QUESTION 5:

a) In the light of the Great Depression, most advanced economies adopted policies after the Second World War that strengthened the bargaining power of employees and labour unions. Initially, inclusive trade unions only asked for wage increases in line with productivity increases. By contrast, after thegolden age, the policies chosen weakened workers' bargaining power.

1. (i)Define the concept of an inclusive trade union and explain how it can help restrict upward shifts of the WS curve. [4]
2. (ii)Show (and explain), using the labour market model, how the end of the Golden Age and the collapse of the Post-war Accords affected the WS and PS curves. [8]

b) Consider the households in the US that held sub-prime mortgages before/during the financial crisis. Assuming high levels of debt and low job security (both features of sub-prime mortgage holders), are these sub-prime households more likely to have a large or a small marginal propensity to consume out of income? Provide reasons for your answer. [4]

c) Provide a brief discussion on the contributing factors that led to the 2007/2008 financial crisis under the following headings:

(i)The housing boom and financial accelerator effect [2]

(ii)Financial deregulation and subprime borrowers [2]

(iii) Bank liquidity and the credit crunch [2]

(iv) Fire sales [2]