1. The Great Recession of 2008, originating with the subprime mortgage problem of the U.S.

, from which Western economies still have to recover, is probably the greatest challenge to macroeconomic theory and policy in many decades. A current debate is now playing out in U.S. policy-making and academic circles about whether, as a means to stimulate the economy, it is better to a. Expand government spending as a stimulus, even if it means increasing the public deficit and government debt, or b. To reduce government spending and instead to reduce taxes. If you were to advise policy makers, what pros and cons would you cite for either side of the argument, and what, if any, would be the content of your policy advice? c. What role, if any, can monetary policy play? Three years after the onset of the Global Financial Crisis of 2008, the United States along with the rest of its Atlantic neighbors still has fallen short of finding possible and long-lasting solutions to restore growth in the advance economies. In fact last September 2011, IMF Director Christine Lagarde reiterated this heightened concern as she spoke to key policy decision makers of the world in the recent 2011 IMF Annual Meeting held in US1. If I were a policy maker, choosing option A may not be the best option for the US at this point in time. Under normal circumstances, financing an increasing deficit may really not be a concern because this can potentially lead to further growth in income through pump-priming activities2. However, as debt increases, this starts to become a drag for the economy. This may hold true for any entity whether it is an individual, corporation or government. And given the current state of affairs of the US, solely expanding government spending will only exacerbate things simply because the US government needs to borrow more today to finance its deficit and at the same time maintain its debt. To-date, the US debt to GDP ratio is at about 60% and is increasing at a rate of 20% annually3. This debt structure in fact holds true to other advanced economies. Additionally, I think increasing government spending excessively will only be detrimental because of weak demand and the wariness of private sector to expand business activities. Thus, increasing spending this time may not have a follow through effect in growing the economy as it may normally have under normal economic circumstances; simply because the US may not have the ability to manage its internal needs on top its ability to repay its debt in the long term. This is evident in the recent deadlock on the debt ceiling scare which sent gitters to financial markets around the world.

http://www.project-syndicate.org/commentary/lagarde4/English

http://useconomy.about.com/gi/o.htm? zi=1/XJ&zTi=1&sdn=useconomy&cdn=newsissues&tm=81&f=00&tt=11&bt=0&bts=0&zu= http%3A//www.gpoaccess.gov/usbudget/fy11/pdf/summary.pdf

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http://www.economist.com/content/global_debt_clock

On another note, I really believe that austerity and achieving financial sustainability is the way to go for the US economy at this point. Thus making option B may be a more viable choice if I were to influence US economic policy. However, I am aware that achieving fiscal austerity cannot be done overnight which is why this makes it even more essential for policy makers to act on reducing debt and slowly turn around deficit spending without reducing living standards and consumption in the economy as soon as possible. In fact, I think that option B may be in line with the recent speeches of current FED chair Ben Bernanke. Furthermore, aside from fiscal austerity, I think giving tax breaks to where it is needed is also essential. Selectively giving tax breaks will be an incentive for expansive business activity and renewed confidence in the real economy. Giving tax breaks may be equated to redeploying savings, or in the case of the US, creating savings in the economy. Reducing taxes may also stimulate investments and formation of capital. Nevertheless, giving tax breaks is a very tricky proposition but if employed selectively and with pin-point accuracy may lead to further growth in the economy. Alternative energy, information technology, research and development are among the areas or industries where I think tax breaks will be very much effective simply because these are areas where the US can have a competitive advantage moving forward. As policy influencers of today and given the current state of the economy, I think we temporarily need to make tradeoffs and put our priorities straight. We all know that the path to recovery does not only require a technical solution but a social solution as well4. I think the recovery has taken a longer path towards recovery simply because I think that economy has already taken its toll of excessive spending. And the only way to recover from this is too simply do the opposite which is to SAVE. And I seriously believe that accumulating savings will take time. Moreover, I think that after 3 years since the onset of the recession, we have come to a point where temporary fixes will not anymore work. I think we have already exhausted the effectiveness of monetary policy which has already brought down interest rates to near zero. In spite of this, credit has still remained frozen (liquidity trap) as banks, firms and may be to some extent even households, continue to hoard cash either to restructure balance sheets or simply because they are still very risk averse5. Although the FED may still have some more leeway in influencing long term rates to go down; nevertheless I think policy makers and government must already face the facts and wake up to the reality that decisions must be made to put the fiscal house in-order to avoid further deterioration of the US and the global economy and secure a sustainable path to global economic prosperity.

http://www.federalreserve.gov/newsevents/speech/bernanke20110614a.htm http://www.project-syndicate.org/commentary/stiglitz143/English

2. The current administration has made it a top priority to combat corruption. Is the shibboleth Kung walang corrupt walang mahirap really a sound starting point, or is it just a popular though ultimately economically empty slogan? Explain your answer fully, based on what the literature says about how institutions affect growth in general. Kung walang corrupt walang mahirap (Aquino,2011)6. This was the slogan used by President Aquino in his speech before he took his oath of office as the next president of the Philippines in 2010. Since he took office, I think Pres. Aquino has full intent in full-filling his promises especially on fighting and putting a stop on corrupt in all levels of the public service profession in the country. Nevertheless, I think he will be faced with a lot of challenges simply because even the very institutions that provide checks and balances may have been already been corrupted and compromised (Balangue, Inquirer 2011)7. Nonetheless despite the corruption of our institutions, I can still say slogan still have a fighting chance of being realized simply because our like laws, property rights, etc. are pertinent, reasonable and still common good for society. However, our informal rules are the challenged. that Pnoys formal rules uphold the ones being

In fact, the effectiveness of the PNoy slogan to influence success of all his policies and his administration can very much be linked to the re-establishment of these informal constraints or rules like morals, integrity, transparency and accountability which is present in all levels of public service but not only limited in professions like police, military, and other agencies highly exposed to bidding out contracts to private suppliers. I can confidently say that PNoys economic policy to lower the deficit and help spur private investment through PPP is a wonderful agenda to which I am sure will catapult the Philippines back to its previous stature as an emerging tiger in Asia. Same goes for all other economic policies in the past administration. However, I think that the name of the game this time is being able to instill a social / moral transformation rather that technical one. The fight against corruption can be won if PNoy can effectively revive our informal rules and establish better safeguards to reinforce the rule of law. On the other hand, PNoy must be able to clean the ranks of all government offices and put in place morally grounded professionals to run these respective institutions and offices and at the same time enable a feedback system wherein it will be possible for the public to have a periodic assessment of that institution or agencies performance.

http://www.gmanews.tv/story/194809/aquino-takes-oath-as-15th-philippine-president

http://opinion.inquirer.net/inquireropinion/columns/view/20100521-271358/Kung-walangcorrupt-walang-mahirap

Additionally, an improvement in public service compensation and benefits system must also be put in place to better provide for government employees. Higher income can translate to lower corrupt practices because people will tend to think less of themselves. I think that the government must be able to highlight the fact that public service can indeed also become a profession where citizens can develop a career in and not only as a means to make ends meet. I am very optimistic in the ability of PNoy and his administration to turn things around. I also agreed with him that every accused public professional must undergo legal process in order for the authorities to really identify the master minds and the root of all corrupt government practices in the Philippines. And in the event that one is proven guilty, the punishment must be enforced. Finally, like in the US and other advanced nations, we must also make tradeoffs and we must start today. We are lucky that we are able to ride on the ongoing emerging market euphoria caused by China; but l believe that the 5-6% growth that we are experiencing now is just a temporary state. Sooner or later, when the party is winding down, I am sure that the financial markets will again loss its confidence in our country. I can only hope and I pray that this doesnt happen and let us not allow the efforts of our brilliant minds to go into waste. END OF ANSWER TO THE EXAM