Current account pt 2

Question 1

Exports to Economic growth chain of reasoning

Answer 1

High exports > High net exports > High aggregate demand > High Real national output > High GDP > High economic growth

Question 2

Imports to inflation rate chain of reasoning

Answer 2

High imports > Low net exports > Low aggregate demand > Low price level > Low inflation rate

Question 3

Link between Low aggregate demand and Low price level

Answer 3

Firms collectively decrease prices to entice customers to buy goods and services and maximise profits otherwise there’ll be an excess supply

Question 4

Imports to unemployment chain of reasoning

Answer 4

High unemployment > Low net exports > Low aggregate demand > High cyclical unemployment

Question 5

Current account deficit

Answer 5

When the money spent on imported goods, services and incomes is more than the money earned from exported goods, services and incomes

Question 6

Current account surplus

Answer 6

When the money spent on imported goods, services and incomes is less than the money earned from exported goods, services and incomes

Question 7

Possible causes of a worsened deficit (higher M or lower X)

Answer 7

High domestic levels of spending - Low savings rate, more chance of M
Appreciation of exchange rate - Lower X, higher M
Higher domestic commodity prices - higher M of commodities

Question 8

Consequences of a worsened deficit

Answer 8

Higher M > Lower Nx > Lower AD > Lower RNO > Lower GDP > Lower EG

Lower X > Lower Nx > Lower AD > Higher cyclical employment

Higher domestic commodity prices > Lower SRAS > cost push inflation

Question 9

Possible cause of an improved surplus (higher X or lower M)

Answer 9

Recession -Less chance of M as spending is lower
Depreciated currency -£ is weaker so M becomes more expensive and our X are cheaper for other countries
Higher domestic interest rates -lower spending on M, more saving