Combined Documents Analyzing Economic Scenarios

1. https://www.forbes.com/sites/kenrapoza/2017/04/13/brazil-hasnt-cut-interest-rates-this-steeply-s
ince-the-great-recession/#3f28af1f3121

2. 1

3. 2

4. 3

5. 4

6. 5

7. 6
In April 2017, Brazil's central bank attempted to stimulate the economy by cutting
interest rates. This is happening due to Brazil's recent recession, caused by both political
instability. This is a stimulus package in order to incentivize consumption. In theory, this works
as the lower interest rates will increase loans and decrease savings, injecting more money into
the economy. This is called expansionary monetary policy, as the lower interest rates allow
banks to give more loans and firms take out loans to finance the purchase of capital goods.
Firstly, those holding money in savings accounts will have less of an incentive to keep
that money instead of spending it. This happens since the return of having money stored
decreases. This helps alleviate a recession as it injects money into the economy, while reducing
savings. Savings are leakages from the economy as it is money that is not spent. In Brazil's
current situation, it is important to decrease savings, as there has been a slump in consumption
of consumer goods. Therefore less money circulates, leading to an increase in the price of
money, also known as rising interest rates. This occurs as the supply of money decreases, but
the demand remains constant, increasing the price.
Meanwhile, decreasing interest rates increase the amount of loans. When rates are high,
paying off loans becomes harder, as the payment is higher. Yet, if a central bank decreases
interest rates, firms and private individuals are willing to take out loans. This occurs because the
amount required to pay back to the banks is less. Banks also are more willing to give loans, as
the return from a single loan is now less, requiring more loans to return the same amount of
profit. This occurs as the quantity of money in the economy increases, leading to a reduction in
the price of money, or a reduction in interest rates. For Brazil, increasing loans means that
smaller firms can expand in a recovering market. Before the recession, small firms relied on
loans to acquire capital. Yet, with the recession, such loans have become less popular as firms
are reducing costs to survive the low demand for consumer goods.

8. 7
What the Brazilian central bank is doing is expansionary monetary policy. This has the
goal to increase consumption and recover confidence in the market. Normally, such attitudes
are standard for a government willing to recover the country from recession. The advantage of
monetary policy of not being affected by politics, differently than fiscal policy. Expansionary
fiscal policy is it alters government budget and legislation. It also has the advantage of being
able to increase the aggregate supply in the long term, as it has the capacity of increasing the
purchase of capital goods with long term returns for firms. The main disadvantage behind these
cuts in interest rates of the Brazilian central bank can have limited success. This happens since
it does not have the capacity of recovering confidence in the market as large as fiscal policy
does. Monetary policy also has the grave drawback from suffering from ​time lags​, also known as
the period between implementation and results. Monetary policy causes inflation. Since

9. 8
aggregate demand is artificially increased, prices increase. This is why central banks does not
commonly do large cuts in interest rates, as they attempt to keep inflation low and stable.
In general, the economy of Brazil has entered a period of recovery after a long
stagnation. The central bank has adopted these measures to grow the economy, as the
recession greatly removed confidence in both the government and the market. In Brazil's
situation, monetary policy has been used before fiscal policy due to various measures. In the
current unstable political scenario, changes to legislation may be hard to implement. Also,
confidence in the market is still enough that changes in interest rates are capable of increasing
the amount of loans. The attempt to restore the economy using monetary policy shows that the
Central Bank still believes that the market is confident enough to recover mainly on its own
without requiring direct intervention. Also, such measure distances politics from the economy,

10. 9
especially in the turbulent situation in Brazil. Fiscal measures may have been more effective,
but there is the risk of crowding out due to decreased government budgets. Monetary policy
allows for a less interventionist approach with a similar goal to fiscal, helping recover the growth
with less government presence.

11. 10
Works Cited:
Rapoza, Kenneth. “Brazil Hasn't Cut Interest Rates This Steeply Since The 'Great Recession'.”
Forbes​, Forbes, 13 Apr. 2017,
www.forbes.com/sites/kenrapoza/2017/04/13/brazil-hasnt-cut-interest-rates-this-steeply-since-th
e-great-recession/#435da5131​21f​.

12. http://www.express.co.uk/life-style/cars/846742/diesel-car-emissions-test-scandal-fix-UK-VW

15. In 2015, it was discovered the diesel cars produced by the Volkswagen Group were
using a device in order to cheat emissions tests. This, in turn produced up to six times more
nitrogen oxide particles that was then released into the atmosphere. To combat this, measures
were taken in order to remove cheater cars from the roads. However, authorities noticed the
need to create solutions to fight other vehicles attempting to cheat these same emissions tests.
The United Kingdom decided to begin new measures September 1st 2017, banning vehicles
with such defeat devices.
When a cheater diesel car was used, it would release toxic gases into the atmosphere.
This had the negative external effect as it raised the chances of citizens developing respiratory
diseases such as bronchitis and emphysema. Anytime a good is used and it has a negative
effect on the general populace, it is considered a good with a negative consumption externality,
or a demerit good. Governments combat demerit goods with methods such as taxation on
production and on the pollutant, regulations and prohibition of sales, negative advertising, and
cap and trade systems. In the case of emissions, original tests were developed in order to
reduce pollution, which would then diminish the effects this consumption caused. Cap and trade
systems are also commonly implemented in order to reduce emissions, with a special focus in
reducing pollutants in exchange for fiscal incentives and subsidies.
By having to invest in new technology to fix illegal vehicles and prepare new models
following changing regulations, Volkswagen is having to deal with increased costs of production.
This leads to an increase in price, harming consumers, or to a decrease in profits, harming
shareholders. By increasing price, supply shifts left because as the supply graph shows how
much can be produced at each price point, an increase in total costs of production means that
the base cost of production will be increased.

16. When governments develop new testing methods, it increases government spending as
it requires investment in new equipment and retraining. An option available is to raise taxes,
which is a very unpopular method to fund such investments. Another option is to subsidize the
production of zero-emission vehicles such as electric and hydrogen powered cars. Automakers
would enjoy such subsidies, as zero-emission vehicles are not held to such tests, and various
firms have already attempted such large scale production of such cars. However, in order to
subsidize these news vehicles, the opportunity cost would be very large, possibly turning into a
hassle for governments to finance.

17. Therefore, such a complex situation demands an equally complex solution. By doing
this, the firm managed to appease partially both shareholders and customers. As Volkswagen
had to provide fixes to sold cars, and correct this issue in future vehicles, in the long term,
technological advancements created in order to solve this issue might reduce the externalities of
using these demerit goods. Lastly, in order to avoid such events from recurring, Volkswagen
may invest more in zero-emission vehicles.
For governments, it was a turning point in emissions regulations. Since it was discovered
that there was a flaw in current methods, a substitute was created. By creating new regulations
at the expense of retraining and recertifying current systems, there is the capacity to combat
this. With the negative repercussions caused by the emissions scandals, investment in electric
car research increased, considering that the engines caught in the emissions scandal were
supposed to bridge the gap between regular gasoline and electric engines. This is happening
mainly in countries with large sales of diesel powered cars, such as Germany and the UK. Since
there was a great negative issue with the most adopted efficient solution, governments have

18. looked into alternative solutions. By investing in such solutions allow governments to have a
decreased risk of a repeat scenario in future years. Governments affected by this scandal could
enforce a tax on vehicles emitting more than what is permitted, but identifying each individual
irregular vehicle may turn into an unnecessary expense of government money.
Meanwhile, if governments did not partake in any form of action, the population as a
whole would be harmed. As much as the cost savings in combating emissions would be huge,
the expenses in health treatments would also rise. Upon balancing out the opportunity costs,
governments came to the conclusion that the most effective solution would be to ban the
cheater cars. In this case, Volkswagen decided that the third party externalities were not a
priority, being foregone for profits.

19. Works Cited
European Commission. ​Volkswagen Golf in Emissions Testing​. N.d. ​European
Commission​. Web. 18 Sept. 2017.
Gates, Guilbert, Jack Ewing, Karl Russell, and Derek Watkins. "How Volkswagen's 'Defeat
Devices' Worked." ​The New York Times​. The New York Times, 08 Oct. 2015. Web.
Smith, Luke John. "End of Emissions Scandals - Rigorous New Test to Stop
Manufacturers Faking Emissions Tests." ​Express.co.uk​. Express.co.uk, 28 Aug.
2017. Web.
Swigonski, Frank. "Future of Clean Diesel Is Uncertain in the Face of Electric Vehicles."
The Energy Collective​. The Energy Collective, 15 June 2017. Web.

23. In an attempt to combat dumping the United States levied taxes in Vietnamese steel as it
believes that this material is made with Chinese iron. Therefore, by taxing the imports, the
demand for the foreign steel will fall. This effectively protects the American steelworks while
reducing the trade with foreign countries for the same materials. This is a direct intervention
done to combat this dumping, instead of doing so with the means of adding regulations in order
to make dumping unfeasible.
When price dumping happens, a foreign government subsidizes the local production in
an attempt to bolster the economy. When this happens countries have to deal with a supply of
very cheap imported goods, harming the local supply. Dumping is when nations heavily
subsidize the production of an export goods, allowing it to be below foreign prices, causing an
increase in market share, undercutting locally produced goods. While some imported goods are
allowed to enter the country in a scheme of dumping, materials considered strategic such as
steel are limited. This occurs as countries still desire having the production of some of these
basic goods as a guarantee in cases of war and to have a stable foundation for the economy.
Therefore, governments combat foreign dumping by adopting techniques such as direct
taxation, indirect protection, such as by adding regulations that make importing goods becomes

24. financially unfeasible, or by subsidising local industries to promote competitivity.
As the United States is taxing Vietnamese, and indirectly Chinese, exports, the economy
of Vietnam gets harmed due to less foreign sales. Sales of exports are vital to a country as they
allow for injection of capital in the economy through the means of remittances while creating
codependence. This happens as the profits made in foreign sales are sent back to their country
of origin, while the nation importing these goods produce less locally and create a small
dependence on imports, while the exporting nation requires the exports in order to maintain
economic stability. Vietnamese steelworks suffer as they lose one of their main clients, causing
less sales. Meanwhile, China also deals with these issues, but at a smaller scale. Vietnam
suffers with the tariff directly, while China does it indirectly, by having less sales of raw iron to
Vietnam.

25. For American steelworks this new regulation is key, as it allows them to remain
competitive in the market. This in return grows the American economy as more money remains
in the country, not being a leakage in the economic flow as it was before. For the government
this measure is also key, as it protects a key industry without requiring subsidies, which
increases government spending. The government has interests in supporting the steel industry,
as it is a strategic resource and is one of the foundations of the economy, being the basis of
most industrialized goods.
For the population of the United States the cost of steel based products would increase
due to the higher cost of this basic good. To the general consumer the price changes won't be
as great, but to the large industries that consume at large amounts the costs will change greatly,
However, since the price will be diluted by the time it arrives at the averages consumer, the
general change in price won't be as visible.
For Vietnam it is very undesirable to have a tariff placed upon one of the main export
goods, as it greatly reduces the demand. Therefore, it is necessary do adapt, looking for other
markets to compensate for the lost market share after the tariff. If this does not happen, it
reflects on the local population, as companies will reduce workforce causing unemployment to
rise.
Since the United States government will have an increase in finances, as the taxation on
imported goods will inject money into federal accounts, allowing for more government spending.
These new injections can be used to fund investments in the public sector and by giving out

26. subsidies.
In general, this measure benefited greatly the United States, while not being as
productive for Vietnam. American consumers will pay slightly more, but since the steel is now
produced in the United States there is a higher demand, leading to a need for more factors of
production. This need for more factors of production causes more employees to be hired in
order to improve the efficiency of firms.

27. Works Cited:
Mullen, Jethro. “U.S. Hits Vietnam with Massive Tariffs over Chinese Steel.” ​CNNMoney​, Cable
News Network, 6 Dec. 2017,
money.cnn.com/2017/12/06/news/economy/us-steel-vietnam-china-tariffs/index.html.