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EC250 Final Exam Blog Summaries.docx

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Jerzy Konieczny

EC250 FINAL EXAM BLOG Q’s 46 The Yellen Fed? Precise and Predictable - New York times prediction on how Janet Yellen will run the US monetary policy - She is all for transparency and relatively simple rules - A careful deliberate approach is what is needed at the central bank 47 More on Nobel winners and markets - Differences between Fama and Shiller - Fama thinks markets are rational and professional money managers are monkeys throwing darts - Shiller thinks that this is not true and there are bubbles in the stock market (as well as in the housing market) caused by irrational behaviour of investors - In Shiller’s view, prices tend to the average price/earning ratio & House prices to the long-run average proportion of income - Shiller predicts that house prices in the US will fall 48 The Federal Government is concerned - The absolute purchasing power parity does not hold between Canada and the US - Prices of many goods and services are, at current exchange rate, higher in Canada than in the US - It is blamed on tariffs and non-competitive behaviour 51 Balanced budget - Government promised balanced budget in normal times - In a recession, they would allow a deficit but with a detailed plan on when the deficit will be eliminated - Much better than proposals to have a balanced budget all the time 56 Deflation in Europe - Summary of deflation in Europe o Euro-area economy started growing but unemployment is high along with greater health risks o Inflation is below 1%, prices are falling o ECB can safely stimulate economy without danger of inflation o If Europe falls into deflation, the cost of servicing debts will rise dramatically  According to one estimate, to keep the debt/GDP ratio constant, it needs to increase its surplus by more than 1% for each % decrease in inflation o Austerity is the cause EC250 FINAL EXAM BLOG Q’s 57 Now about the problems with Inflation - If the inflation was raised o FED may lose control of inflation o As inflation accelerates, any benefits will be swamped by people spending asap o Inflation punishes people on fixed incomes o It discourages lending and investing, slow economic growth for future 58 Record Unemployment in Europe - 19.5 million people looking for a job and not finding it - Unemployment rate: 12.2%, over 25% in Spain and in Greece - Youth unemployment: over 55% in Spain in Greece 60 Monetary Policy in action - Unexpectedly, European Central Bank lowered the short-term interest to lowest level ever at 0.25% o 22/23 analysts thought there would be no change o The reason for the cut is that inflation in the Euro-area is very low at 0.7%  ECB target for inflation is just below 2% - Low rate of inflation if it falls further may become deflation - ECB is not aiming for high rate of inflation but rather closer to 2% o Euro-area economy is weak o Euro has appreciated, making life difficult for exporters o Lower interest rate leads to depreciation of the currency making exports cheaper and imports more expensive  If results in lower long-term interest rates, will provide stimulus to the economy - Markets think there will be an improvement in the economy and they are up 61 A Useful opinion on ECB moves - Long term Refinancing Operation (LTRO) introduced by the European Central Bank (ECB)
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