Evaluate the use of contractionary fiscal policy to reduce high inflation.
2.6.2 · 2.1.2
Argentina supports it- Fiscal surplus from 2024 ended money-financed deficits.
- Inflation fell from 211% (2023) to 31.5% (2025).
- Monthly inflation fell from 25.5% (Dec 2023) to under 3%.
Argentina warns against it- GDP fell in 2024; poverty peaked at 52.9%.
- Inflation stuck near 30% in 2026.
- A strong peso and controls also did much of the work.
ChainSpending cut, deficit eliminated → no need to print money → money supply growth slows → AD falls and inflation expectations fall → lower inflation, at a short-run cost in output and jobs.
JudgmentWorks when the deficit is the cause of inflation, as it was in Argentina. The cost depends on credibility: the more people believe it will last, the faster expectations fall and the smaller the recession.
Assess the costs of very high inflation for an economy.
2.1.2
Severe costs- Poverty rises as wages lag prices (52.9% in H1 2024).
- Savings flee to dollars; banks and credit shrink.
- Investment stays at 16% of GDP; firms cannot plan.
Some costs avoided- Widespread indexation of wages and contracts.
- Debtors gain as the real value of peso debt falls.
- Dollar savings protect better-off households.
ChainHigh inflation → uncertainty and shoe-leather and menu costs → savers switch to dollars → less lending for investment → lower LRAS growth.
JudgmentCosts rise sharply once inflation is high and unpredictable. Indexation protects formal workers, so the poor and informal workers bear most of the cost.
Evaluate whether an emerging economy should fix its currency to the US dollar.
4.1.8
Benefits- Convertibility (1991) cut inflation from hyperinflation to near zero.
- Imports a credible anchor when the central bank has none.
- Lowers exchange rate risk for trade and investment.
Costs- Lost competitiveness when Brazil devalued in 1999.
- No lender of last resort: the 2001 bank freeze.
- Needs large dollar reserves and fiscal discipline.
ChainPeso fixed to dollar → money supply tied to reserves → inflation falls → but if prices rise faster than in the US, the real exchange rate rises → exports fall, current account deficit widens.
JudgmentA fixed rate buys credibility quickly, but it only lasts if fiscal policy is tight and the economy can adjust wages and prices. Argentina in 2001 shows what happens when it cannot.
Evaluate the role of the IMF in helping countries facing financial crises.
4.3.3 · 4.4
Helps- $20 bn programme (2025) rebuilt reserves and confidence.
- Lending when markets are closed avoids a disorderly default.
- Conditions support fiscal discipline.
Limits- The 2018 $57 bn loan did not prevent the 2019 crisis or the 2020 default.
- Austerity conditions raise poverty in the short run.
- Moral hazard: Argentina keeps returning.
ChainIMF loan → central bank reserves rise → fewer fears of devaluation → capital flight slows → peso stabilises, inflation falls.
JudgmentThe IMF can buy time but cannot fix the cause. Success depends on government ownership of reforms. The 2018 loan failed partly because the government lost the 2019 election.
Discuss the extent to which dependence on primary products limits economic growth.
4.3.2 · 4.1.4
Limits growth- 2023 drought cut exports and GDP.
- Farm prices volatile; Prebisch–Singer falling terms of trade.
- Farm and processed farm goods ~57% of exports.
Need not- Energy surplus of $7.8 bn (2025) from Vaca Muerta.
- Agro-industry is high-tech and productive.
- Rich around 1900 on farm exports.
ChainFall in world soy prices or a drought → export earnings fall → fewer dollars, peso falls → imported inflation and lower tax revenue → lower growth.
JudgmentDependence is a risk, not a ceiling. Argentina's real problem is that it has never saved commodity windfalls, unlike Norway or Botswana.
Assess the consequences for an economy of defaulting on its government debt.
4.5.3
Severe- 2001 default: bank freeze, GDP −10.9% in 2002.
- Shut out of world markets for years; higher borrowing costs.
- Nine defaults damage credibility for decades.
Less than feared- Strong growth 2003–07 after default and devaluation.
- Debt relief freed money for spending.
- Commodity boom helped recovery.
ChainDefault → loss of access to credit → higher risk premium → less investment and capital flight → lower growth and a weaker currency.
JudgmentThe short-run cost is very high, but recovery can be quick if exports boom. The long-run cost is reputation: Argentina still pays a risk premium of about 5 percentage points over US bonds.
Evaluate supply-side policies that reduce labour market regulation.
2.6.3
Could work- About 45% of workers are informal; high hiring costs keep them out.
- 2026 reform cuts severance costs, allows flexible hours.
- Lower costs may attract investment and formal jobs.
Limits- Weaker job security for workers; union strikes.
- Informality also reflects taxes and low productivity.
- Effects take years; demand was falling in Q2 2026.
ChainLower cost of hiring and firing → firms more willing to take on formal workers → labour market more flexible → productivity and LRAS rise → higher tax base.
JudgmentMost effective alongside macro stability. Without demand and confidence, firms will not hire even if hiring is cheaper.
Evaluate import substitution as a development strategy.
4.3.3 · 4.1.6
Helped- Built an industrial base and urban jobs from the 1940s.
- Reduced dependence on farm exports.
- Created car and steel industries.
Failed- Protected firms stayed small and uncompetitive.
- Industry needed imported inputs, so dollar shortages recurred.
- Higher prices for consumers; rent-seeking.
ChainHigh tariffs → domestic firms face little competition → X-inefficiency and low productivity → exports uncompetitive → chronic shortage of foreign exchange.
JudgmentCompare with East Asia, where protection was temporary and tied to export targets. Argentina's protection was permanent, so industry never had to compete.
To what extent does reducing inflation reduce poverty?
4.2.1 · 2.1.2
Large effect- Poverty fell from 52.9% (H1 2024) to 28.2% (H2 2025).
- The poor hold cash and cannot hedge in dollars.
- Stable prices protect real benefits.
Limited effect- Poverty rose to 32.3% in H1 2026 despite lower inflation.
- Austerity cut some benefits and pensions in real terms.
- Informal jobs and low skills remain.
ChainInflation falls → real wages and benefits stop eroding → purchasing power of poor households rises → fewer below the basic-basket poverty line.
JudgmentFalling inflation is necessary but not sufficient. Lasting poverty reduction needs formal jobs and wage growth, which depend on investment.
Evaluate the use of capital and currency controls.
4.1.8 · 4.4
Benefits- Slowed capital flight and protected reserves (2019–25).
- Gave room to set interest rates.
- Bought time in crises.
Costs- Black-market "blue" dollar at up to double the official rate.
- Exporters held back sales; importers faced shortages.
- Deterred foreign investment, as profits could not leave.
ChainLimits on buying dollars → parallel market emerges → gap between official and market rates → resources misallocated, investment falls.
JudgmentUseful as a short emergency tool. Kept for years, the costs grow. Lifting controls in 2025 worked because the fiscal surplus and IMF reserves came first.