Paper 2 Flashcards
1
Q
Advantages of a Floating Exchange Rate
A
- Monetary Sovereignty - Interest rates are set on the needs of the economy (e.g. to manage inflation or unemployment) rather than to stabilise exchange rate
- Automatic adjustment to current account balance - Large deficit on current account would see overflow of pounds, leading to exchange rate falling
- No need for government to hold stocks of foreign currency
2
Q
Disadvantages of a Floating Exchange Rate
A
- Uncertainty for businesses - Hard to plan ahead as don’t know future exchange rates
- Over-valued/under-valued currency - Exchange rate may remain high or low due to speculators deciding to either buy or sell the currency. Over-valued currency makes it hard for exporters, under-valued currency causes cost-push inflation
3
Q
Advantages of a Fixed Exchange Rate
A
- Easier trading for businesses - So likely for expansion of trade between fixed exchange rate countries
- Stability - Encourages investment
- Monetary discipline - Keeping interest rates same as economy the currency is fixed to gives monetary policy added credibility
4
Q
Disadvantages of a Fixed Exchange Rate
A
- Loss of monetary sovereignty
- Large reserves of foreign currency needed
- Lack of adjustment to current account imbalances
5
Q
Arguments in favour of Currency Union
A
- Greater certainty for businesses that trade with members of currency union
- No costs involved in converting currencies between members
- No worries about exchange rate being under or over valued against other members
- Greater price transparency for consumers
6
Q
Arguments against Currency Union
A
- Monetary policy has to be set for Currency Union as a whole, individual countries lose right to set their own monetary policy
- Businesses may be unable to compete with lower-cost producers that are members of the union
- Fiscal policy needs to be used more widely to correct for imbalances across the currency union
- Currencies may have to ‘bail out’ other members that run into problems financially (e.g. Greece)
7
Q
Benefits of Economic Growth
A
- Higher living standards
- Easier to find employment
- Improved social indicators (e.g. less crime)
- Increased tax revenue
- Less need for welfare expenditure
- Lower absolute poverty
8
Q
Costs of Economic Growth
A
- Increased negative externalities (e.g. pollution, traffic etc.)
- Could lead to greater inequality
- Higher inflation
- Depletion of natural resources
9
Q
Consequences of Inflation
A
- Uncompetitive exports
- Menu costs (e.g changing labels)
- Shoe leather costs (e.g. cost of going to bank)
- Fiscal drag (being dragged into higher tax brackets)
- Uncertainty
- Policy response (policies to deal with inflation have policy conflicts)
- Purchasing Power loss
10
Q
Consequences of Deflation
A
- Delays in consumption
- Rising real value of debt
- Wage rigidity
11
Q
Problems in Measuring Inflation
A
- Quality of goods change
- Not all goods included
- Short term inflation (tax, interest rates)
- Basket of goods outdated
- Effects of inflation vary
12
Q
Costs of Unemployment
A
- Inefficient use of resources
- Loss of tax revenue
- Workers lose skills if inactive for long time
- Lower incomes
- Other externalities, (e.g. increased crime)
13
Q
Measures used for HDI
A
- Real National Income per Capita
- Health of population (life expectancy at birth)
- Education (mean years of schooling)
14
Q
Argument for Aid
A
- Countries may be unable to trade
- Aid is necessary in emergencies, as trade is too long-term
- Aid can be better if not in the form of money, and instead through training, which is better long-run
15
Q
Argument for Trade
A
- Countries can benefit from specialisation, so will be better in the long-run
- Problem with trade is that if country is corrupt, then aid will not make it to the people, and so won’t help
- Countries can gain a trading partner
- Even if country is not corrupt, aid may not be spent properly (e.g. spent on roads and airport)
