Question

Assuming the government of Ghana is selling a government bond to fight COVID-19, and at the same time, ASHANTI Goldfields Company is selling a corporate bond to increase its production. Under what conditions will the production-linked corporate bond be over-subscribed at the expense of the government bond. Explore all possible scenarios.( not more than one-page).

B) Based on the functions of the banking system, give reasons why governments bail out banks during economic crises?

C)Is the World heading for a recession? Explain the conditions under which the world can be classified as being in a recession as COVID-19 persists. Explain linking the pandemic to the various stages of a recession.

Answer 1

A)

The production linked corporate bonds would be oversubscribed under certain conditions:

• When the production is likely to rise exceptionally and firm would accrue the larger benefits.
• When the return on the corporate bond is relatively larger and stable.
• The government bonds might not be attractive due to the Larger accumulation of government debt levels.

B)

Government bails out the banks during the crisis time for the following reasons:

• The bank system is base of the entire economic system, thus when banks fail, the entire economic system is at the risk.
• Further, the crisis in the banking system has contagious effects on the entire economy. The externalities of the banking system are larger and pervasive.

C)

The world is heading for a recession as the pandemic has caused the fall in the aggregate demand unprecedently. Thus, the fall in aggregate demand has caused the rise in the unemployment rate and output has declined significantly. If we do not control the pandemic, the recession would be profound and long lasting.