7. In October 2012, amid European debt crisis, a newspaper article, describ- ing a meeting between ECB President Mario Draghi and members of the German parliament, quoted Draghi saying that in deciding to buy sovereign debt, the ECB was attempting to reduce "unfounded fears about the future of the euro area ... and the only way to do so was to establish a fully credible backstop against disaster scenarios." (a) What "disaster scenarios" was the ECB worried about? How would buying sovereign debt provide a "backstop" against these scenarios? I (b) The German central bank, the Bundesbank, criticized the plan, calling it "tantamount to financing governments by printing bank notes." Briefly explain what the Bundesbank meant by this statement. What is a potential problem with financing governments by printing currency?

7. In October 2012, amid European debt crisis, a newspaper article, describ- ing a meeting between ECB President Mario Draghi and members of the German parliament, quoted Draghi saying that in deciding to buy sovereign debt, the ECB was attempting to reduce "unfounded fears about the future of the euro area ... and the only way to do so was to establish a fully credible backstop against disaster scenarios." (a) What "disaster scenarios" was the ECB worried about? How would buying sovereign debt provide a "backstop" against these scenarios? I (b) The German central bank, the Bundesbank, criticized the plan, calling it "tantamount to financing governments by printing bank notes." Briefly explain what the Bundesbank meant by this statement. What is a potential problem with financing governments by printing currency?

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter23: The International Trade And Capital Flows

Section: Chapter Questions

Problem 44P: Imagine that the U.S. economy finds itself in the following situation: a government budget deficit...

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