mistake cards

Question 1

How can FDI lead to increase in exports

Question 2

What are the consequences of a postive output gap

Question 3

When is delfation bad and what are the consequences?

Answer 3

If it comes from a lack of AD
1)Delayed spending - deflationary spirals
Pirces falling -> households expect to continue -> delay their spending ->reducing consumption -> reducing AD -> business need to reduce prices further -> deflation persists -> less growth, unemployment ETC

2) Reduced inective to borrow
Interest rates will always be positive when deflation is occuring in order to encourage spending -> even if they are 0, real interest rates adjusted for inflation will be positive -> always incentive to save as real value of savings is rising -> futher reducing consumption

3) Increases real value of debt
Debt is fixed -> wages falling in line with defaltion -> level of profits for firms is also falling, harder to service their debt -> further reducing C

Question 4

When is delfation good and what are the consequences?

Answer 4

If generated from the supply side, as a result of falling raw material prices (SRAS shift right)

Short term relief, increasing spending power for consumers and relieving cost pressures on businesses -> benenficial as factors that cause it do not persist in long term.

Question 5

Eval points for deflation

Answer 5

Cause
Anticipated OR not

Question 6

How is a recession defined?

Answer 6

2 consecutive quarters with negative growth rates

Question 7

What is disinflation?

Answer 7

A slowing positive rate of inflation

Question 8

When does a structural budget deficit occur?

Answer 8

Budget deficit at full employment

Question 9

All other things being equal, if the velocity of circulation is constant, the quantity theory of
money based on Fisher’s equation of exchange, MV=PQ, predicts that an x% increase in
the money supply will always cause an x%

Answer 9

increase in nominal national income