The Balance Of Payments 3

Question 1

Expenditure Reducing Policy: instrument of increase in income taxes

Answer 1

Reduces real disposable incomes causing falling demand for imports

Question 2

Expenditure Reducing Policy: instrument of cuts in real level of government spending

Answer 2

Lowers AD, firms may look to export their spare capacity

Question 3

Expenditure Reducing Policy: evaluative comment for increases in income taxes

Answer 3

Cut in living standards & risk of damage to work incentives in labour market

Question 4

Expenditure Reducing Policy: evaluative comment for cuts in real level of government spending

Answer 4

Damage to short term economic growth, risks that austerity hits investment

Question 5

What does the J Curve effect show

Answer 5

The time lags between a falling currency and an improved trade balance

Question 6

What does the Marshall Lerner condition state

Answer 6

That a depreciation / devaluation of the XR will lead to a net improvement in the trade balance provided that the sum of the PED for exports and imports > 1

Question 7

What is a current account surplus

Answer 7

External surplus.

A net inflow of income into the economy and allows a country to run a financial account deficit.