AD/AS
C+I+G+(X-M)
What is a creeping inflation?
Where the rate of inflation is relatively low and relatively stable over a period of time
Definition of the balance of payment
Balance of payment is a set of accounts that show the payments and receipts arising from the transactions of the country with the rest of the world.
Definition of floating exchange rate.
An exchange rate system where the value of a currency is allowed to float up or down, determined by the market forces of the demand for, and the supply of, the currency.
Definition of comparative advantage
Comparative advantage means that a country can produce a product at a lower opportunity cost than another country. So, comparative advantage is based on the relative efficiency of one country compared to another.
What is the difference between a short-run and a long-run period in macroeconomics?
Short-run: at least one factor of production can't change. Long-run: a sufficient period of time for all prices to fully adjust
What is the difference between deflation and disinflation?
Deflation: a situation where there is a fall in the general price level over a period of time.
Disinflation: a situation where there is a fall in the rate of inflation.
Formula of terms of trade
Index of export prices/Index of import prices x 100
Identify three different ways in which exchange rates can be measured.
Nominal, real, trade-weighted exchange rate
Definition of Voluntary export restraints
Voluntary export restraints (VER) are arrangements between exporting and importing countries in which the exporting country agrees to limit the quantity of specific exports below a certain level in order to avoid the imposition of mandatory restrictions by the importing country.
Why is AD curve downward sloping?
Wealth effect, International effect/Foreign trade effect, Interest rate effect
What determines the weights in the CPI?
The proportion of income spent by the average household on particular goods
If the country’s exchange rate depreciates/is devalued: terms of trade will ___________
If the country’s exchange rate depreciates/is devalued: terms of trade will worsen.
Which aim would be consistent with a government’s decision to buy its own currency in foreign exchange markets?
A) an appreciation under a freely floating exchange rate system
B) an appreciation under a managed float exchange rate system
C) a depreciation under a fixed exchange rate system
D) a devaluation under a managed float exchange rate system
B
What is meant by an economic and monetary union?
Monetary union: countries come together and adopt a single currency. There is usually one single central bank and certain policies may also be adopted to support the operation of the currency.
Full economic union: countries come together and adopt a number of common economic policies that apply to all member countries. There is no restriction on not only movements of the goods and services, but also on labour and capital. It operates as a single market.
Identify 4 factors that shift out the Keynesian LRAS. Also, draw the shift.
Immigration, Deregulation, Labour market participation, Innovation, Investment, Education etc
Identify 4 negative consequences of inflation
Purchasing power of nominal sum of money will fall in real terms, Exports could become not competitive, Menu cost, shoe leather cost, greater uncertainty, fiscal drag
Explain the current account in great detail.
Current account:
Trade in goods
Trade in services
Net primary income - income from interest, profits, dividends
Net secondary income - contributions to international organisations and overseas development aid
Two advantages of floating exchange rates
Floating exchange rate restores the balance of the current account: There is the trade deficit, i.e. EX<IM => there is less demand for local currency => exchange rate of local currency now depreciates =>price of exports will now be lower => quantity demanded export will go up => Export is higher
Government is not intervening, so foreign reserve can be used for other purposes.
What is the difference between trade diversion and trade creation?
Trade diversion: country may lose some trade opportunity with low cost country outside a trade bloc due to trade within the bloc.
Trade creation: high cost domestic production is replaced by more efficiently produced imports from within the trade bloc.
Identify 4 factors that cause shifts in SRAS.
Subsidies for businesses, Productivity, Input prices, Taxes on businesses, Expectations about inflation, supply shocks
Name 3 positive consequences of inflation
Debt burden can be lower for borrowers, Prevent unemployment(explain), Stimulating output: During low and stable demand-pull inflation, firms could feel optimistic about their future and could invest to expand. That could lead to economic growth.
In general any changes that cause a change in the:
will cause changes in the terms of trade.
In general any changes that cause a change in the:
Demand and supply of exports and imports
Exchange rate of the currency
Price level
will cause changes in the terms of trade.
Explain Marshall-Lerner condition and J-Curve effect.
Explain Marshall-Lerner condition and J-Curve effect properly.
A trading possibility curve shows the advantages of two countries trading with each other, taking advantage of the fact that the opportunity cost of production the two countries are different.
Country can specialise where they have comparative advantage and by trading, they would be able to produce at the point that was previously unattainable.