Question

1. Which internal condition forced countries to accumulate debt throughout the 1970s and be even more exposed to exchange rate fluctuations?

2. Show how short-run policies that reduce unemployment can lead to inflation in the long run. Similarly, show how populism may drive governments to take advantage of temporary low unemployment rates at the expense of permanent higher price levels (Use AD, SRAS, and LRAS framework.)

3. Why does debt monetization may have drastic effects on the money supply?

4. Why does debt monetization may have drastic effects on the money supply?

Answer 1

1. The 1970s will long be remembered as a decade of poor economic performance and poor economics. Poor performance is the easier of the two to document: high inflation around the world, sagging productivity growth, rising unemployment, and wide domestic and international imbalances.

That combination of ills even brought a new word, "stagflation," into the language. A charge of poor economic analysis and policymaking is inherently more controversial, but in this case many examples may be cited: attempts to live with and accommodate inflation, attempts to fine-tune aggregate demand to sustain economic growth, attempts to use nominal policy tools to achieve real goals, and faith in the power of general principles such as Keynesian or monetarist macroeconomics and purchasing power parity (PPP) in exchange rates.

Inflation in the 1970s was at its highest levels since just after World War II. When inflation finally peaked in 1980, consumer prices around the world rose by nearly 18 percent over the year before: 12½ percent in industrial countries and almost 29 percent in developing countries. A decade earlier, that problem would have been analyzed as a simple case of "too much money chasing too few goods"; in Milton Friedman's catchphrase, inflation was said to be "always and everywhere a monetary phenomenon.

2. As unemployment rates increase, inflation decreases; as unemployment rates decrease, inflation increases. Short-Run Phillips Curve: The short-run Phillips curve shows that in the short-term there is a tradeoff between inflation and unemployment. ... As unemployment decreases to 1%, the inflation rate increases to 15%.

we conceptualise unemployment as one of

the key drivers of economic insecurity, and treat it as a proxy for measuring the latter.

Our aim in doing so is to identify the specific policy contexts, which may mediate the

effect of unemployment on different social groups, and thus indirectly impact on far right party support.

.

3. An increase in liquidity with corresponding reductions in debt issuance would cause a higher money supply and disequilibrium in growth to debt. Interest rates would have to rise to bring equilibrium back to the system. The problem occurs when interest rates rise, the value of outstanding debt falls.