Economics Cases

Case 1.

Question 1. Can growth go on forever, given that certain resources are finite in supply?

Resources limitation is an economic concept that expresses the rarity, scarcity of the resources available for mankind at a certain moment (Simpson 2005). Unfortunately, resources have limited nature in comparison with the human needs, to meet which these resources are utilized. In the broad sense, people have limited abilities to take the needed resources from the ones that are in the free abundance in the nature. Nevertheless, in the long-term planning, resources can be deficit only in case they are irreproducible and if a long period of time is needed to resume them (Ralph 2005).

People around the world understand the resources we use are running out; as a result, nowadays a vast number of researches are devoted to the technological development of every field of human life. For example, various car manufactures tend to design cars that use less gasoline. This means that, notwithstanding that fact that the amount of cars is steadily increasing, the amount of gasoline usage is gradually decreasing; this leads to the decrease in naphtha consumption. For this purpose the brand new automobiles that work due to electricity were created. Therefore, the consumption of limited resources decreases daily.

Economic growth leads to the increase of level and quality of the people’s lives. Economic growth is affected by the investments and by the technologic development of the country, as well as due to every new technology creating or improving ways to increase consumption and exports that provide the country with additional profits. Therefore, it is evident that, despite the finite resources, economy can grow rapidly with the simultaneous continuous technological development of the country.

Case 2.

Question 2. Why do high international financial mobility and an absence of exchange controls severely limit a country’s ability to choose its interest rate?

International financial mobility has become so significant today that it can fuel the formation of international market of capital and resources with the variety of types of the assets exchange. Globalization has led to the “modern look” of this market due to its financial operations (Dunis 1996). As a result, this market has been segmented by the currency, credit, insurance, stock markets, markets of debts and derivatives (financial tools), etc. The main types of international financial mobility refer to the credit migration and international investments. These two financial tools highly affect exchange rates in the global market and influence interest rates of the country. The financial situation of a particular country can be manipulated with the help of this instrument.

Capital control systems are measured by the transactional taxes, governmental limitations and other limits and prohibitions of the country’s government that were specifically developed in order to regulate internal and external country’s capital flows. Capital controls include the control and limitation of the currency amount that can be bought and sold by the person or organization in or out of the country. This control is obvious; its absence can lead to uncontrollable economic movables and supply/demand shifts, which can both ruin the boom of the country’s economics.

If high international financial mobility and an absence of exchange controls occurred and the interest rates of the country were lower than international rates, it would lead to the tremendous capital outflow from the country. As a result, the interest rates of that particular country would be pushed up. At the same time, if the country’s interest rates are higher than the international rates, it would lead to the huge capital inflows in the country. As a result, this would push down the country’s interest rates.

Thus, the absence of exchange controls and high capital mobility would lead to the manipulation of the country’s economy by the people or organizations that have enough money and resources for such affairs.

Case 3.

Question 3. If tax cuts are largely saved, should an expansionary fiscal policy be confined to increase in government spending?

Expansionary fiscal policy is the type of government policy aimed to increase aggregate demand. The main goals of this policy are to increase public spending on goods and services and, at the same time, to decrease the net tax revenue. In addition, this policy refers to the encouragement of the economic growth and combat/price inflation throughout the process of increasing the money supply. The main instruments of this policy are tax cuts, increase in government spending and rebates (Allsopp 2005). This kind of fiscal policy is a useful tool in the low growth periods of economic cycles.

Expansionary fiscal policy is applied during the periods of depression of the particular country’s or world’s economy. This policy leads to the tax cutting. As people are afraid to lose their money, they tend to save them with consumption reductions. Government has to increase its spending in order to stimulate economic and business cycles in order to increase money turn out periods. Such measures can have both positive and negative outcomes. Positive side can be seen in the increase of the investments and international capital within the country, which would obviously have positive effect on the amount of goods export and consumption. Therefore, the most effective outcomes can be seen in the increase of direct expenditures of government on the output generative activities. The negative effects of the increase in governmental expenditures can be witnessed in the possibility of high inflation occurrence. High inflation within the country can lead to the rise in prices and business shutdowns; as a result, economy would face even higher recession than before. There exists one more risk connected to the governmental expenditures increase. It is a time gap between the money supply movements performed and the time when the method will actually start to work. This can lead to the fail of economy.

Therefore, the increase of governmental expenditures can lead to different results; the consequences depend on the circumstances that definite country experiences.

Case 4.

Question 4. A. Give some other examples of the impossibility of using one policy to achieve two policy objectives simultaneously.

The exchange rate cannot be used to decrease the inflation and to improve the balance of trade (the difference between export and import amount) simultaneously. Therefore, the implementation of both suggestions would lead to the opposite results in economics. The improvement of trade balance will give the depreciation (reduction) of exchange rates and the inflation reduction will cause positive effect on the exchange rate (its increasing). This happens because of the principle strategies of these two methods: trade balance improvement requires reduction of import prices and the decrease of inflation rates requires the reduction of prices on the domestic goods (exports).

Another example is the one that refers to the changes of income tax rates. This is a debatable issue as it can lead to the opposite results in the economy performance. The decrease of the income tax can lead to the increase in the income of people, organizations, etc. which, in turn, would decrease the incentives to work. At the same time, it can lead to the increase in the business performance and profits. The changes of income tax rates can lead both to the recession and boom of economic performance.

Question 4. B. If the central bank wanted to achieve a lower rate of inflation and also a higher exchange rate, could it under these circumstances rely simply on the one policy instrument of interest rates?

Interest rate is the rate that shows the percentage amount of the loan paid by the borrower for the credit/debit usage during a certain period. The increase in the interest rate can lead to the increase in the investments of a particular country and, as a negative side, can increase the inflation rate within the country. The decrease in the interest rate can lead to the inflation rates decreasing and to the recession/boom of the economy, depending on the certain circumstances in the given country (Krugman 2006).

Therefore, the increase in interest rates will lead to the inflation reduction and exchange rate increase. The problem is that, in order to achieve both results, different sizes of the interest rate increase are needed. As a conclusion, the usage of only one policy instrument is an unacceptable strategy for any country.

Case 5.

Question 5. Could resources crowding out take place at less than full employment?

Crowding out effect refers to the situation when the government expenditures decrease spending in the private sector. Resources crowding out by the government can be referred to the situation with the public sector, like works that are connected to the national land (road building). This excludes the chance to use these resources by the private sector.

At the same time, resources crowding out cannot take place in the country when full employment is appreciated. If the government of the country decided to increase its expenditures in the public sector, only private business can make this possible, because it can supply the required resources and receive high benefits from this. For example, when the problem with garbage removal arises and the country has low rate of unemployed people, it can organize a tender and the company that wins will receive an opportunity to find the new sector to work in and that will definitely increase the company’s income.