Theme 4

Question 1

What are the 4 sections of the current account

Answer 1

1. trade in goods
2. trade in services
3. income e.g remittances
4. transfers e.g paying aid to foreign countries

Question 2

what is the current account of the BoP?

Answer 2

it measures international flows of money into and out of the UK

Question 3

what is the financial account?

Answer 3

measures the UKs trade in financial assets, through: portfolio investment, FDI and reserves (currency/ gold)

Question 4

what is the marshall lerner condition

Answer 4

it states that a devaluation of the currency will only lead to a surplus on the current account if the sum elasticity of demand of exports and imports totals more than one and is shown by the J curve

Question 5

what is the phillips curve?

Answer 5

the phillips curve, was created to show the relationship between the inflation rate and unemployment. It shows that as wages/ inflation rises unemployment falls and vice versa

Question 6

how does a rightward AD shift affect the phillips curve?

Answer 6

AD shifting right creates inflationary pressure, which drives down unemployment

Question 7

how does the phillips curve explain periods of high inflation and high unemployment caused by cost push inflation?

Answer 7

a leftward shift in SRAS could be cause by higher business costs, this results in job losses as firms look to save money, in reaction to this the phillips curve shifts in the opposite direction to the SRAS shift to account for higher unemployment and higher inflation