T4 RWE

Question 1

Monetary: Expansionary

Answer 1

Brazil’s Rate Cuts Amid COVID-19 (2020)

What: Record-low rates to boost demand.
Who: Central Bank of Brazil.
When: 2020.
Why: Counter recession caused by pandemic.

Causes: COVID-19 lockdowns stalled growth.
Effectiveness: Stimulated short-term demand but caused inflation, forcing policy reversal within a year.

Rates cut to 2% (record low).
Inflation surged to over 9% by mid-2021.

1. Short vs. long-run: Effective short-term stimulus, but inflation negated benefits.
2. Stakeholders: Borrowers benefited, but savers lost due to inflation.
3. Priorities: Expansionary policy poorly aligned with inflation management goals.

Question 2

Monetary: Contractionary

Answer 2

U.S. Fed Rate Hikes (1980s)

What: Aggressive rate hikes to reduce inflation.
Who: Federal Reserve under Paul Volcker.
When: Early 1980s.
Why: Address double-digit inflation.

Causes: Oil shocks and excessive monetary stimulus in the 1970s.
Effectiveness: Reduced inflation from double digits to ~3%, but triggered a recession with high unemployment.

Federal funds rate peaked at 19% (1981).
Inflation fell from ~13% (1980) to ~3% (1983).

1. Stakeholders: Businesses and workers suffered due to the recession.
2. Priorities: Inflation control succeeded but at high employment costs.
3. Long-run tradeoff: Short-term recession paved the way for longer-term price stability.

Question 3

Fiscal: Expansionary

Answer 3

New Deal (USA, 1933-1939)

What: Public spending to combat Great Depression.
Who: U.S. government under FDR.
When: 1933-1939.
Why: Boost demand and reduce unemployment.

Causes: High unemployment and economic stagnation post-1929.
Effectiveness: Reduced unemployment and boosted GDP, though full recovery only came with WWII spending.

Unemployment fell from 25% (1933) to ~15% (1939).
GDP grew ~9% annually during the New Deal.

1. Stakeholders: Helped workers but placed fiscal strain on government.
2. Long-run concerns: Debt levels increased, limiting flexibility for future spending.
3. Priorities: Focused on short-term recovery but lacked sufficient scale for full recovery.

Question 4

Fiscal: Contractionary

Answer 4

UK Austerity Measures (2010-2015)

What: Spending cuts and tax increases.
Who: UK government.
When: 2010-2015.
Why: Reduce budget deficit post-2008 crisis.

Causes: High public debt (~80% of GDP in 2010).
Effectiveness: Reduced deficit but slowed economic recovery, widening inequality and harming low-income households.

Budget deficit fell from 10% (2010) to ~4% (2015).
Debt stabilized but recovery lagged behind G7 peers.

1. Stakeholders: Low-income groups suffered due to spending cuts.
2. Short vs. long-run: Effective in reducing deficits but slowed short-term recovery.
3. Priorities: Focus on fiscal discipline hindered growth potential.

Question 5

Deep recession

Answer 5

U.S. ARRA (2009) What: $831 billion fiscal stimulus.

Who: U.S. government under Obama.
When: 2009 (Great Recession).
Why: Boost demand and reduce unemployment.
Causes: 2008 financial crisis led to GDP decline and 10% unemployment.
Effectiveness: Stabilized GDP growth and reduced unemployment, though effects on long-term unemployment were limited.

Stimulus: $831 billion.
GDP grew ~3% in 2010.
Unemployment fell from ~10% (2009) to ~7% (2013).

1. Debt risks: U.S. federal debt rose to ~90% of GDP (2012).
2. Stakeholders: Helped workers and businesses but had uneven regional impacts.
3. Short-term focus: Effective short-term, but structural reforms were needed for sustained growth.

Question 6

2008 Global Financial Crisis

Answer 6

2008 Global Financial Crisis (GFC)

What: A global recession triggered by the collapse of financial institutions.
Who: Affected economies worldwide, particularly the U.S. and Europe.
When: 2007–2009, with impacts lasting through the mid-2010s.
Why: Caused by excessive risk-taking in the housing market and financial sectors.

Causes: Collapse of major financial institutions and the subprime mortgage crisis led to widespread economic contraction.
Effectiveness: Stimulus measures stabilized economies, though recovery was slow and uneven.

GDP: Global GDP fell by 0.1% in 2009.
Unemployment: U.S. unemployment peaked at 10% in 2009.
Stimulus: U.S. passed a $787 billion stimulus package.
Trade: Global trade fell by over 10% in 2009.

Debt Risks:

Stimulus measures increased government debt, especially in the U.S. (80% of GDP in 2010).
While effective short-term, rising debt posed long-term fiscal challenges.
Stakeholders:

The crisis disproportionately affected lower-income groups and led to job losses.
Stimulus helped corporations and workers, but inequality remained a concern.
Structural Reforms Needed:

The crisis exposed flaws in financial regulation, requiring reforms like Dodd-Frank.
While reforms stabilized the system, recovery was still fragile and slow.