Open economy shocks Flashcards
1
Q
How do shocks affect the trade balance?
A
Positive supply shock: q depreciates, real wage falls and trade surplus.
Positive demand shock: q appreciates, real wage rises and trade deficit.
2
Q
What is the BT curve?
A
yBT= B(σ, y*) + cq
3
Q
What shifts the BT curve?
A
BT curve only shifts from changes in home share of world trade or foreign GDP.
So if there was a rise in σ or y*, the BT curve would shift downwards.
4
Q
What shifted the AD Curve right in the UK?
A
Looser financial regulations and bank lending requirements lead to strong consumer spending, along with housing equity withdrawal, leading to increases in spendable wealth.
