Macro Yellow Booklet

Question 1

When evaluating which of the components of AD is most important?

Answer 1

Consumption- is two thirds of aggregate demand.

Question 2

What does economic performance measure?

Answer 2

Economic Performance measures the success or failure in achieving economic policy objectives

Question 3

What are seasonal fluctuations?

Answer 3

variations of economic activity resulting from seasonal changes in the economy

Question 4

What is the actual rate of growth from the economic growth diagram?

Answer 4

Real GDP/ real output produced by an economy (backed by AD)

Question 5

What the trend rate of economic growth?

Answer 5

Underlying rate of growth- potential growth/ output capable by an economy if producing at full capacity.

Question 6

Define positive output gap?

Answer 6

the level of actual real output in the economy is greater than the trend output level

Question 7

Define negtaive output gap?

Answer 7

the level of actual real output in the economy is lower than the trend output level

Question 8

What happens in the recovery stage of the economic cycle?

Answer 8

• economic activity goes up
• Optimism- bussiness + consumer confidence
• Consumer spending goes up
• Firms investment goes up
• Imports rise and people have more income and so want to buy more imported good

Question 9

What happens in the Boom stage of the economic cycle?

Answer 9

• economic activity peaks
• growth is high
• firms expanding (investment)
• full employment
• output reaches full capacity
• AD>AS economy overheats

Question 10

What happens in the downturn stage of the economic cycle?

Answer 10

• economic activity falls below the trend rate of growth
• firms cutback
• investment falls
• output falls
• employment falls (spare capacity)
• Less imports (BOP improves)

Question 11

What happens in the recession stage of the economic cycle?

Answer 11

• employment falls further
• some firms bankrupt
• low AD
• Inflation may fall further could result in deflation
• bank lending falls
• output falls
• investment falls

Question 12

List the causes of changes in the phases of the Economic Cycle

Answer 12

• Fluctuations in AD
• Supply side factor
• Role of speculative bubbles
• Political business cycle theory
• External shocks hitting the economy
• Multipler and accelerator interaction

Question 13

Explain how the role of speculative “price” bubbles cause changes in the phases of the economic cycle

Answer 13

When people realise that house
prices and/or share prices rise far above the assets real values, asset selling replaces asset buying. This causes the speculative bubble to burst, which in turn destroys consumer and/or business confidence. People stop spending and the economy falls into recession. The resulting cyclical instability is made worse by the excessive growth in credit and levels of debt.

Question 14

Explain how the political business cycle theory causes changes in the phases of the economic cycle

Answer 14

In democratic countries, general elections usually have to take place every 4 or 5 years. As an election approaches, the political party in power may attempt to buy votes’ by engineering a pre-election boom. After the election, the party in power deflates aggregate demand to prevent the economy from overheating, but when the next general election approaches, demand is once again expanded.

Question 15

Explain how external shocks hitting the economy cause changes in the phases of the economic cycle

Answer 15

Economic shocks, divide into ‘demand shocks’, which affect aggregate demand, and ‘supply shocks’ which impact on aggregate supply In some cases, an outside shock hitting the economy may affect both aggregate demand and aggregate supply.
•A commonly example is the effect on other countries of a war in the Middle East. Not only might the war affect business confidence in a country such as the UK (a demand shock), it may lead to an oil shortage which increases businesses’ costs of production. This would be a supply shock.

Question 16

Explain how multipler and accelerator interaction causes changes in the phases of the economic cycle

Answer 16

Business cycles may be caused by the interaction of two dynamic processes: the multiplier process, through which an increase in investment leads to multiple increases in national income; and the accelerator, through which the increase in income induces a change in the level of investment.
Thus the relationship between investment and income is one of mutual interaction; investment affects income (via the investment multiplier), which in turn affects investment demand (via the accelerator process), and in this process income and employment fluctuate in a cyclical manner.

Question 17

How is economic growth measured?

Answer 17

economic growth is measured by the annual % change in real GDP.

Question 18

Define short-run economic growth

Answer 18

growth of real output resulting from using idle resources, including labour, thereby taking up the slack in the economy.

Question 19

Define long-run economic growth

Answer 19

an increase in the economy’s potential level of real output, and an outward shift of the economy’s production possibility frontier.

Question 20

What is the difference between SR and LR growth? How would you show this on a PPF?

Answer 20

SR growth is an increase in Real GDP by using spare capacity until the productive potential (capacity) of an economy is reached. Where as LR growth is an increase in productivite capacity/ potential of an economy. It is a outward movement of the PPF cruve or LRAS cruve.

Question 21

What are the causes of economic growth in demand

Answer 21

An increase in any of the determinants of AD will incentivise firms to produce more so increasing real GDP in the short run. External shocks also effect deamnd side determinants.
The effect on the price level depends on the slope of the AD curve.

Question 22

What are the causes of economic growth in the short run SRAS- supply side?

Answer 22

•Political Stability can provide a postive shock to growth
•Decrease wage rates
Short term growth takes account of the spare capacity/ slack in the economy. This will increase output in the SR but is not sustainable in the LR.

Question 23

What are the causes of economic growth in the long term LRAS- supply side?

Answer 23

•Increase in labour participation (quantity of labour)
•Increase quality of labour to raise productivity (education, apprenticeships, training)
•Increase Investment on capital (expansion, replacement, newer technology)
Long term growth actually increases the productive capacity of the whole economy. Increase productivity= reduced unit costs as efficiency rises

Question 24

Will economic growth increase or reduce income and wealth inequality?

Answer 24

It will depend upon how the income is redistributed and where the economic growth occurs. If the income of the rich rises more than the income of the poor then wealth inequality will increase.

Question 25

Why may inequality be negative for an economy?

Answer 25

• It reduces productivity as human resoruces are depleted. (poorer people may also lose aspirations)
• More money is spent on benefits and looking after these people.

Question 26

How may the pursuit of economic growth be harmful for the environment?

Answer 26

• uses up finite resources
• more pollution and environmental degradation
• urbanisation and spread of cities reduces agricultural land

Question 27

What impact may pollution caused by SR growth have on LT economic growth?

Answer 27

Land degradation and depletion of natural respruces means the economy cannot grow in the LR as these rescoures are fintie.

Question 28

What are the benefits of economic growth?

Answer 28

• Increases standard of living
• Increases life expectancy and reduces diseases
• Route out of poverty- creates jobs
• Taxes pay for better public and merit goods
• Postive multiplier- more bussiness confidence leads to investment and even more growth
• Access to training and education increases

Question 29

What are the costs of economic growth?

Answer 29

• uses up finite resources
• more pollution and environmental degradation
• raises commodity prices
• destroys local cultures and communities
• widens inequality gap with income and wealth
• raises inflation
• encourages population growth which means more mouths to feed
• worsens BOP- trade deficit (more money so we import more)

Question 30

Define unemployment

Answer 30

The number of people willing and able to work at the market wage rates but unable to find jobs.

Question 31

Why is there a difference between the claimant count and the labour force survey?

Answer 31

• those ineligible for benefits due to higher savings of a high earning parnter
• some people do not want the stigma of claiming benifits so will not be included
• LFS includes 16 & 17 year olds

Question 32

What are the main UK measures of unemployment?

Answer 32

• claimant count

* labour force survey

Question 33

What are the 5 types of unemployment?

Answer 33

• frictional.
• cyclical.
• seasonal.
• structural.
• classical

Question 34

Define frictional unemployment

Answer 34

unemployment that is usually short term and occurs when a worker switches between jobs.
(The search theory of unemployment)

Question 35

Define structural unemployment

Answer 35

long term unemployment occurring when some industries are declining, even though other industries may be growing.

Question 36

What factors may cause structural unemployment?

Answer 36

• occupational and geographical immobility of labour.

* Automation (robots replace labour) reduces the demand for labour

Question 37

Define cyclical unemployment

Answer 37

unemployment caused by a lack

of AD in the economy and occurs when the economy goes into a recession or a depression.

Question 38

Define involuntary unemployment

Answer 38

when workers are willing to work at current market wage rates but there are no jobs available

Question 39

Define voluntary unemployment

Answer 39

occurs when workers choose to remain unemployed and refuse job offers at current market wage rates

Question 40

What is the keynesian argument for cyclical unemployment?

Answer 40

•If low AD is persistant it can lead to mass unemployment or a higher accepted level of unemployment unless there is intervention
-long term and involuntary

Question 41

What is the free market critique for cyclical unemployment?

Answer 41

•It is short-term, self correcting as long as prices and wages are flexible
-Markets will return to equilibrium without intervention.

Question 42

Define seasonal unemployment

Answer 42

unemployment arising in different seasons of the year, caused by factors such as the weather and the end of the Christmas shopping period

Question 43

What is real wage unemployment?

Answer 43

a type of disequilibrium unemployment caused by real wage rates being too high to clear the labour market, resulting in excess supply of labour.

Question 44

What are real wages?

Answer 44

Wages that have been adjusted for inflation, a real wage measures the amount of goods and services that can be bought

Question 45

Explain the consequences of unemployment (relating to how it is bad for the economy)

Answer 45

•Unemployment is bad for the economy as a whole, largely through the waste of human capital. When workers are unemployed, not all the economy’s productive resources are used to produce output, which, if produced, could add to the material standards of living and economic welfare of the whole population. Instead, the economy produces inside its production possibility frontier and fails to operate to its potential.
•Unemployment is also one of the factors that reduce an economy’s international competitiveness. High unemployment can reduce incentives for firms to invest in new state-of-the-art technologies that generally lead to increased export competitiveness.
More compex reason:
•Economies are particularly badly affected by long-term unemployment. A worker may become effectively unemployable the longer the period that he or she is out of work: for example, because of the erosion of job skills and work habits. Long term unemployment is also made worse by the fact that employers, who might otherwise hire and retrain workers who have been economically inactive for several years, perceive that workers with more recent job experience present fewer risks and are more employable. When inactive workers are seen as unemployable, the economy begins to behave as if it is on its production possibility frontier, even though there are plenty of unemployed workers notionally available for work. An increase in aggregate demand can then lead to inflation rather than to an increase in output and jobs.

Question 46

Explain the consequences of unemployment (relating to how it is bad for the buget)

Answer 46

Under-investment can also be caused by the higher business taxes that firms
may have to pay to help finance the welfare benefits paid to unemployed
workers. While it is true that the Jobseeker’s Allowance can be claimed only in the first months of unemployment, in the UK the state continues to pay Universal Credit to families in which there is no wage earner, in order to save family members, particularly children, from the effects of absolute poverty.

Question 47

Explain the consequences of unemployment (relating to how it is bad for the unemploymed)

Answer 47

Unemployment is obviously bad for the unemployed themselves and for their families, largely because of the way in which the low incomes that accompany unemployment lead to low standards of living. However, the costs of unemployment for the unemployed go further than this. Unemployment destroys hope in the future. The unemployed become marginalised from normal economic and human activity, and their self-esteem is reduced. Families suffer increased health risks, greater stress, a reduction
in the quality of diet, and an increased risk of marital break-up and social exclusion caused by loss of work and income.

Question 48

Give possible benfeits of unemployment (as a evaluating counter argument)

Answer 48

despite the disadvantages of high unemployment for the economy,
many free-market economists believe a certain amount of unemployment is
necessary to make the economy function better. In particular, by providing downward pressure on wage rates, unemployment can reduce inflation. Unemployment also contributes to a widening of income differentials between better-paid and low-paid workers. Some free-market economists argue that this is a good thing, believing that differences in pay are needed to promote incentives,
which then create the supply-side conditions in which the economy can prosper.
•May also increase self-employment start ups as people do this as an alternative to being unemployed.

Question 49

Explain the government policies to reduce frictional and structural unemployment

Answer 49

Governments can try to reduce frictional unemployment by improving the geographical and occupational mobility of labour, and by reducing workers search periods between jobs. Geographical mobility could be improved by making it easier for families to move house from one region to another, for example by subsidising removal costs.
However, the widening difference in UK house prices between south and north are in fact reducing the geographical mobility of labour. Government spending on rented social housing in areas where there are ongoing labour shortages would perhaps be the most effective way of improving the geographical mobility of labour, though for cost and other reasons, this policy is unlikely to be adopted, at least on a scale sufficient to have a significant effect.
The introduction of the Jobseeker’s Allowance JSA) in 1996 was an attempt
to reduce search periods between jobs it can only be claimed for the first few months of unemployment providing the claimant is actively seeking work. The allowance creates an incentive for the newly unemployed to accept lower wage rates and to speed up the search for vacancies that meet their (now reduced) aspirations.
•However, the only really effective way to reduce frictional and structural unemployment is to achieve successful economic growth, which increases firms’ demand for new employees.
Governments can improve the occupational mobility of labour by providing retraining schemes.
Government retraining schemes are usually less effective than those run by private sector firms. But a problem is that employers in trades such as plumbing often prefer to avoid spending on training their employees. As a result of this market failure, too few workers may end up being trained.

Question 50

Explain the government supply side policies to reduce unemployment

Answer 50

(This makes no sense) (-like none at all)
Supply-side policies which try to improve the competitiveness and efficiency of markets are now used to reduce frictional and structural unemployment. In the past, deindustrialisation led to large-
scale structural unemployment, concentrated in regions of decline such as coal fields and areas previously dominated by heavy industry.
Many traditional manufacturing industries and the coal industry have now largely disappeared in the UK, so there is less scope for further structural decline in these activities. The supply-side improvements of the 1980s and 1990s also created conditions in which service industries grew to replace manufacturing. As a result, more workers were able to move from declining industries into growing ones. However, as the recent and current financial services crisis shows, service industries such as banking have themselves become vulnerable to structural decline and to overseas location.

Question 51

Define inflation

Answer 51

The continuing rise in the average price leve for all goods and servives in the economy.

Question 52

What are the two baisc causes of inflation?

Answer 52

• excess aggreate demand in the economy

* a general rise in costs of production

Question 53

Define demand-pull inflation

Answer 53

a rising price level caused by an increase in aggregate demand, shown by a shift of the AD curve to the right. Also known as demand inflation.

Question 54

Explain demand-pull inflation

Answer 54

demand-pull inflation is caused by an increase in aggregate demand. If the economy is initially producing on the economy’s SRAS curve, but below the normal capacity level of output, the price level has to rise to persuade
firms to produce more output to meet the extra demand. In part, this is because firms incur higher costs when they produce more goods. For firms to maximise profit, higher prices are needed to reward firms for producing more output. Once the LRAS curve is reached, higher prices can temporarily encourage firms to produce beyond this point, but the increase in output cannot be sustained. Instead, the quantity of goods and services produced falls back to the normal capacity level of output, in this case at y2.
An increase in any of the components of aggregate demand, C, I, G or
(X - M), can lead to demand-pull inflation. (So textbook waffle but basically prices rise to persuade firms to produce more to meet the higher aggregate demand but this cannot be sustained in the long term)

Question 55

Define cost-push inflation

Answer 55

a rising price level caused by an

increase in the costs of production, shown by a shift of the SRAS curve to the left. Also known as cost inflation.

Question 56

Briefly explain cost-push inflation

Answer 56

The price level rises caused by an increase in production costs. Firms will pass this cost onto consumers by raising their prices.

Question 57

Why may anticipated inflation be better than unanticipated inflation?

Answer 57

If inflation could be anticipated with complete certainty, some economists argue that it would pose few problems. Households and firms would simply build the expected rate of inflation into their economic decisions, which would not be distorted by wrong guesses.

Question 58

Describe how a low, steady rate of inflation may be seen to be beneficial to an economy

Answer 58

•Creeping or low inflation, is associated with growing markets, healthy profits and a general climate of business optimism, greases the wheels of the economy. Viewed in this way, a low rate of inflation may be a necessary side-effect of expansionary policies to reduce unemployment.
•Necessary to make labour markets
function efficiently. (The explanation in the textbook makes no sense)

Question 59

What is the acronym SPICED

Answer 59

Strong Pound Imports Cheaper Exports Deerer

Question 60

What is the acronym WPIDEC

Answer 60

Weak Pound Imports Deerer Exports Cheaper

Question 61

Explain the distribution effects as a cost of inflation

Answer 61

Purchasing power is re-distributed from those and fixed nominal income towards those with variable incomes whose earnings keep pace with inflation.

Question 62

Explain the distortion of normal economic behaviour as a cost of inflation

Answer 62

Inflation can distort consumer
behaviour by causing households to bring forward purchases and hoard goods if they expect the rate of inflation to accelerate. Similarly, firms may divert funds out of productive investment in fixed investment projects into unproductive commodity hoarding and speculation. People are affected by inflationary noise.
This occurs when changes in relative prices (i.e. a rise or fall in the price of one good) is confused with a change in the general price level or inflation.

Question 63

Explain the breakdown in the functions of money as a cost of inflation

Answer 63

money becomes less useful and efficient as a medium of exchange and store of value. (Erodes value of savings)

Question 64

Explain the international uncompetitiveness as a cost of inflation

Answer 64

When inflation is higher than in competitor countries, export demand will fall and imports demand may rise. Lower growth and rising unemployment are likely to result.

Question 65

Explain the shoe leather and menu costs as a cost of inflation

Answer 65

Consumers incur shoe leather costs,
spending time and effort shopping around and checking which prices have or have not risen. By contrast, menu costs are incurred by firms having to adjust price lists and menus more often.

Question 66

Define deflation

Answer 66

A sustained fall in the general average price level

Question 67

What are the two types of deflation?

Answer 67

• Benign

* Malign/ malevolent

Question 68

Define benign deflation

Answer 68

falls in the price level because of technological advances which bring down the prices of certain goods e.g. computer chips

Question 69

Define malign deflation

Answer 69

falls in the price level as a result in a fall in AD. The multiplier effect works in a downward cycle: a fall in AD reduces employment, reducing spending, reducing AD further and so on.

Question 70

Explain Benign deflation and it’s consequences

Answer 70

A good or benign deflation, results from improvements in the economy’s supply side, which reduces business costs of production. Both the SRAS curve and the LAS curve shift to the right and, the price level falls, but output and employment rise.
•It comes with higher growth as output grows.
•Benign defaltion is usually short term and unanticipated.

Question 71

Explain malevolent deflation and it’s consequences

Answer 71

• Malevolent deflation if bad deflation as it is usually long term and anticipated.
• Anticipated deflation is the worst type if deflation for an economy as consumers delay their spending resulting in a lower AD which lowers consumption and leads to higher unemployment.
• Malign deflation leads to postive real intrest rates this means their will be more saving and less spending further lowering consumption and AD.
• It also increases the real value of debts, as profits and incomes fall it becomes harder for people to pay off debt as debt if a fixed value, consumers and firms become aversed to taking on debt. It is also a big drag to consumer confidence.
• Malign deflation leads to lower growth as lower prices mean reduced revenues and profit margins for firms. Firms then try to reduce the costs by shredding labour causing higher unemployment.

Question 72

What are the evaluative points when discussing defaltion?

Answer 72

• Depends of type (benign/malign) and cause (demand or supply)
• Anticipated is the worst!
• Deflation can make exports more competitive eventually but this has high socio-econmic costs such as higher unemployment in the short term.

Question 73

What are trade goods in the current account?

Answer 73

VISIBLES
•manufactered goods eg.cars
•non-manufactured goods eg.tobbacco

Question 74

Is the UK a importer or exporter in the trade in goods?

Answer 74

UK is a net importer of primary products.

Used to be a exporter but is not anymore due to structural change

Question 75

What are trade services in the current account?

Answer 75

INVISIBLES
•Tertiary or service sector eg: financial services, transport, intellectual services
•Also outsourcing

Question 76

What is Primary Income in the current account?

Answer 76

•Flow of income (profit) from;

• assests owned abroad by UK companies- injection
• assests owned by foreign companies- withdrawals

Question 77

What is Secondary Income in the current account?

Answer 77

• Payments not in exchange for any product of econmic value flowing in and out of the UK eg. Foregin aid, grants
• Cost of armed forces overseas

Question 78

List the factors that influence a country’s current account on the blance of payments

Answer 78

• Exchange Rate
• Relative inflation rates
• Economic activity in another country
• Productivity

Question 79

What factors may cause an exchange rate to fluctuate?

Answer 79

• Relative Inflation Rates
• Relative Interest Rates
• Speculation
• The current account
• Political Stability
• Productivity Levels

Question 80

What is an exchange rate?

Answer 80

The rate at which one currency exchanges for another

Question 81

Explain how Relative interest rates can affect the exchange rate?

Answer 81

If the UK has higher interest rates than other countries then it will attract hot money therefore increases demand for the £ strengthening the £.

Question 82

Explain how Relative inflation rates can affect the exchange rate?

Answer 82

If the UK has a low inflation rates than its trading partners then its goods will be relatively cheaper. This will increase demand for exports which will increase the demand of the £ strengthening the £.

Question 83

Explain how Speculation can affect the exchange rate?

Answer 83

If traders think the £ will be more valuable in the future they will buy it now so they can sell it at a profit later on.
If they think it will fall they will avoid selling it and making a loss.

Question 84

Explain how the Current Account can affect the exchange rate?

Answer 84

If a country imports more than they export then their will be less demand for their currency causing it to depreciate in value.

Question 85

What are the possible causes for a fall in the value of the pound? WPIDEC

Answer 85

• decrease in interest rates
• decrease in UK exported goods
• decrease in UK competitiveness
• decrease in FDI
• increase in inflation
• increase in demand for imports
• pessimistic speculation

Question 86

What are the possible causes for a rise in the value of the pound? SPICED

Answer 86

• increase in interest rates
• increase in UK competitiveness
• increase in FDI
• increase in demand for UK goods (X)
• decrease in inflation
• decrease in demand for imports
• optimistic speculation

Question 87

What are the costs of FDI?

Answer 87

• FDI can cause interference in domestic investments.
• Foreign investments can be more costly than domestic investments
• Capital-intensive investments can be dangerous in some cases
• Sometimes investments can result in negative values

Question 88

What are the benefits of FDI?

Answer 88

• helps boost the economy of a country.
• aids in the expansion of human capital by subsistence of workforce
• facilitates trade in the global market allowing an increase in exports.
• countries have limited domestic stock in your advanced capital inflow
• builds a competitive share market of global standards

Question 89

What may trigger hot money flows?

Answer 89

• higher interest rates

* speculation

Question 90

What could be the problems created by large scale hot money flows between countries?

Answer 90

A mass move by investors to buy a currency in anticipation of a rate rise will actually cause a rate rise.

• self-fulfilling prophecy
• destabilising effects

Question 91

What is a Expenditure-reducing policy?

Answer 91

a government policy which aims to eliminate the deficit by reducing the
demand for imports by reducing the level of AD in an economy

Question 92

What is a Expenditure-switching policy?

Answer 92

a government policy which aims to eliminate a current account deficit by
switching domestic demand away from imports to exports.

Question 93

Explain deflation as an expenditure reducing policy

Answer 93

It is a monetary policy which uses interest rates and exchange rates in aims to reduce aggregate demand.
Not a long term solution because of the negative impact on both (cyclical) employment and growth.

Question 94

Explain Direct Controls as expenditure switching policies

Answer 94

Import controls: quotas, tariffs and regulations

Question 95

Explain Devaluation or currency depreciation as an expenditure switching policy

Answer 95

an exchange rate depreciation can improve the price competitiveness of exports and make imports more expensive when priced in a domestic currency

Question 96

What is the main evaluation point for the expenditure switching policy devaluation of currency depreciation?

Answer 96

The effectiveness of a devaluation or depreciation in a currency on a country’s current account deficit will
depend on the PED of exports and imports.

Question 97

How will devaluation on elastic goods affect UK spending on imports?

Answer 97

Spending on UK imports will decrease as a  change in the price of elastic goods will cause a proportionately greater change in demand for imports.

Question 98

How will devaluation on inelastic goods affect UK spending on imports?

Answer 98

It will worsen the balance of payments as the change in demand will not be greater/ as much as than the change in price. (Ineffective in deceasing imports)

Question 99

How will devaluation on inelastic goods affect overseas expenditure on UK exports?

Answer 99

Exports will not increase this is because the change in price will not cause proportionately greater change in demand due to the inelasticity making demand relatively unresponsive, worsening the balance of payments.
(Exports don’t increase that much)

Question 100

How will devaluation on elastic goods affect overseas expenditure on UK exports?

Answer 100

The change in price will cause a proportionately greater change in demand meaning exports increase as they become cheaper and demand is responsive to the change is price.

Question 101

What is the Marshall Lerner Condition?

Answer 101

The Marshall-Lerner condition, states that a currency devaluation will only lead to an improvement in the balance of payments if the demand elasticity for imports and exports is greater than one.

Question 102

J CURVE REVISE

Answer 102

the curve isn’t a J but other than that it’s not overly complicated!

Question 103

What are supply-side policies in relation to reducing the UK Current Account deficit?

Answer 103

Supply side policies aim to allow the economy to become more productive and improve the quality of domestic production.
They are long term solutions mean there’s significant time lag before they actually take effect.

Question 104

Does a current account deficit pose problems for an economy? (Give arguments for both sides)

Answer 104

✅ The deficit may indicate the UK has lost competitiveness due to insufficient investment.
✅Continuous deficits lead to withdrawals from the second floor reducing employment.
✅Loss of manufacturing jobs leads to structural unemployment.
❌There is no problem as long as there is sufficient foreign investment in the UK to finance it.
❌The deficit may be due to imports of new capital machinery that will increase productivity which is potential growth.

Question 105

Does a current account surplus pose problems for an economy? (Give arguments for both sides)

Answer 105

✅A surplus indicates a country suggests a country is globally competitive which is positive.
✅Leads to a higher standard of living for citizens.
❌But unless a spare capacity or growth can be achieved a surplus can lead to inflation.
❌Surpluses mean deficits elsewhere.

Question 106

The UK has run Current Account deficits for the last few years. State 3 reasons why this might be the case

Answer 106

• higher labour costs compared to the rest of the world
• strong exchange rate (exports are more expensive so countries import from elsewhere)
• Inelastic imports due to the demand for luxury goods.

Question 107

What are the government’s main macroeconomic objectives?

Answer 107

• Full employment
• Price Stability
• Equilibrium on the balance of payments
• Economic growth
• improve environment
• even distribution of income

Question 108

Explain how the objectives full employment,inflation and growth conflict with trying to maintain satisfactory balance of payments

Answer 108

• When incomes are rising at a rapid rate consumers will tend to buy more imports.
• Fast growing countries may suffer high inflation worsening competitiveness.
• Businesses have to import more raw materials to help expand supply for the increased demand that results from the growth.

Question 109

Explain how achieving low unemployment and controlling inflation will cause conflicts

Answer 109

Higher employment increases aggregate demand as more people have more disposable income to spend this leads to higher prices resulting in inflation.

Question 110

Explain how the macroeconomic objectives of economic growth and controlling inflation may conflict with each other

Answer 110

An overheating economy may suffer accelerating inflation. Stagflation may also occur which is when high inflation is associated with slow growth. (Resolved by effective supply side policies)