ECON529 Module 2 Assignment 2020S-Answer Key.pdf - ECON529...

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Macroeconomics Assignment 2 1 ECON529, Macroeconomics Summer 2020 Module 2 Assignment (60 points + 10 points extra credit) Please do not share with anyone else. Distribution of this document to other students or anyone outside of this course, as well as sharing of this document through any distribution channels, is a violation of the University of Illinois Student Code.Assignment (Short-Answer and Algebraic Questions): (The numbers in square brackets give the breakdown of the points for various parts of each question. To receive full credit, please explain your answers.)1. This question is based on the article, "Lean on me," published by The Economistin its March 31, 2016 print edition. In answering the following questions, note that when a country grows slowly, its demand for investment is relatively low. Also, keep in mind that all countries in the Eurozone use the same currency (the euro) and trade freely among themselves. (a)According to the article, on the eve of the global financial crisis, Germany and some other rich northern European countries were running large surpluses in their trade with peripheral European countries. Based on the discussions in the article, what is the key underlying cause of these trade imbalances? [11] Based on the discussions in the article, the key underlying cause of these trade imbalances was the excess saving in Northern European countries. Those countries were rich and had lots of savings, but were not growing fast enough to generate demand for investment. So, their savings exceeded the investments. The peripheral European countries (such as Spain, Portugal, Greece, etc.) had lower incomes and had potential to grow. Their governments and households were also inclined to spend more and save less. The advent of economic integration created an opportunity for the Northerners to lend their savings to peripheral countries, who were happy to receive them. This caused the Northern countries to develop large trade surpluses vis-à-vis peripheral countries. Peripheral countries started running large trade deficits versus Northerners. [11] “Europe’s economic crisis was a stew with many ingredients, from spendthrift governments to inadequate safeguards in the banking system. The stock in which it all simmered, however, consisted of big imbalances in trade and capital flows. Economic integration encouraged high-saving households in slow-growing northern economies to ship their money to the periphery, where potential returns were higher. The flipside of that lending was a parallel imbalance in trade, as peripheral economies consumed more goods and services than they could produce themselves. On

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