Paper 2 Flashcards
1
Q
Advantages of a Floating Exchange Rate
A
- Monetary Sovereignty - Interest rates are set on the needs of the economy (e.g. to manage inflation or unemployment) rather than to stabilise exchange rate
- Automatic adjustment to current account balance - Large deficit on current account would see overflow of pounds, leading to exchange rate falling
- No need for government to hold stocks of foreign currency
2
Q
Disadvantages of a Floating Exchange Rate
A
- Uncertainty for businesses - Hard to plan ahead as don’t know future exchange rates
- Over-valued/under-valued currency - Exchange rate may remain high or low due to speculators deciding to either buy or sell the currency. Over-valued currency makes it hard for exporters, under-valued currency causes cost-push inflation
3
Q
Advantages of a Fixed Exchange Rate
A
- Easier trading for businesses - So likely for expansion of trade between fixed exchange rate countries
- Stability - Encourages investment
- Monetary discipline - Keeping interest rates same as economy the currency is fixed to gives monetary policy added credibility
4
Q
Disadvantages of a Fixed Exchange Rate
A
- Loss of monetary sovereignty
- Large reserves of foreign currency needed
- Lack of adjustment to current account imbalances
5
Q
Arguments in favour of Currency Union
A
- Greater certainty for businesses that trade with members of currency union
- No costs involved in converting currencies between members
- No worries about exchange rate being under or over valued against other members
- Greater price transparency for consumers
6
Q
Arguments against Currency Union
A
- Monetary policy has to be set for Currency Union as a whole, individual countries lose right to set their own monetary policy
- Businesses may be unable to compete with lower-cost producers that are members of the union
- Fiscal policy needs to be used more widely to correct for imbalances across the currency union
- Currencies may have to ‘bail out’ other members that run into problems financially (e.g. Greece)
7
Q
Benefits of Economic Growth
A
- Higher living standards
- Easier to find employment
- Improved social indicators (e.g. less crime)
- Increased tax revenue
- Less need for welfare expenditure
- Lower absolute poverty
8
Q
Costs of Economic Growth
A
- Increased negative externalities (e.g. pollution, traffic etc.)
- Could lead to greater inequality
- Higher inflation
- Depletion of natural resources
9
Q
Consequences of Inflation
A
- Uncompetitive exports
- Menu costs (e.g changing labels)
- Shoe leather costs (e.g. cost of going to bank)
- Fiscal drag (being dragged into higher tax brackets)
- Uncertainty
- Policy response (policies to deal with inflation have policy conflicts)
- Purchasing Power loss
10
Q
Consequences of Deflation
A
- Delays in consumption
- Rising real value of debt
- Wage rigidity
11
Q
Problems in Measuring Inflation
A
- Quality of goods change
- Not all goods included
- Short term inflation (tax, interest rates)
- Basket of goods outdated
- Effects of inflation vary
12
Q
Costs of Unemployment
A
- Inefficient use of resources
- Loss of tax revenue
- Workers lose skills if inactive for long time
- Lower incomes
- Other externalities, (e.g. increased crime)
13
Q
Measures used for HDI
A
- Real National Income per Capita
- Health of population (life expectancy at birth)
- Education (mean years of schooling)
14
Q
Argument for Aid
A
- Countries may be unable to trade
- Aid is necessary in emergencies, as trade is too long-term
- Aid can be better if not in the form of money, and instead through training, which is better long-run
15
Q
Argument for Trade
A
- Countries can benefit from specialisation, so will be better in the long-run
- Problem with trade is that if country is corrupt, then aid will not make it to the people, and so won’t help
- Countries can gain a trading partner
- Even if country is not corrupt, aid may not be spent properly (e.g. spent on roads and airport)
16
Q
Evaluation of Fiscal Policy
A
- Trade-offs (Phillips curve etc.)
- Laffer curve
- Crowding out
- Automatic stabilisers
- Will economy self heal? (monetarist view)
17
Q
Evaluation of Monetary Policy
A
- Liquidity Trap
- Are banks willing to lend (may not be currently due to Brexit uncertainty)
- Trade-offs
18
Q
Pros of Austerity (Contractionary Fiscal Policy)
A
- Reduce Govenment Debt
- Promotes FDI (Foreign Direct Investment)
- Lower Government bond yields
- Allows for flexibility in recession (government can use saved money to be expansionary during a recession)
- Less Crowding Out, X Inefficiency
19
Q
Cons of Austerity (Contractionary Fiscal Policy)
A
- Shock to the economy could lead to a recession (e.g. Greece)
- Costs to public services (NHS, Education, Welfare)
- Higher income inequality
20
Q
Argument for Higher Interest Rates
A
- Control Demand-Pull Inflation
- Asset and credit bubbles
- Reduces systemic risk
- Promotes sustainable lending and borrowing
21
Q
Argument against Higher Interest Rates
A
- Shock to economy (AD left)
- People may be unable to pay off debt
- Reduces investment (bad currently due to Brexit)
22
Q
Problems with measurements of Economic Development
A
- HDI only for country as a whole, doesn’t distinguish between different areas of country
- Index doesn’t measure freedom
- No indication of distribution of income
- Excludes other aspects, such as crime, corruption, pollution etc.
23
Q
Problems with using GDP to measure growth and living standards
A
- Doesn’t factor other aspects, such as environmental, life expectancy, inequality etc.
24
Q
Problems with measuring unemployment
A
- Government often changes criteria of claimant count (30 times since 1979) so hard to compare over time
- Some people can claim benefits while working on black market
- Can be hard to decide if someone is sick or inactive
25
Q
Aspects of Globalisation
A
- Freer trade
- Opening up to FDI
- Opening up to migration flows
- Opening up to capital flows
26
Q
Market-based strategies to promote development
A
- Trade liberalisation
- Removal of subsidies
- Policies to attract FDI (removing barriers)
27
Q
Interventionist strategies to promote development
A
- Infrastructure Investment
- Education and Training Investment
- Investment in Tourism and other services
- Overseas aid
- Debt cancellation
- State investment in welfare system
28
Q
Characteristics of Less Developed Countries
A
- Low levels of Real GDP per Capita
- Dependence on primary products for export revenue
- Fast population growth and low median age
- High proportion of population based in rural areas
- Poor levels of infrastructure
- Poor financial markets
29
Q
Other measures of development
A
- Human Poverty Index
- Gender-related Development Index (GDI)
- Social indicators (e.g. education )
30
Q
Barriers to development
A
- Poor infrastructure
- Corruption
- Inadequate human capital
- Lack of property rights
- Primary product dependency
- Volatile earnings from commodities
- Undeveloped financial system
- Institutional factors
31
Q
Problems of a current account deficit
A
- Foreigners have greater claim of domestic assets
- Large deficit could be unsustainable
- May indicate unbalanced economy (focused on short-term rather than long-term)
- Could cause depreciation of exchange rate and cause cost-push inflation
- For countries with fixed exchange rate, it may indicate they have become uncompetitive
