Estudo practive final saddi

1) Why do economists claim that a debt/GDP around 70% may hamper growth?

2) How can you explain that an increase in the growth rate of output may decrease the deficit and thus the debt?

The increase in activity leads companies to invest more, increase their businesses and therefore pay more taxes. By doing that, the deficit tends to reduce, or in other words, primary surplus should be increased, causing the debt to be reduced over time. In order for that statement to be true, however, the government’s spending has to stain stable over time.

3) Explain, according to Sargent & Wallace - (1984; ‘Some Unpleasant Monetarist Arithmetic’) - why a contractionist monetary policy may lead to greater inflation in the near future, according to the fiscal policy instance.

4) What is the problem of a rising deficit and an increasing debt for the value of the dollar?

5) The ECB approach to the crisis has been distinct to the US one. Provide at least three differences between the policies adopted at the Euro level countries with the ones adopted in the US.

6) Explain why the system of credit default swap increases the overall systemic risk. Why does CDS differ from regular insurance?

In one way, CDS only transfer risk from one place to the other. In reality, however, it ends up spreading the risk around, which implies that in a given shock, more parties will be affected, and therefore, the systemic risk is increased by the usage of such instruments.

A major difference between a CDS and insurance is that an insurance contract provides indemnity against the losses actually suffered by the policy holder while the CDS offers an equal payout to all holders. The payout in case of a CDS is calculated by using an agreed method.

While insurance contracts involve disclosure of all the risks involved, there is no such requirement in the case of a CDS resulting in many unknown risks. Another major difference is that unlike insurance companies, the CDS