Macroeconomic Year 2 Definitions

Question 1

Exchange rates

Answer 1

Price of one country’s currency in terms of another currency

Question 2

Fixed exchange rates

Answer 2

Happens when two countries currencies will always be exchanged at the same price

Question 3

Floating exchange rates

Answer 3

Rates are determined by the private market ( FOREX ) through supply and demand

Question 4

Marshall Lerner condition

Answer 4

States that a devaluation of a currency improves the BoP ( current account ) only if the sum of price inelasticities of demand for imports and exports are greater that one

Question 5

J-Curve

Answer 5

Demand for both imports and exports tend to be price inelastic so changing prices won’t have an immediate effect due to the time scale

Question 6

Terms of trade

Answer 6

Measure of a country’s relative competitiveness ( index )
Index of Export Prices/ Index of Import Prices *100

Question 7

Globalisation

Answer 7

The process of interaction and integration among people, companies and governments worldwide

Question 8

Protectionism

Answer 8

Represents any attempt to impose restrictions on trade in goods and services

Question 9

Tariffs

Answer 9

A tax on imports

Question 10

Quotas

Answer 10

Quantitative ( volume ) limits on the level of imports allowed into a country in a year

Question 11

Technical barriers to trade

Answer 11

including product labelling rules and stringent sanitary standards. These increase product compliance costs and impose monitoring costs on export agencies

Question 12

Export subsidies

Answer 12

A payment to encourage domestic production by lowering their costs ( exporting )

Question 13

Domestic subsidies

Answer 13

Government help ( state aid ) for domestic businesses facing financial problems ( compete with imports )

Question 14

Import licensing

Answer 14

Governments grants importers the license to import goods

Question 15

Fledgling industry

Answer 15

Certain industries possess possible comparative advantage but haven’t yet exploited economies of scale

Question 16

Strategic industries

Answer 16

Sectors of the economy that are deemed critical for a country’s national security, economic well-being or technological advancement

Question 17

Dumping

Answer 17

Goods are dumped when they are sold for export at less than their normal value. It’s a type of predatory pricing behaviour and a form of price discrimination

Question 18

Free trade area

Answer 18

When atleast two states partially or fully abolish custom tariffs on most ( if not all ) goods traded between them

Question 19

Customs union

Answer 19

A free trade area with a common external tariff

Question 20

Single market

Answer 20

Composed of a customs union with common policies on product regulation and freedom of movement of the factors of production

Question 21

Monetary union

Answer 21

Composed of a customs union/ single market with a common currency

Question 22

Full economic union

Answer 22

Complete free trade, a common external tariff, a single market, monetary union and also fiscal and supply-side union- i.e. the same federal taxation policies. e.g. The USA

Question 23

WTO

Answer 23

World Trade Organisation, sets the global rules concerning trade between nations

Question 24

Trade creation

Answer 24

Refers to the increase in economic welfare from joining a free trade area, such as a customs union

Question 25

Trade diversion

Answer 25

Occurs due to the existence of a common external tariff

Question 26

Traditional Phillips curve ( Keynesian )

Answer 26

Suggests a trade-off between inflation and unemployment, you can't achieve both together

Question 27

Stagflation

Answer 27

High rates of inflation at the same time as high rates of unemployment

Question 28

Neo-Classical Phillips curve

Answer 28

Agree that policies to reduce unemployment will lead to inflation, but they further argue any change in unemployment will only be temporary

Question 29

NRU

Answer 29

Natural Rate of Unemployment - Unemployment is fixed in the long term at this rate

Question 30

NAIRU

Answer 30

Non-Accelerating Interest Rate of Unemployment - NRU exists at NAIRU The lowest unemployment rate that can be sustained without causing wages to grow and inflation to rise

Question 31

Money illusion

Answer 31

Where individuals focus on nominal levels of income and wealth

Question 32

Adaptive expectations

Answer 32

Employers and employees realise that nothing has changed so demand for labour reverts to NRU

Question 33

Income inequality

Answer 33

When levels of income are unevenly distributed within an economy

Question 34

Wealth inequality

Answer 34

When levels of wealth are unevenly distributed within an economy

Question 35

Absolute poverty

Answer 35

Where household income is below a necessary level to maintain basic living standards ( food, shelter, housing ), income less than $2 a day in extreme poverty

Question 36

Relative poverty

Answer 36

Individuals whose incomes are less than 60% of median incomes

Question 37

Balance of Payments Current Account

Answer 37

Balance of trade in goods and services + Balance of primary income + Balance of secondary income ( Balance is always money in money out )

Question 38

Gini-Coefficient

Answer 38

Lies between 1 and 0, a higher number suggests more income inequality

Question 39

Central Bank

Answer 39

A national bank that provides financial and banking services for its country's government and commercial banking system, as well as implementing monetary policy and issuing currency

Question 40

Money supply

Answer 40

The total amount of money in circulation or in existence in a country

Question 41

Interest rate

Answer 41

Cost of borrowing money

Question 42

Base rate

Answer 42

The interest rate that the central bank charges commercial banks for loans ( determines all other rates of interest in the economy )

Question 43

Privatisation

Answer 43

Moving public sector organisations and functions to the private sector

Question 44

Infrastructure

Answer 44

The man-made environment of a country

Question 45

Functions of money

Answer 45

Medium of exchange Store of value Unit of account Standard of deferred payment

Question 46

Narrow Money (M0)

Answer 46

Physical currency in circulation issued by the BoE and reserves held by commercial banks at the central bank

Question 47

Broad Money (M4)

Answer 47

Narrow Money + all money held in accounts of banks and building societies

Question 48

Liquidity

Answer 48

The ease with which assets can be converted into cash ( M0 very liquid/ M4 less liquid )

Question 49

Fisher Equation

Answer 49

MV=PT or MV=PY M = Money Supply V = Velocity ( of money spent ) P = Price Level T = Number of transactions in the economy Y= Real GDP | T is hard to measure so substituted