MACRO

Question 1

Fixed Exchange Rate

• e.g. countries x2

Answer 1

• Hong Kong
• Cuba

Question 2

Trade Creation

• Benefits of trade
• Reasons for protectionism

Answer 2

Benefits of trade:

• Exploiting comparative advantage = allocatively efficient = +world output and consumption
• -prices = +CS and -CoP
• +quantitiy = +choice

Reasons for protectionism:

• -domestic output = -PS
• -domestic output = -DL (derived demand)
• -domestic output = -revenue/profits

Question 3

Import Tariff

Where is:

• Consumer surplus loss
• Producer surplus gain
• Tariff revenue
• Deadweight welfare loss

Benefits of tariffs

Costs of tariffs

Answer 3

Benefits of tariffs:

• Protects infant economies
• Protection against dumping
• Increase domestic output = +DL
• Tariff revenue
• Increase producer surplus
• -M = reduces the trade deficit
• Self-sufficient = not exposed to external shocks e.g.war

Costs of tariffs:

• Less efficient domestic producers (area 2)
• Higher price = +CoP AND -disposable AND -CS
• Lower quantity = less choice
• Deadweight loss of consumer surplus (area 4)
• Distorts comparative advantage = -world output and consumption

Question 4

J Curve

• Basis (Why? x2)
• Marshall Learner Condition

Answer 4

• In short run PED(X) and PED(M) is inelastic
• Stuck in long term contracts
• Lack of information
• Improve current account position if: PED(X) + PED(M) > 1

Question 5

Laffer Curve

• An x4
• Ev x1

Answer 5

• An:
• ‘Brain drain’
• Tax avoidance
• Tax evasion (illegal)
• Less incentive to earn a high income (work hard)
• EV:
• Fixed hour contracts

Question 6

Lorenz Curve

• x-axis
• y-axis
• Gini coefficient formula
• Gini coefficient range
• High coefficient means?

Answer 6

• Cumulative share of population by income (%)
• Cumulative share of incomes earned (%)
• A/(A+B)
• 0<gini>
  </gini><li>More inequality </li>

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Question 7

Phillips Curve

• An chains for LR curve (either x2)
• An chains for SR curve (either x2)

Answer 7

Short Run

Unemployment falls reducing the supply of labour = Firms have to compete for fewer workers and workers gain more bargaining power = Wages rise = Firms costs rise = Pass on to consumers

OR

Unemployment falls increasing disposable incomes = Increasing consumption = Increasing AD = Demand-pull inflation

Long Run

In long run firms costs rise (overtime and unproductive labour) = Reduces SRAS (-short run economic growth) = Increases unemployment

OR

Unemployment falls and inflation rises = In long run workers realise real wage rate has not risen = Demand higher wages = Increase real wage unemployment

Question 8

Financial Crowding Out

• Chains

Answer 8

government may try to sell more bonds to finance spending = increases demand for loanable funds = rising interest rates = more expensive for consumers and private sector businesses to borrow = less C + I

Question 9

Resource Crowding Out

Answer 9

Question 10

Increase in AD on AD-AS Diagram

• Effects on macro objectives
• EV

Answer 10

Economic Growth:

• Increase AD = price mechanism incentivises and signals for firms to increase production = extension in aggregate supply = increase RNO

Unemployment:

• Increase AD = increases demand for goods and services = will be derived demand for labour = more FoP employed = -U

Inflation:

• Increase AD = price mechanism incentives and signals for firms to increase production = extension in aggregate supply = more pressure on scares resource/FoP e.g. labour overtime, demand higher wages = increase price of FoP = increase costs = upward pressure on prices
• Increase AD = excess demand = producers can raise prices

Trade Balance:

• […] increase inflation = decreases international competitiveness of exports = -X
• […] increase economic growth = increase RNI (income) = increase demand for products = increase demand for M

EV: Size of the multiplier

Question 11

Increase in LRAS on AD-AS Diagram

• Effects on macro objectives

Answer 11

Growth:

• Increase LRAS = increase productive potential = -CoP = fall in the price level and corresponding extension in demand = producers respond by increasing output

Unemployment:

• […] producers increase output = labour is derived demand so +DL = -U

Inflation:

• Increase LRAS = increase productive potential = reduced pressure on FoP = -prices FoP = -CoP = passed on to consumer = lower inflation

Trade Balance:

• […] lower inflation = increases international compeitiveness = +X = improves trade balance
• […] increase growth RNI = +D for imports

Question 12

Circular Flow of Income

Answer 12

Question 13

Natural Rate of Unemployment on Labour Market Diagram

• Why is there a difference S(whiling and able to work) and S(actual)
• Impact of supply-side policies

Answer 13

• Structural Unemployment: mismatch of skills between unemployed and available jobs.
• Frictional: time delays when finding new employment
• Seasonal: when people are unemployed a particular times of the year, due to demand for labour being lower than usual

Question 14

Comparative Advantage

• Use numbers to explain the comparative advantage
• Effect of comparative advantage explotation on the diagram (conditions)

Answer 14

• New PPF if: suitable exchange rate is found

Comparative advantage in Services:

• UK because give up 3 manufactured goods compared to China’s 5

Comparative advantage in Manufactured Goods:

• China because only give up 1/5 of a service compared to UK’s 1/3

Question 15

Liquidity Trap

• Chains

Answer 15

IR hit lower bound = individuals have converted all financial assets in cash (due too low return on financial assets e.g.bonds) = demand for money/liquidity preference curve becomes perfectly elastic = if BoE engage in QE (increase the money supply) = no effect on IR

Question 16

Trade Diversion (common external tariff)

• PS gain
• CS loss

Answer 16