Question one

During recent years, the global economic crisis has thrown a spotlight on different governments attitudes to debt and borrowing. It is therefore important to understand opposing views on government borrowing, as well as the mechanisms of borrowing.

(a) Explain the difference between automatic stabilisation and discretionary

stabilisation.

(b) Explain why a government may have difficulty in implementing discretionary

stabilisation successfully.

(c) Explain why monetarists would argue that control of inflation is the most

effective method of achieving growth in the economy.

(d) In terms of debt instruments, distinguish between the primary and secondary

market and discuss the implications for liquidity if an instrument is not tradable on the secondary market.

(e) Define the following terms associated with borrowing

i. Residual maturity

ii. Euro bonds (1)

iii. Strips (1)

iv. Index-linked bonds

(f) Describe the economic effects associated with a government using bills or

bonds to borrow from overseas.