Astranti Mock 3 Qs

Question 1

Regional Trading Bloc A has approximately 12 members states and permits free movement of goods between them. However Trading Bloc A does apply a common external tariff on imports into the union.

What type of trading arrangement exists between the countries?

Customs Union
Free Trade area
Economic union
Single market

Answer 1

Answer: Customs Union

The trading bloc allows for free trading on GOODS (only), as well as applying a common external tariff on imports into the union.

Process of elimination - it cannot be a free trade area as this only allows free movement of goods, services, capital and investment but do not include external tariffs. (note. free trade areas members tend to be in same geographic areas)

Single markets and Economic unions are similar in that they both permit the free movement of goods, services, factors of production and enterprise between member states. but in the question, The trading bloc allows the trading of goods only then these cannot be the best fit, even though economic unions also apply a common external tariff.

Single markets are trading blocs where physical, technical and fiscal barriers (eg. tax) have been removed and that permits free movement of goods, services, factors of production and enterprise

Question 2

??? Q9. The government of Sandania is given several pieces of advice to tackle their falling exchange rate:

1. lower interest rates in Sandania down to 0.8%
2. Buy a large amount of Sandania $
3. Put high taxes on all imported goods
4. Decrease tariffs on exported goods
5. Remove quotas on imported goods

Answer 2

Answer:

3. Put high taxes on all imported goods
4. Buy a large amount of Sandania $

Falling exchange rates are caused by a lack of demand for domestic currency, which is likely result of a small demand for domestic products (exports) or foreign investment in the home country, as well high demand for foreign goods (imports) and a desire to invest in foreign countries.

Question 3

Which of the following list roles performed by the central bank?

Answer 3

1. to allow for transfers to be made from one bank to another
2. to facilitate the export and import of goods by holding reserves of foreign currency
3. to maintain a cash reserve to lend banks in case of emergency

Question 4

What are the 4 types of inflation?

Answer 4

Demand-pull - (aggregate) demand is too high and so people put prices up eg. an inflationary gap

Cost-push - Rising costs of raw materials push prices up. costs may increase due to : shortages of goods, rising costs of raw materials, increased indirect/direct taxes, unfavourable move in FX rates making import (of goods/raw materials for example) more expensive

Wage-price spiral - increasing wages leading to increased costs leading to increased prices.

Stagflation - combination of recession and inflation

Question 5

give an example of stagflation

Answer 5

1970s oil crisis

In 1970’s a rise in the price of oil triggered a recession. Normally during a recession there is low inflation as aggregate demand is low. However, rising oil prices caused inflation to be high despite low aggregate demand.

Oil is used in manufacturing process of goods by a lot of businesses hence an increase in oil price leads to an increase in cost for the businesses hence an increase in costs.

Question 6

Why is unemployment a problem for the economy?

Answer 6

Output is below full capacity

long term loss of labour - if skills are forgotten/lost during

long periods of unemployment

Increased welfare costs - benefits claimed by unemployed

Fall in tax revenue

potentially increased crime and civil unrest

Fall in national income - wage fall due to the excess supply in (unemployed) workforce

Question 7

Why is inflation a problem?

Answer 7

Fall in standard of living

Investments tend to stall - high prices tend to lead to fall in demand

Affect on savings - purchasing power of savings drop

Affect on a country’s trading performance - eg. high prices on domestic goods will not sell well abroad