Balance of Payments

Question 1

6 Factors affecting current account

Answer 1

Exchange rates
Relative inflation
Productivity
Growth
Quality
Protectionism

Question 2

Impact of CAD on AD and eval

Answer 2

Fall, as imports>exports. AD falling will impact living standards and unemployment

Eval:if deficit only small % of GDP, magnitude limited

Question 3

Impact of CAD on exchange rates and eval

Answer 3

More pounds supplied so depreciates. Investors may also sell. WPIDEC

Eval: If too low However exports are cheaper so demand for pound increases, appreciating

Question 4

Impact of CAS on AD

Answer 4

Increase AD (exports>imports).

Eval:significant surplus can mean consumer choice limited as too focused on foreign consumers

Question 5

3 ways to reduce CA imbalances

Answer 5

Expenditure switching, reducing, supply side policies

Question 6

Expenditure reducing policies and eval

Answer 6

Reduce overall spending in economy. Increasing income tax/decrease benefits.

Eval:although reduces CA imbalances reduces living standards too

Question 7

Expenditure switching policies

Answer 7

Switching from foreign to domestic goods.
Trade barriers e.g tariffs and subsidies
Low interest rates:reduce hot money inflows, depreciate pound so imports expensive so expenditure reduced

Question 8

Supply side policies

Answer 8

Market based SSP’s to make domestic goods cheaper.
Tax reforms-reduce corp tax/income tax (more incentive to work)
Labour market reforms-reduce benefits and min wage
Competition policy-dereg,privatisation