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ECO209 - OCT 29 Case Study 2.docx

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Case study 2 1) Consumer, business sector, government: summation of the expenditure was greater than GDP, assuming that GDP = income a. Deficit in the trade account, net export is negative for C+I+G to be greater than GDP b. Not only addicted to oil, but also importing c. Foreign saving financing this additional expenditure 2) Fully financing investment + government deficit? a. It was not sufficient b. Needed to get external financing c. Domestic savings + foreign savings d. S = I + BD + NX i. If NX is 0, S = I+BD ii.But NX is negative, so I + BD = S-NX 3) Spending particularly more on housing market a. Construction industry was growing i. Infrastructure ii.What contributed to the housing bubble 1. Pockets along the coasts where prices increased dramatically iii.Creates employment but not productive capacity b. Consumer goods buying i. Not saving to increase productive capacity c. US bonds are relatively save despite the low interest rate d. Right now foreign savings are financing mostly the government debt i. The housing market has not recovered, the constructing industry is not booming 4) Increase in consumption expenditure, the main variable: rate of interest was exceptionally low, as well as positive expectation, wealth increases as value of houses increases due to the bubble a. There were tax cuts but mostly for the rich i. No great impact to the economy as consumption does not increase dramatically from the increase in additional disposable income b. Contribution to consumption: disposable income, transfer payment, expectation of the future, rate of interest, wealth c. Comparing the situation today: i. Lo
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