy risk deflation?
Why can an expansionary monetary policy risk deflation?
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What can be included as securities within a bank's asset balance sheet?
What can be included as securities within a bank's asset balance sheet?
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What occurs when banks lend more than their reserves?
What occurs when banks lend more than their reserves?
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What is indicated by a currency being in circulation?
What is indicated by a currency being in circulation?
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Which statement is incorrect regarding reserves in a bank's balance sheet?
Which statement is incorrect regarding reserves in a bank's balance sheet?
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Which of the following would be considered a contractionary monetary policy?
Which of the following would be considered a contractionary monetary policy?
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What is the primary risk associated with excessive reliance on public and corporate bonds by banks?
What is the primary risk associated with excessive reliance on public and corporate bonds by banks?
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What does 'money supply' refer to within a banking context?
What does 'money supply' refer to within a banking context?
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How does an increase in reserves impact the economy?
How does an increase in reserves impact the economy?
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What is a potential effect of implementing an official interest rate of zero?
What is a potential effect of implementing an official interest rate of zero?
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What role do deposits from other banks serve in a bank's balance sheet?
What role do deposits from other banks serve in a bank's balance sheet?
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Which of the following best defines 'fractional reserve banking'?
Which of the following best defines 'fractional reserve banking'?
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What is one potential consequence of the central bank buying all types of financial assets?
What is one potential consequence of the central bank buying all types of financial assets?
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What challenge does the environment pose for foreign direct investment in China?
What challenge does the environment pose for foreign direct investment in China?
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Which of the following is NOT a disadvantage for foreign direct investment in China?
Which of the following is NOT a disadvantage for foreign direct investment in China?
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What is indicated to potentially happen if inflation is not controlled by the central bank?
What is indicated to potentially happen if inflation is not controlled by the central bank?
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In the case of Greece, what was the government facing due to high levels of debt?
In the case of Greece, what was the government facing due to high levels of debt?
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What role does the central bank play in relation to banking systems during financial panic?
What role does the central bank play in relation to banking systems during financial panic?
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What is a challenge mentioned regarding China's labor force?
What is a challenge mentioned regarding China's labor force?
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What was a significant impact observed in China after 25 years regarding foreign direct investment?
What was a significant impact observed in China after 25 years regarding foreign direct investment?
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Which of the following is NOT mentioned as an issue affecting foreign direct investment in China?
Which of the following is NOT mentioned as an issue affecting foreign direct investment in China?
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What issue does the circular flow model face during a pandemic in terms of economic dynamics?
What issue does the circular flow model face during a pandemic in terms of economic dynamics?
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Which of the following factors contributes to the negative view on foreign direct investments in China?
Which of the following factors contributes to the negative view on foreign direct investments in China?
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What can occur if too much liquidity is introduced into the market without caution?
What can occur if too much liquidity is introduced into the market without caution?
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Which issue is commonly acknowledged as influencing corporate decisions in China?
Which issue is commonly acknowledged as influencing corporate decisions in China?
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What was one major consequence of the housing market crash that sparked the Great Recession?
What was one major consequence of the housing market crash that sparked the Great Recession?
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What is one potential drawback of the Euro as a common currency among the Eurozone countries?
What is one potential drawback of the Euro as a common currency among the Eurozone countries?
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Which of the following best describes the Stability and Growth Pact within the EU?
Which of the following best describes the Stability and Growth Pact within the EU?
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What is the primary goal of the 'Made in China 2025' initiative?
What is the primary goal of the 'Made in China 2025' initiative?
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What is a significant challenge facing the Chinese economy that can create vulnerabilities?
What is a significant challenge facing the Chinese economy that can create vulnerabilities?
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What distinguishes Real GNP from Nominal GNP?
What distinguishes Real GNP from Nominal GNP?
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Which of the following accurately describes hyperinflation?
Which of the following accurately describes hyperinflation?
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What is a significant result of a financial account surplus in relation to the current account?
What is a significant result of a financial account surplus in relation to the current account?
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How is economic growth quantified?
How is economic growth quantified?
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What does the Consumer Price Index (CPI) primarily measure?
What does the Consumer Price Index (CPI) primarily measure?
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What characterizes demand-driven inflation?
What characterizes demand-driven inflation?
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Which of the following best describes national income (NI)?
Which of the following best describes national income (NI)?
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What is a primary goal of the central banks when managing monetary policy?
What is a primary goal of the central banks when managing monetary policy?
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What was a significant global response to the Great Recession of 2008-2009?
What was a significant global response to the Great Recession of 2008-2009?
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Which of the following is a drawback of the Euro as a common currency within the Eurozone?
Which of the following is a drawback of the Euro as a common currency within the Eurozone?
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What is a primary objective of the Stability and Growth Pact in the European Union?
What is a primary objective of the Stability and Growth Pact in the European Union?
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What does the 'Made in China 2025' policy primarily aim to achieve?
What does the 'Made in China 2025' policy primarily aim to achieve?
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What is one main risk associated with the Euro's common currency system?
What is one main risk associated with the Euro's common currency system?
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What is Real GNP adjusted for?
What is Real GNP adjusted for?
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Which type of inflation is characterized by excessive price increases exceeding 10% per year?
Which type of inflation is characterized by excessive price increases exceeding 10% per year?
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What aspect does the Balance of Payments Current Account primarily track?
What aspect does the Balance of Payments Current Account primarily track?
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What is a primary goal of monetary policy as managed by central banks?
What is a primary goal of monetary policy as managed by central banks?
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What economic measure is used to gauge economic growth?
What economic measure is used to gauge economic growth?
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What occurs in the Balance of Payments equilibrium?
What occurs in the Balance of Payments equilibrium?
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What phenomenon is described as negative inflation leading to economic stagnation?
What phenomenon is described as negative inflation leading to economic stagnation?
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Which of the following economic tools is generally associated with fiscal policy?
Which of the following economic tools is generally associated with fiscal policy?
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Study Notes
Functions of Government
- Preserve market competition
- Correct suboptimal market outcomes
- Redistribution
- Fight recessions
- Steer the economy in the long run
Public Budget
- A record of all revenues & expenditures
- Revenues: Taxes (e.g., Consumption Taxes)
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Expenditures:
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Public Budget Deficit:
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Monetization: Central Bank purchases public debt directly from the government
- Forbidden in most developed countries to ensure the independence of Monetary Policy
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Selling Public Debt in Bond Markets: Issue public bonds (T-Debt) to investors
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Why excessive debt is not sustainable?
- PBB < 0 -> ↑ Interest Payments -> ↑ PBB -> Every extra E generates add interest payments
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Why excessive debt is not sustainable?
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Monetization: Central Bank purchases public debt directly from the government
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Downsides of Public Debt:
- Siehe Slides !!
-
Government spending allows for strategic investments:
- Infrastructure
- Digital green, reliable (EU-Covid-19)
-
Public Budget Deficit:
Economic Policy (Class Session 2)
- Fiscal Policy: (Siene Slide davor)
-
Monetary Policy: (Central Banks Banking Institutions)
- Definition: All policies that allow for control of the quantity of money available in the economy for immediate use
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How do we create money?
- Reserve Requirement: Reserves in circulation = 1000E / Reserve requirement (rc) = 20%
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Step 1:
- Bank 1 receives 1000E in deposits, with 200E reserves and 800E loans.
- Bank 1 loans out 640E.
- Bank 2 receives 640E in deposits and keeps 20% (128E) in reserves and loans out the remaining 512E.
- This process continues, and the money supply expands.
- Money supply: 1000E / 20% = 5000
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Balance Sheet of a "Modern Bank":
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Assets:
- Reserves
- Cash in CB
- Deposits from other Banks
- Loans given
- Public Bonds
- Corporate Bonds
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Assets:
-
Tools:
-
Conventional Monetary Policy Tools:
-
Official interest rate (i):
- Expansionary: ↓ i
- Contractionary: ↑ i
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Minimum Reserve Coefficient (rc):
- This is the most used tool for controlling the money supply
-
Open Market Operations (GMO)
- The CB directly buys all types of financial assets to force a decrease on interest rates.
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Example: Greece - the government had to pay very high interest on its debt.
- ECB/FED (secondary market) buys Greek bonds.
- This leads to an increase in demand for government bonds, which lowers interest rates.
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Effects:
- Huge impact on the size of the ECB/FED Balance Sheet.
- Negative effects:
- Very inflationary if not stopped in time.
- Potential creation of bubbles.
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Official interest rate (i):
-
Conventional Monetary Policy Tools:
-
The Circular Flow and the Pandemic:
- The CB is responsible for being the lender of last resort for the banking system to avoid financial panic.
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China Case:
- China is labor-intensive transitioning toward a capital-intensive country.
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Facts:
- FDI in China turned negative for the first time in 25 years.
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Disadvantages of FDI in China:
- An ever-changing legal environment.
- Bureaucratic & administrative complexities.
- Aging population & cultural differences.
- High level of corporate indebtedness.
- Overcapacity in several sectors of production.
- A lack of transparency & weak intellectual property rights protection.
- Underdeveloped middle management.
- Message: Government (Chinas institutions) should work to make the country attractive for companies to move their operations there.
Introduction to Global Economics
- Gross National Product (GNP): Measures the market value of final goods/services produced by a nation's factors of production. Real GNP adjusts for inflation using base-year prices.
- Gross Domestic Product (GDP): Total value of goods/services produced within a country's borders. Understanding its components is crucial. Nominal GDP uses current prices, while real GDP accounts for inflation.
- Economic Growth: Percentage increase in real GDP.
- National Income (NI): Calculated as GNP minus depreciation and indirect taxes, plus subsidies.
- Inflation: A general increase in prices. Measured using the Consumer Price Index (CPI). Central banks typically target inflation around 2%.
- Types of Inflation: Demand-pull (rising aggregate demand) and cost-push (decreased production). Hyperinflation exceeds 10% annually. Deflation is a decrease in prices, potentially harming economic activity.
- Unemployment: Key metrics include the unemployment rate and labor force participation rate. Government aims to reduce unemployment and manage economic growth.
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Balance of Payments: Records all economic transactions between a nation and the rest of the world.
- Current Account: Tracks trade in goods, services, and income.
- Financial and Capital Account: Covers transactions in financial assets (investments, loans).
- Equilibrium: Achieved when current account deficits are balanced by financial account surpluses. Changes in foreign exchange reserves are relevant here.
Macroeconomic Variables and Policy
- Fiscal Policy: Government tools (spending and taxation) to influence the economy. Goals include managing economic growth and stability.
- Monetary Policy: Central banks (e.g., ECB, Federal Reserve) control interest rates and the money supply to manage inflation and growth. Conventional and unconventional tools (like Quantitative Easing or QE post-2008) are used.
- The Great Recession (2008-2009): Originated in the U.S. housing market, causing global financial crisis. Governments responded with expansionary fiscal policies (increased spending) to prevent collapse.
The European Economy
- European Union (EU): Political and economic union of 27 member states.
- Eurozone: Countries using the euro.
- Stability and Growth Pact: Limits government deficits (to 3% of GDP) to ensure fiscal discipline within the Eurozone, particularly during recessions.
- Next Generation EU – Recovery Plan: A significant post-crisis recovery initiative.
- The Euro: Offers benefits like eliminating exchange rate uncertainty and promoting integration, but also leads to a loss of national monetary policy control and fiscal constraints. The concept of Optimal Currency Areas is relevant to its evaluation.
China: Economic Policy and Transformation
- Economic Reforms: China aims to transition from low-end manufacturing to higher-tech industries (Made in China 2025). The semiconductor industry is particularly important in this transition.
- Economic Imbalances and Vulnerabilities: Understanding these is crucial for analyzing China's economic future.
- Taiwan Case: This region's role in the global semiconductor industry and its geopolitical significance in relation to China's ambitions should be considered.
Introduction to Global Economics
- Gross National Product (GNP): Market value of final goods/services produced by domestic factors of production. Real GNP adjusts for inflation using base-year prices.
- Gross Domestic Product (GDP): Total value of goods/services produced within a country's borders. Includes nominal GDP (current prices) and real GDP (adjusted for inflation).
- Economic Growth: Percentage increase in real GDP.
- National Income (NI): GNP minus depreciation and indirect taxes, plus subsidies.
- Inflation: General increase in prices. Measured by Consumer Price Index (CPI). Central banks typically target inflation around 2%. Types include demand-driven (rising aggregate demand), supply-driven (decreased production), hyperinflation (>10% annually), and deflation (negative inflation).
- Unemployment: Key metrics include the unemployment rate and labor force participation rate. Government aims to reduce unemployment and manage economic growth.
- Balance of Payments: Current account tracks international transactions in goods, services, and income. Financial/capital account covers transactions in financial assets (investments, loans). Equilibrium occurs when a current account deficit is offset by a financial account surplus. Changes in foreign exchange reserves are also relevant.
Macroeconomic Variables and Policy
- Fiscal Policy: Government tools (spending and taxation) to influence the economy. Goals include stimulating growth and stabilizing the economy.
- Monetary Policy: Central banks (e.g., ECB, Federal Reserve) manage interest rates and money supply to control inflation and promote growth. Includes conventional and unconventional tools like quantitative easing (QE), implemented post-2008 to boost liquidity.
- The Great Recession (2008-2009): Triggered by the US housing market crash, leading to global financial crisis. Governments used expansionary fiscal policies (increased spending) to mitigate economic collapse.
The European Economy
- European Union (EU): Political and economic union of 27 member states.
- Eurozone: Countries using the euro.
- Stability and Growth Pact: Limits government deficits during recessions to ensure fiscal discipline (3% of GDP).
- Next Generation EU – Recovery Plan: A post-pandemic recovery initiative.
- The Euro: Benefits include reduced exchange rate uncertainty and economic integration. Drawbacks include loss of national monetary policy control and fiscal policy constraints. The concept of Optimal Currency Areas addresses the advantages and disadvantages of a single currency.
China: Economic Policy and Transformation
- Made in China 2025: Policy to transition China's economy from low-end manufacturing to higher-tech industries, including semiconductors.
- Economic Transition: China's need to move to a new productive model.
- Economic Imbalances and Vulnerabilities: Key risks and challenges facing the Chinese economy.
- The Taiwan Case: The geopolitical and economic significance of Taiwan in relation to China.
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Description
This quiz explores the essential functions of government, including its role in market competition, economic redistribution, and recession management. It also discusses public budgeting practices, revenue sources, and the implications of public debt. Assess your understanding of government spending and its economic impact.