Economics, 3rd Edition

4 

To what extent do you think that the response by central 

banks to the financial crisis was ‘fragmented’?

5 

Why have some critics argued that the cause of the 

sovereign debt crisis lies in the poor design of the euro 

system and the ability of countries within the euro area 

to free ride?

6 

What is the role of the European Stability Mechanism in 

managing sovereign debt problems of member countries?

7 

Is there any meaningful difference between a cyclical 

deficit and a structural deficit? Explain your answer.

8 

Governments across Europe have instituted austerity 

measures in an attempt to cut budget deficits which 

ballooned after the financial crisis. Are they right to do 

this at a time when the European economic recovery is 

acknowledged as being fragile?

9 

Suppose the government cuts taxes and increases 

spending, raising the budget deficit to 12 per cent of GDP. If 

nominal GDP is rising 7 per cent per year, are such budget 

deficits sustainable forever? Explain. If budget deficits of 

this size are maintained for 20 years, what is likely to happen 

to your taxes and your children’s taxes in the future? Can 

you do something today to offset this future effect?

10 

The chapter says that budget deficits reduce the 

income of future generations, but can boost output and 

income during a recession. Explain how both of these 

statements can be true.

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