Chapter 15 Flashcards
Where are currencies bought
Through the foreign exchange market
Define exchange rate
External price of a currency, usually measured against another currency
Explain the different managed exchange rates
Free floating
Dirty floating
Adjustable peg
Rigidly fixed
Explain freely floating exchange rate
Exchange rate is determined solely by interplay of demand, and supply of the currency
What happens to the competitive of overseas markets when paths pound falls
UK exports get more competitive, leading to greater overseas demand for pound to finance these purchases
How are exports paid for
Through the currency of the country exporting
When does current account balance occur in a free floating exchange rate, draw it
Where D=S
What happens to the amount of £ when there is more imports than exports
There is more of it
Advantages of floating exchange rates
- Balance of payments equilibrium
- Improves resource allocation
- Gov doesn’t need to control this
- Monetary policies can be used just to adjust domestic objectives
Disadvantages of floating exchange rate
- Money is not always exchange just to finance trade
- Very volatile and unstable
Can floating exchange rate cause cost push inflation, why?
Yes,
Why might a floating exchange rate cause demand pull inflation
If all countries AD increases, not enough
What is the opposite of a free floating exchange rate
Fixed exchange rate
Explain fixed exchange rate
By country’s central bank and maintained by central bank a
Draw the ceiling , central peg and floor on a fixed exchange rate
…
Intervention is not needed if between here
Advantages of fixed exchange rate
- Achieve certainty and stability
- Anti inflationary discipline on a countries economic management
Disadvantages of a fixed exchange rate
- If over valued then severe deflationary costs of lost output and unemployment
- Independent monetary policy cannot be implemented
- Overvaluation and Undervaluation can lead to misallocation of resources
Two main ways in which a central bank can intervene in markets to maintain a iced exchange rate
- Buying or selling own currency on foreign exchange market
- Lowering the bank rate to keep points exchange rate between a ceiling and floor
What is a currency union
Agreement between group of countries that share a common currency
Why was the euro created
Facilitate greater economic integration among EU members
Why is the eurozone an incomplete single model
There should be assumption that there is no immobility of labour, but this is true
How can economic development be observed
- Living standards improved
- Access go good and water
- Access to opportunities
- Sustainability
- Decent healthcare
What was Rostows model
How countries go from being developing into developed
- Traditional society
- Transitional stage preparing for take off
- Take off
- Drive to maturity
- High mass consumption
Define indicator of development
Includes GDP per head, information on distribution of income, mortality rates, health statistics
What is the United Nations Human Development Index
- Life expectancy at birth
- Mean years of schooling
- GNI
What is the maximum value of HDI and what does this means
1, greater human development
What are some barriers to economic growth
- Corruption
- Institutional factors (such as rules)
- Poor infrastructure
- Lack of human capital
Difference between macro and micro economic policies
Micro- specific market
Macro- Overall
What is capital fight
Much more serious in poor countries, sudden withdrawal of money out of a country
Define aid
Money goods and services, soft loans by other countries
Various forms of aid
Military aid Hard loan Soft loan (no repay) Disaster relief Tied aid
What is ineffective aid
Aiding poorer countries with high speed technology which they do not know how to use
