Revision

Question 1

What does Schumpter say about economic growth?

Answer 1

Creative destruction. Where we have gales of destruction, waves of innovation.

Question 2

What does Harrod-Domar say about economic growth?

Answer 2

The savings-capital ratio. If you have high levels of saving and low levels of capital, it increases economic growth.

Question 3

What does Solow say about economic growth?

Answer 3

Where you get an increased population with increased levels of savings and capital development.

Question 4

What does Heckscher-Ohlin say about economic growth?

Answer 4

Focus where you have the most abundant factors of production.

Question 5

What does the Lewis model say about economic growth?

Answer 5

As an economy grows, you have an excess supply of labour in agriculture with low wages which moves into manufacturing with higher productivity and wages.

Question 6

What were the NICE 90’s?

Answer 6

A period of non-inflationary, constantly expanding growth.

There was an absence of major economic shocks, fallen expectations of inflation, independence of the Bank of England, Uk’s comparative advantage, European Union and globalisation, product market reform, labour market reform.

Question 7

What’s mortgage equity withdrawal?

Answer 7

Where an increase in house prices creates the wealth effect. Households will then withdraw the equity in their home through a mortgage and then pump this into the economy which will stimulate AD.

Question 8

What’s the multiplier effect?

Answer 8

An increase in the component of AD creates further increases in AD and creates a ripple throughout the economy.

Question 9

What’s the accelerator effect?

Answer 9

If there’s an increase in RNI, firms will undertake more investment.

Question 10

What are the two types of unemployment?

Answer 10

Equilibrium (structural/frictional)

Disequilibrium (cyclical/real-wage)

Question 11

What are the policies used to reduce equilibrium unemployment?

Answer 11

Supply side policies

Question 12

What are the policies used to reduce disequilibrium unemployment

Answer 12

Monetary/fiscal policy.

Question 13

What’s the natural rate of unemployment?

Answer 13

The rate of unemployment that an economy tends towards in the long run. It includes structural and frictional employment. In a dynamic economy, you want to have a natural rate of unemployment (old industries collapsing, new ones building. The UK’s is 3-4%.

Question 14

What’s the short run phillips curve?

Answer 14

If there’s an increase in AD, there’s an increase in demand for labour. In the short-term, the labour market will tighten, there’s a smaller pool of labour to recruit from. Workers will, either individually or collectively, bid up there wages and there’s a trade-off between unemployment and inflation.

Question 15

What’s the long run phillips curve?

Answer 15

In the long run, there’s no trade off because of the money illusion. If workers bid up their wages in real terms, then unemployment will always return to the natural rate but you would’ve injected inflation into the economy.

Question 16

What are the three theories of international trade?

Answer 16

International and comparative advantage.
Free trade.
Economies of scale.

Question 17

What’s the balance of payments?

Answer 17

A record of the import and export of goods/services across international frontiers.

Question 18

What does the current account measure?

Answer 18

Trade of goods and services
Primary income
Secondary income

Question 19

What are the policies that can be used to correct the balance of payments?

Answer 19

Direct controls (Bans, tariffs, quotas, restrictions)
Devaluation
Deflation (reduce consumption)

Question 20

What’s the Marshall Lerner condition?

Answer 20

If the combined elasticities of imports and exports are less than one, a devaluation will make the trade deficit worse before it gets better. Only if the combined elasticities of imports and exports are greater than one will a devaluation improve the trade deficit.

Question 21

What are the three determinants for free-floating exchange rates?

Answer 21

Interest rates (increase = stronger)
Demand for imports/exports (higher demand for imports = weaker)
Speculation

Question 22

How does being a major importer/exporter affect exchange rates?

Answer 22

The currency will float freely in the foreign exchange markets. If you’re a major importer into the forex markets, supply shifts to the right and the currency gets weaker. If you’re an exporter, demand shifts to the right.

Question 23

What’s a managed/semi-fixed/pegged exchange rate system?

Answer 23

If you’re part of an economic or monetary union, the currency can float between an upper and a lower limit but you need central bank intervention.

Question 24

What are the advantages of a common currency?

Answer 24

Price transparency
Can help tourism
Can lower costs

Question 25

What are the disadvantages of a common currency?

Answer 25

Changeover costs
Interest rate policy is the same for all countries

Question 26

What’s the convergence criteria for the euro?

Answer 26

Inflation no more than 1.5% higher than the three lowest countries.

Yield rate on bonds no more than 2% of the lowest three countries.

Must be able to adhere to the fiscal compact.

Must join an exchange rate mechanism system and have no major fluctuations in 18 months.

Question 27

What’s the HDI?

Answer 27

Usually measures absolute poverty. Looks at gender equality, literacy rates, infant mortality. From 0 to 1 and the closer to 1, the more developed an economy.

Question 28

How can the tax system reduce relative poverty?

Answer 28

Income tax but laffer curve effect.
Corporation tax but laffer curve effect.
Capital gains tax but laffer curve effect.
National insurance (ring fence tax to pay for social protection).
Excise duty but regressive tax.
VAT but regressive tax.