4.5 - Shock Absorption Flashcards
What are the 6 main policies implemented as shock absorption?
Floating rate
Freedom to adjust monetary policy
Labour force mobility
Non-price competitiveness
Economic diversification
Strong fiscal position
How does a floating rate improve a nations capacity to cope with shocks?
Scope for depreciation
Improve export competitiveness
How does monetary freedom improve a nations capacity to cope with shocks?
Central Bank has autonomy
Able to intervene + stabilise
QE, interest rates etc
How does labour mobility improve a nations capacity to cope with shocks?
Shocks may affect export patterns
Regional disparities
How does non-price competition improve a nations capacity to cope with shocks?
Demand + output more resilient
Less price vulnerability (Undercutting)
How does economic diversification improve a nations capacity to cope with shocks?
Reduces over reliance + dependency
Flexible export patterns
How does a strong fiscal stance improve a nations capacity to cope with shocks?
Strong finances improve confidence
Scope to run fiscal stimulus
Recover AD
What is the Keynesian viewpoint regarding external shocks?
Free market not self correcting
Prone to lengthy recessions
Stuck in ‘underemployment’ equilibrium
State intervention required
