Lesson notes Flashcards
What are hot money funds?
Money that follows freely and quickly around the world looking to earn the best rate of return.
What does rising stock prices mean?
Better return for hot money managers as it is a substitute for saving.
What is the evaluation of the idea that Low interest rate means lower cost of borrowing?
It depends if it is fixed rate, then it doesn’t lower the cost of borrowing but if it is variable it will lower cost of borrowing.
What is a current account deficit?
When net external trade and income is negative leading to a net outflow in demand from the circular flow.
What are 3 causes of a current account deficit?
Recession in other countries ( Trade patners buy less of our goods)
2) Strong exchange rate affecting demand for exports and imports. ( Exports expensive for other countries
3) Poor price and non price competitiveness ( from countries don’t want to buy our exports due to design, branding)
What is a Balance of Payments deficit?
Value of imports is greater than value of exports
What are 3 methods a government can use to reduce a BOP deficit?
1) Devaluation of the currency ( weaken the value of the pound to other countries WPIDEC
2) Reduce AD ( monetary policy or fiscal to reduce CS and reduce imports
3) Protectionism ( tarrifs, quotas, subsidies)
What are 3 evaluations of different methods to reduce BOP deficit?
Devaluation of the currency ( not really allowed under international agreements.
J - curve
Self correcting mechanism
What is the Self correcting mechanism?
The value of the pound falls —- exports cheaper — increase in demand for exports — increase in demand for sterling. The foreign firms have to convert money into UK sterling
What is the J curve?
The J curve effect is the idea that deprecating the pound can worsen current account in short run, because demand is inelastic. But in the long run the current account will improve and go into a surplus.
Why is Demand inelastic for the J curve?
Importers need to react to the fact that imports are more expensive.
Exporters need to react
What is an Evaluation for the J curve?
It depends on the demand for exports
It depends on inflation ( depreciation can cause imported inflation ( prices rice due to an increase in costs of imported products
What is the Positive multiplier effect?
When an inital increase in an injection ( or a decrease in leakage leads to a greater final increase in Real GDP
What is the Negative Multiplier effect?
When an intital decrease in an injection ( or a increase in leakage) leads to a greater final increase in Real GDP)
What is the reason the supply curve?
because firms need to sell their extra output at a higher price, so that they can pay for the marginal costs of production and make a profit.
What is Ad - valorem?
percentage of the value of the good.
