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Macroeconomics theme 4 notes > Theme 4 > Flashcards

Theme 4 Flashcards

1
Q

4.3.3 What are the disadvantages of AID?

A

Corruption means funds for development and misused.

Some countries give aid eg Shoes with TOMS, which damages the market selling shoes in that country as it becomes a free good. (Destroys domestic industry).

  • Creates aid dependency, after aid is taken away creates problems
  • Tied aid, conditions for receiving the aid, are harmful in the short-run and long-run.
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2
Q

4.3.3 What is debt relief.

What forms can this come in?

A

-When external debt built up and tax revenues are being used to pay back loans, instead of supply side policies:

  • Debt forgiveness = all or some of the debt is cancelled
  • Debt restructuring= the length of time of the loan, or interest payable is adjusted to make it less onerous.
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3
Q

What are examples of debt relief in the past?

A

Highly Indebted Poor countries Initiative in 1996

Multilateral debt relief initiative in 2005

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4
Q

One advantage and one disadvantage of debt relief.

A

ADV- more fiscal space for supply side policies rather than paying back debt.

DIS- Moral hazard there is no incentive to pay back future loans.

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5
Q

Why do currencies fixed ER, Peg ER

A

When an exchange rate is fixed to another currency.
-When entering the Euro Zone countries have to peg their currency to the euro.

  • When a currency become unstable It can be fixed to another to establish stability.
  • Eg 1£
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6
Q

What is the trilemma when you have a fixed exchange rate?

A
  • Allow free movement of (capital)
  • Use monetary policy to manage inflation and AD
  • Maintain exchange rate stability.
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7
Q

When did exchange rate stability start?

A

-UK in the Bretton Woods system (1971) and ERM (1992).

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8
Q

What are examples of countries who have a fixed exchange rate?

Why do they have this?

A
  • Panama, Balboa have adopted the dollar.
  • Qatari fixed to the USA.

They try and prevent speculation and they have a primary product dependency of OIL.

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9
Q

How do PPD impact volatility?

A
  • As primary products are volatile

- this impacts the volatility of the currency.

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10
Q

What are EU countries that have tied currencies to ER?

A

Bulgaria, Croatia and Denmark.

They fix against euro to increase trade with neighbours.

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11
Q

What are the advantages and disadvantages of a fixed exchange rate?

A
  • ADV
  • Protects against speculation.
  • Can bring about stability
  • To join a monetary union.

DIS

  • The trilemma (you have to sacrifice sovereignty).
  • Speculation can attack currency leading to revaluation .
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12
Q

How do governments manage Exchange rate?

A
  • Foreign currency transactions: Buying own currency to revalue own currency.
  • Foreign currency transactions: Selling own currency to devalue own currency and build up stores of foreign currency.
  • Alternatively, can change interest rates to attract or repel hot money.
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13
Q

What is one strategy associated with a managed exchange rate?

A

-Competitive devaluation.

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14
Q

What is a managed exchange rate?

A
  • The ER is mostly determined by market forces, but the government intervenes to influence the ER for macroeconomic reasons.
  • China, want to stimulate export-led growth so will intervene to keep their ER low.
  • They do this by selling Yuan (increase supply) thereby bringing about a decrease in value.
  • They will sell the Yuan to buy US government bonds
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15
Q

Advantages of a floating exchange rates?

A

-Automatic stabiliser.
ER should automatically change to bring about Balance of payments equilibrium.
-Absorbs external shocks more easily
EU referendum - exchange rate depreciated

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16
Q

What does the J curve suggest?

A
  • The market will adapt but not in the short term
  • Due to supply contracts, and costs of changing suppliers that despite depreciation the same volume of imports and exports take place in the immediate term.
  • Therefore in the short run value of export falls. and value of imports increases.
  • This causes a deterioration in balance of payments.
17
Q

Why may it take time to change suppliers?

A

-Systems may be designed for specific suppliers and then epos systems must be recalibrated.

18
Q

How to draw the j curve?

A

X axis = times
Y axis = % on balance of payment.

Curve:
Straight line down and then make J

19
Q

What is the Marshall Lerner condition?

What country does this apply to?

A

-States that a depreciation will improve a current deficit only if the sum of the elasticity of demand is greater than -1.

so, for economies such as Germany where exports are high quality differentiated goods, the normal rules of depreciation may be reversed.

20
Q

What else can exchange rate depreciation cause?

A

Depreciation- increase in net trade (x-m)
Economic growth —- more workers needed in export markets.
Unemployment falls
-Multiplier effects as exports are an injection.

21
Q

What does exchange rate cause to inflation?

A

-Increase cost of imports — cost push inflation wages are higher.
(known as imported inflation)
-SRAS shifts inwards.

22
Q

How do exchange rates impact FDI?

What is an evaluation for this?

A
  • Depreciation– Reduces cost of fixed investment in foreign currency, increase in FDI (but depends on what caused depreciation, instability or long run reduced growth.
  • The investors may not want to enter the market depreciation.
23
Q

What is an example of a depreciation causing increase FDI?

A

-Russian property company buys the gurkin.

24
Q

What is competitiveness?

A

It measures how effectively a country with rivals in a global market for goods and services.

25
Q

What are the drivers of productivity and competitiveness?

A
  • Adam Smith = specialisation and the division of labour
  • Neo-classical economists= investment in physical and infrastructure
  • Education and training
  • Quality of infrastructure
  • Technological progress
  • Macro-economic stability
  • Good governance.
  • Market efficiency.
26
Q

What is the organisation that measures competition?

A

-The world economic forum.

-

27
Q

What are the two types of competition?

A
  • Price competition

- Competition on quality

28
Q

How does the financial system impact competitiveness?

A
  • If you can access international bond markets and stock markets you are able to raise more finance.
  • Cost to develop global financial market.
29
Q

How does infrastructure increase competition?

A

-

30
Q

What are two main measures of international competitiveness?

A
  • Unit labour costs

- Relative export prices.

Macroeconomics theme 4 notes (1 decks)

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