Macroeconomics and Policy

The surge in global liquidity was the result of

Directions: Answer the given question based on the following passage:

The Global Financial Crisis which began in 2007 led to the Great Recession. It took some unconventional and radical steps such as quantitative easing and bank bailouts to ward-off the dreaded threat of a second Great Depression. The year 2010 witnessed a good recovery raising hopes that things were getting back to normal. However, the onset of the sovereign debt crisis in Europe in late 2010 cast a continuing doubt regarding the nature of the global economy in general and the Euro-Zone in particular. If the Great Recession had prompted a rethink regarding some of the established ideas in economics, finance and public policy, the Euro-Zone crisis has gone a step further in raising issues which are as much politico-socio-cultural as economic and financial. To assess where the Euro-Zone might go from here needs an examination of the basic fundamental factors leading to the crisis.
With the Euro-Zone crisis surfaced several deep-rooted problems that date back to the early years of this century, more or less the same period during which the excesses that resulted in the Great Recession were built up. The surge in global liquidity due to a prolonged period of easy monetary policy had led to a relentless rise in asset prices that encouraged not only sub-prime mortgage lending in USA but also a pile up of debt in the European countries. In the Western world, ‘unprecedented leverage, massive debt creation, and a seemingly infinite sense of credit entitlement prevailed. Financial excesses became the rule rather than the exception, facilitated by financial innovation and the erosion of lending standards and prudential regulation. High leverage was the common theme in the budges of individuals, companies, financial institutions and even governments. High leverage led to the near-collapse of several banks and financial institutions in 2008 and 2009. Although the Great Recession was overcome with a heavy dose of monetary easing by central banks and fiscal stimulus by governments, it ultimately prepared the ground for the sovereign debt crisis. When banks tottered on the brink of collapse, the central banks bailed them out as the lender of last resort. Moreover, the governments recapitalized the banks with tax-payers’ money which imposed a severe strain on their own fiscal health. The taking over of the bad debts of the banks by the governments weakened government finances and turned the spotlight on the credit worthiness of governments itself. As economic growth turned negative due to the Great Recession, the debt burden of several European countries appeared even more onerous. Global markets became wary of their high levels of deficits and debt. As the leverage cycle turned after nearly one and half decades debt intolerance heightened with almost complete ‘risk-off’ in global markets. Greece with a current account deficit of 13.6 percent and a debt-to-GDP ratio exceeding 160 percent became the first target of international speculators. This signalled the onset of the sovereign debt crisis in Europe. By 2011 the debt super-cycle led to the debt-GDP ratio in G-7 countries crossing 100 percent for the first time after World War II. Thus, one way or the other the Great Recession paved the way for the current sovereign debt crisis in Europe. (Sourced from Whither Euro-Zone by Radha Shyam Rathor)

What turned the spotlight on the credit worthiness of the governments?

Directions: Answer the given question based on the following passage:

The Global Financial Crisis which began in 2007 led to the Great Recession. It took some unconventional and radical steps such as quantitative easing and bank bailouts to ward-off the dreaded threat of a second Great Depression. The year 2010 witnessed a good recovery raising hopes that things were getting back to normal. However, the onset of the sovereign debt crisis in Europe in late 2010 cast a continuing doubt regarding the nature of the global economy in general and the Euro-Zone in particular. If the Great Recession had prompted a rethink regarding some of the established ideas in economics, finance and public policy, the Euro-Zone crisis has gone a step further in raising issues which are as much politico-socio-cultural as economic and financial. To assess where the Euro-Zone might go from here needs an examination of the basic fundamental factors leading to the crisis.
With the Euro-Zone crisis surfaced several deep-rooted problems that date back to the early years of this century, more or less the same period during which the excesses that resulted in the Great Recession were built up. The surge in global liquidity due to a prolonged period of easy monetary policy had led to a relentless rise in asset prices that encouraged not only sub-prime mortgage lending in USA but also a pile up of debt in the European countries. In the Western world, ‘unprecedented leverage, massive debt creation, and a seemingly infinite sense of credit entitlement prevailed. Financial excesses became the rule rather than the exception, facilitated by financial innovation and the erosion of lending standards and prudential regulation. High leverage was the common theme in the budges of individuals, companies, financial institutions and even governments. High leverage led to the near-collapse of several banks and financial institutions in 2008 and 2009. Although the Great Recession was overcome with a heavy dose of monetary easing by central banks and fiscal stimulus by governments, it ultimately prepared the ground for the sovereign debt crisis. When banks tottered on the brink of collapse, the central banks bailed them out as the lender of last resort. Moreover, the governments recapitalized the banks with tax-payers’ money which imposed a severe strain on their own fiscal health. The taking over of the bad debts of the banks by the governments weakened government finances and turned the spotlight on the credit worthiness of governments itself. As economic growth turned negative due to the Great Recession, the debt burden of several European countries appeared even more onerous. Global markets became wary of their high levels of deficits and debt. As the leverage cycle turned after nearly one and half decades debt intolerance heightened with almost complete ‘risk-off’ in global markets. Greece with a current account deficit of 13.6 percent and a debt-to-GDP ratio exceeding 160 percent became the first target of international speculators. This signalled the onset of the sovereign debt crisis in Europe. By 2011 the debt super-cycle led to the debt-GDP ratio in G-7 countries crossing 100 percent for the first time after World War II. Thus, one way or the other the Great Recession paved the way for the current sovereign debt crisis in Europe. (Sourced from Whither Euro-Zone by Radha Shyam Rathor)

From the accounts given of the economic slowdown and euro-zone crisis, it would seem

1. the crisis was blown out of proportion
2. it was a man made crisis, waiting to happen
3. the wrong economic policies largely contributed to it
4. the basic fundamental factors were grossly overlooked

   Directions: Answer the given question based on the following passage:

   The Global Financial Crisis which began in 2007 led to the Great Recession. It took some unconventional and radical steps such as quantitative easing and bank bailouts to ward-off the dreaded threat of a second Great Depression. The year 2010 witnessed a good recovery raising hopes that things were getting back to normal. However, the onset of the sovereign debt crisis in Europe in late 2010 cast a continuing doubt regarding the nature of the global economy in general and the Euro-Zone in particular. If the Great Recession had prompted a rethink regarding some of the established ideas in economics, finance and public policy, the Euro-Zone crisis has gone a step further in raising issues which are as much politico-socio-cultural as economic and financial. To assess where the Euro-Zone might go from here needs an examination of the basic fundamental factors leading to the crisis.
   With the Euro-Zone crisis surfaced several deep-rooted problems that date back to the early years of this century, more or less the same period during which the excesses that resulted in the Great Recession were built up. The surge in global liquidity due to a prolonged period of easy monetary policy had led to a relentless rise in asset prices that encouraged not only sub-prime mortgage lending in USA but also a pile up of debt in the European countries. In the Western world, ‘unprecedented leverage, massive debt creation, and a seemingly infinite sense of credit entitlement prevailed. Financial excesses became the rule rather than the exception, facilitated by financial innovation and the erosion of lending standards and prudential regulation. High leverage was the common theme in the budges of individuals, companies, financial institutions and even governments. High leverage led to the near-collapse of several banks and financial institutions in 2008 and 2009. Although the Great Recession was overcome with a heavy dose of monetary easing by central banks and fiscal stimulus by governments, it ultimately prepared the ground for the sovereign debt crisis. When banks tottered on the brink of collapse, the central banks bailed them out as the lender of last resort. Moreover, the governments recapitalized the banks with tax-payers’ money which imposed a severe strain on their own fiscal health. The taking over of the bad debts of the banks by the governments weakened government finances and turned the spotlight on the credit worthiness of governments itself. As economic growth turned negative due to the Great Recession, the debt burden of several European countries appeared even more onerous. Global markets became wary of their high levels of deficits and debt. As the leverage cycle turned after nearly one and half decades debt intolerance heightened with almost complete ‘risk-off’ in global markets. Greece with a current account deficit of 13.6 percent and a debt-to-GDP ratio exceeding 160 percent became the first target of international speculators. This signalled the onset of the sovereign debt crisis in Europe. By 2011 the debt super-cycle led to the debt-GDP ratio in G-7 countries crossing 100 percent for the first time after World War II. Thus, one way or the other the Great Recession paved the way for the current sovereign debt crisis in Europe. (Sourced from Whither Euro-Zone by Radha Shyam Rathor)

    

Which of the following observations is directly attributable to the author?

Directions: Answer the given question based on the following passage:

The Global Financial Crisis which began in 2007 led to the Great Recession. It took some unconventional and radical steps such as quantitative easing and bank bailouts to ward-off the dreaded threat of a second Great Depression. The year 2010 witnessed a good recovery raising hopes that things were getting back to normal. However, the onset of the sovereign debt crisis in Europe in late 2010 cast a continuing doubt regarding the nature of the global economy in general and the Euro-Zone in particular. If the Great Recession had prompted a rethink regarding some of the established ideas in economics, finance and public policy, the Euro-Zone crisis has gone a step further in raising issues which are as much politico-socio-cultural as economic and financial. To assess where the Euro-Zone might go from here needs an examination of the basic fundamental factors leading to the crisis.
With the Euro-Zone crisis surfaced several deep-rooted problems that date back to the early years of this century, more or less the same period during which the excesses that resulted in the Great Recession were built up. The surge in global liquidity due to a prolonged period of easy monetary policy had led to a relentless rise in asset prices that encouraged not only sub-prime mortgage lending in USA but also a pile up of debt in the European countries. In the Western world, ‘unprecedented leverage, massive debt creation, and a seemingly infinite sense of credit entitlement prevailed. Financial excesses became the rule rather than the exception, facilitated by financial innovation and the erosion of lending standards and prudential regulation. High leverage was the common theme in the budges of individuals, companies, financial institutions and even governments. High leverage led to the near-collapse of several banks and financial institutions in 2008 and 2009. Although the Great Recession was overcome with a heavy dose of monetary easing by central banks and fiscal stimulus by governments, it ultimately prepared the ground for the sovereign debt crisis. When banks tottered on the brink of collapse, the central banks bailed them out as the lender of last resort. Moreover, the governments recapitalized the banks with tax-payers’ money which imposed a severe strain on their own fiscal health. The taking over of the bad debts of the banks by the governments weakened government finances and turned the spotlight on the credit worthiness of governments itself. As economic growth turned negative due to the Great Recession, the debt burden of several European countries appeared even more onerous. Global markets became wary of their high levels of deficits and debt. As the leverage cycle turned after nearly one and half decades debt intolerance heightened with almost complete ‘risk-off’ in global markets. Greece with a current account deficit of 13.6 percent and a debt-to-GDP ratio exceeding 160 percent became the first target of international speculators. This signalled the onset of the sovereign debt crisis in Europe. By 2011 the debt super-cycle led to the debt-GDP ratio in G-7 countries crossing 100 percent for the first time after World War II. Thus, one way or the other the Great Recession paved the way for the current sovereign debt crisis in Europe. (Sourced from Whither Euro-Zone by Radha Shyam Rathor)

All of the following are ascribed by economists as reasons behind the Great Depression except:

Directions: Read the following passage and answer the question.
While historians focus mainly on the macro events that cause perceptible changes, the economists are more concerned with the minute details. It is a well known fact that many a time in history, the act of a single person has been responsible for a paradigm shift in the way the story is told. The economists go into the most exiguous detail possible to reach a conclusion. Also, the history is written by the victor, but economics thrives on various theories put forth by a multitude of experts. It therefore comes as no surprise that, even on an event of the magnitude of the Great Depression, the experts in the two subjects have conflicting views.
While the historians ascribe the meltdown to a host of macro factors like the cataclysmic crash of the stock market, the failure of the banks, and unemployment, the economists are more intent on finding the nuances and the recondite riff surrounding the turn of events. According to them, the rot in the system started much before and the Great Depression was actually a culmination of causative events rather than the starting point itself. They point towards the deflationary actions of the Federal Reserve, including regulating the currency in circulation in accordance to the Gold Standard and increasing the interest rates as some of the principal causes behind the fiasco. Also, the fact that Great Britain went back to pre World War Gold Standard also set in motion a set of protectionist policies that killed off trade between nations and added fuel to the fire. Although government spending, or rather the lack of it, is blamed for the crisis, a casual perusal of government spending in 1930 clearly points out that the governmental spending actually increased year on year in an effort to revive the economy. However, in a case of too little, too late, the actions failed to yield the desired results.
The historians cite bank failures and the reluctance of banks to lend money as a key factor. Blaming the lack of foresight by the financial regulators and the government, the economists contend that the stock market crash so frightened the common citizens that the they stopped spending. The decreased spending triggered off a chain of events that had far reaching repercussions. Businesses struggling to keep their heads above the water laid off employees to cut costs. This in turn, resulted in further reduction in consumer spending.
It is in our best interest if reconciliation between these two fields of study can be effected. It will allow us to sum up the findings with a degree of consensus that appeals not only to the scholars of economics but also to the historians who look for patterns in history.

How best can the organization of the passage be described?

Directions: Read the following passage and answer the question.
The Federal Reserve has announced that it will be further buying treasuries worth six hundred billion dollars in the form of long term bonds. In a statement released in the form of an article to one of the leading national dailies, the Chairman of the Federal Reserve defended his actions by stating that similar steps have successfully been used in United States as well as other nations in the past to promote healthy fiscal growth. According to the administration, the previous injection of liquidity had reversed the downward slide of the economy but had left a lot to be desired in terms of employment generation and spending stimulus. With this additional inflow, coupled with near zero short  term interest rates, the Fed hopes to boost fresh home buying and trigger off a prolonged bout of spending. The timing of the announcement, so close to the holiday season, cannot be termed as accidental, though, it remains to be seen if it will help spread the holiday cheer or if any of that cheer will come back to the beleaguered Chairman. Although it remains too premature to comment upon the long term effects of the multiple stimuli, initial signs, though not overtly encouraging, have not been depressing either, with the retail data showing an increase in spending and manufacturing data also showing a jump that is the most in the last half year.
However, the reaction in many emerging economies has been less than euphoric and from a strictly fiduciary point of view, there seems to be a lot of merit in the statements of these nations. Although no nation has come out openly and slammed the move, the strategists and analysts who function as governmental mouthpieces have been, without exception, critical of what they call ‘uncontrolled money printing’ by the United States. While the U.S.A. has been accusing China of artificially devaluing its currency, an advisor to the Central Bank of China has hit back at Washington by accusing it of employing tactics that would devalue the dollar. Even Japan, the traditional ally of America, has voiced similar concerns. Many fear that the additional liquidity will find its way into the developing nations’ capital markets and most likely create an asset bubble in the emerging markets where the capital markets have been outperforming the global indices. There are indications that the central banks of many of these nations are in touch with each other and are contemplating a collective action if a sudden surge in volumes in stock markets creates a scenario for galloping inflation. Many banks in Asia Pacific have increased interest rates or are mulling the same to curb inflation.

According to the passage, United States expects to accomplish everything with economic stimulus except

Directions: Read the following passage and answer the question.
The Federal Reserve has announced that it will be further buying treasuries worth six hundred billion dollars in the form of long term bonds. In a statement released in the form of an article to one of the leading national dailies, the Chairman of the Federal Reserve defended his actions by stating that similar steps have successfully been used in United States as well as other nations in the past to promote healthy fiscal growth. According to the administration, the previous injection of liquidity had reversed the downward slide of the economy but had left a lot to be desired in terms of employment generation and spending stimulus. With this additional inflow, coupled with near zero short  term interest rates, the Fed hopes to boost fresh home buying and trigger off a prolonged bout of spending. The timing of the announcement, so close to the holiday season, cannot be termed as accidental, though, it remains to be seen if it will help spread the holiday cheer or if any of that cheer will come back to the beleaguered Chairman. Although it remains too premature to comment upon the long term effects of the multiple stimuli, initial signs, though not overtly encouraging, have not been depressing either, with the retail data showing an increase in spending and manufacturing data also showing a jump that is the most in the last half year.
However, the reaction in many emerging economies has been less than euphoric and from a strictly fiduciary point of view, there seems to be a lot of merit in the statements of these nations. Although no nation has come out openly and slammed the move, the strategists and analysts who function as governmental mouthpieces have been, without exception, critical of what they call ‘uncontrolled money printing’ by the United States. While the U.S.A. has been accusing China of artificially devaluing its currency, an advisor to the Central Bank of China has hit back at Washington by accusing it of employing tactics that would devalue the dollar. Even Japan, the traditional ally of America, has voiced similar concerns. Many fear that the additional liquidity will find its way into the developing nations’ capital markets and most likely create an asset bubble in the emerging markets where the capital markets have been outperforming the global indices. There are indications that the central banks of many of these nations are in touch with each other and are contemplating a collective action if a sudden surge in volumes in stock markets creates a scenario for galloping inflation. Many banks in Asia Pacific have increased interest rates or are mulling the same to curb inflation.

The author uses the phrase 'uncontrolled money printing' to convey that

Directions: Read the following passage and answer the question.
The Federal Reserve has announced that it will be further buying treasuries worth six hundred billion dollars in the form of long term bonds. In a statement released in the form of an article to one of the leading national dailies, the Chairman of the Federal Reserve defended his actions by stating that similar steps have successfully been used in United States as well as other nations in the past to promote healthy fiscal growth. According to the administration, the previous injection of liquidity had reversed the downward slide of the economy but had left a lot to be desired in terms of employment generation and spending stimulus. With this additional inflow, coupled with near zero short  term interest rates, the Fed hopes to boost fresh home buying and trigger off a prolonged bout of spending. The timing of the announcement, so close to the holiday season, cannot be termed as accidental, though, it remains to be seen if it will help spread the holiday cheer or if any of that cheer will come back to the beleaguered Chairman. Although it remains too premature to comment upon the long term effects of the multiple stimuli, initial signs, though not overtly encouraging, have not been depressing either, with the retail data showing an increase in spending and manufacturing data also showing a jump that is the most in the last half year.
However, the reaction in many emerging economies has been less than euphoric and from a strictly fiduciary point of view, there seems to be a lot of merit in the statements of these nations. Although no nation has come out openly and slammed the move, the strategists and analysts who function as governmental mouthpieces have been, without exception, critical of what they call ‘uncontrolled money printing’ by the United States. While the U.S.A. has been accusing China of artificially devaluing its currency, an advisor to the Central Bank of China has hit back at Washington by accusing it of employing tactics that would devalue the dollar. Even Japan, the traditional ally of America, has voiced similar concerns. Many fear that the additional liquidity will find its way into the developing nations’ capital markets and most likely create an asset bubble in the emerging markets where the capital markets have been outperforming the global indices. There are indications that the central banks of many of these nations are in touch with each other and are contemplating a collective action if a sudden surge in volumes in stock markets creates a scenario for galloping inflation. Many banks in Asia Pacific have increased interest rates or are mulling the same to curb inflation.