COMPLEX DEFINITIONS

Question 1

X-inefficiency

Answer 1

When a firm fails to produce at the lowest possible cost due to lack of competitive pressure, leading to higher than necessary average costs

Question 2

Trade diversion

Answer 2

When joining a trade bloc shifts imports from a more efficient non-member producer to a less efficient member producer due to preferential treatment

Question 3

Marshall-Lerner condition

Answer 3

A currency depreciation will improve the current account only if the sum of the absolute values of the price elasticities of exports and imports is greater than 1

Question 4

J-curve effect

Answer 4

After a depreciation, the current account may worsen initially before improving, creating a “J” shaped pattern on a graph

Question 5

Fiscal drag

Answer 5

When inflation pushes taxpayers into higher tax brackets, automatically increasing tax revenue and reducing disposable income, which can slow economic growth

Question 6

Crowding out

Answer 6

When government borrowing increases interest rates, which reduces private sector investment

Question 7

Neutral interest rate

Answer 7

The interest rate that is neither expansionary nor contractionary, keeping the economy stable at full employment

Question 8

Taylor rule

Answer 8

A formula used by central banks to set interest rates based on inflation and the output gap

Question 9

Cyclical unemployment

Answer 9

Unemployment caused by low aggregate demand during a downturn in the business cycle

Question 10

Hidden unemployment

Answer 10

People who want work but are not included in official unemployment statistics, such as discouraged workers or the underemployed

Question 11

NAIRU

Answer 11

Non-Accelerating Inflation Rate of Unemployment – the lowest unemployment rate consistent with stable inflation

Question 12

Velocity of money

Answer 12

The rate at which money circulates through the economy; higher velocity means more spending per unit of money

Question 13

Hysteresis

Answer 13

When past unemployment affects future unemployment, e.g., long-term unemployed losing skills or motivation

Question 14

Adaptive expectations

Answer 14

When people base their predictions of the future on past experiences or past data

Question 15

Rational expectations

Answer 15

When people use all available information, including policy announcements, to predict future economic variables

Question 16

Underemployment

Answer 16

when people are working fewer hours than they want or in jobs that do not fully use their skills and qualifications

Question 17

Outline all steps of a speculative attack caused by fixed/pegged exchange rates?

Answer 17

Fixed exchange rate exists

Investors expect depreciation

Investors sell domestic currency

Central bank intervenes

Reserves run low

Currency depreciates

Question 18

Capital flight

Answer 18

large amounts of money or financial assets leave a country rapidly, usually due to loss of confidence in the economy, political instability, or expected currency depreciation