Question spotting for F585 Economics The Global Economy OCR A level June 2011

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Reply 180

Iram0105

alsoooo anyone know the relevance of figure 2.2
and how do each of these three figures relate?

(edited 12 years ago)

Reply 181

arsenal111

Original post by Tariq_3458

Learn about trade liberalisation which is going to be the big 20 mark question ( most likely)
PIIGS lack of competitveness and loose monetary policy.
Is is possible for me to get the toolkit of you ?

yeah you may do - pm me your email address and I'll send it over

Reply 182

frabbar

Is revising from the turor2u toolkit enough on it's own? I'm not really sure how I'm supposed to use the toolkit? Should I be focusing on revising from the Colin bamford textbook or just learning the points in the toolkit, as the toolkit seems very vague to me and not very useful for the 20mark question.

Reply 183

mqt

Original post by nini27

Hello

Can someone help me answering that question please :smile:

Comment on the extent to which a fixed exchange rate rather than a floatinf exchange rate is a stimulus to inflows of foreign direct investment.
I know that a fixed exchange rate would reduce the cost of trade and will increase the productivity of firms so they can match the improvements of foreign cometitors so that would attract FDI.
But I thought a fixed exchange rate wouldn't atrtact investment as much as a floating one as it does not reflect the economy's performance (because isn't their perfomance reflected though their exchange rate when it's floating) so foreign countries would be more reluctant to buy their goods, and if the country has a balance of payments problem it wouldn't be corrected automatically if it's fixed. Also, an economy operating at fixed exchange rate wouldn't be effective in controlling inflation through monetary policy..?
Help, please? :smile:

By the way...did you ever find this out?..cause i tried this question too..and likewise, i got the same stuff as you...didn't really know what else to say too!....

Reply 184

ASDFGHJKLQWERTYUIO

Original post by Iram0105

alsoooo anyone know the relevance of figure 2.2
and how do each of these three figures relate?

I think, the link between the three figure graphs shows that an increase in unit labour costs, showin in figure 2.3, causes an increase in output prices, showin in figure 2.2. This is because firms pass on the extra cost in the form of higher prices to the consumer, the extent of which may depend on elasticity. The higher output prices cause GDP growth rates to decrease, as shown in figure 2.1 because AD will fall as consumers may look to substitutes, maybe from otther countries, and so AS will also fall because firms won't produce as much to meet AD :smile:

Reply 185

frabbar

Original post by ASDFGHJKLQWERTYUIO

Quality answer, Do you think learning about the benefits of freely floating exchange rates pointless for this exam?

Reply 186

In terms of an optimal currency area and one aspect of it being fiscal transfers, am I correct in saying that fiscal transfers is another term for bail-outs?

Reply 187

frabbar

Seems like bail out to me, Well it's says thus in tutor2u kit "When member nations are willing and able to make fiscal transfers between each other, for example to help stabilise demand and provide financial support during difficult times"

Reply 188

ASDFGHJKLQWERTYUIO

Original post by frabbar

Quality answer, Do you think learning about the benefits of freely floating exchange rates pointless for this exam?

Ermmmmm i think just know about the benefits of freely floating and fixed so if they say which one is better then you are ready to talk about them? They might be a 6 marker maybe? So just be familiar with it!

Reply 189

nini27

Original post by mqt

By the way...did you ever find this out?..cause i tried this question too..and likewise, i got the same stuff as you...didn't really know what else to say too!....

Hi, I gave it a go, but I wasn't really confident on this one though, I mainly talked about confidence, sustainability, and fluctuations of economic cycles. I asked my teacher whether she could mark it, it's not amazing but i could send it to you if you want :smile:

Reply 190

frabbar

Original post by ASDFGHJKLQWERTYUIO

Ok I'll do that then, one more thing is it safe to ignore the development and sustainability chapter for this exam?

Reply 191

mqt

Original post by nini27

Yes please! they would be so helpful :smile:

\

ps. if you ever need any help in return! i'm happy to do so :biggrin:

Reply 192

ASDFGHJKLQWERTYUIO

Original post by frabbar

Ok I'll do that then, one more thing is it safe to ignore the development and sustainability chapter for this exam?

Yes i think so! its not mentioned at all in the material tbh!

Reply 193

ajayhp

Original post by mqt

Yes please! they would be so helpful :smile:

\

ps. if you ever need any help in return! i'm happy to do so :biggrin:

I am stuck on a q, i need ur wonderful help

So, here it goes

Figure 1.1 shows that real gdp for Ireland and Slovenia has fallen by more than 10% from peak to trough, Analyse how a fall in real GDP will affect inflationary pressures in theses countries

AS will shift to the leftt may cause cost-push inflation depends if AD is close to capacity

AD will decrease so demand pull-inflation will not happen

Am i confusing real gdp with long term. Should i be relating to the short-term

Reply 194

viksta1000

Original post by ajayhp

AS will shift to the leftt may cause cost-push inflation depends if AD is close to capacity

AD will decrease so demand pull-inflation will not happen

Am i confusing real gdp with long term. Should i be relating to the short-term

not really, but the context seems to be more short term than long term

fall in real GDP = reduction in AD which will relax demand pull inflation

then you can go on to say, due to the lack in demand, firms will look to reduce costs...higher unemployment = less consumption = less AD further reducing inflationary pressure

At the same time, labour/output costs are increasing in these countries, so cost push inflation is also occuring...this could be due to factors other than high AD...e.g. high oil prices. Therefore, a fall in GDP would have little effect in reducing these cost-push inflationary pressures as they are due to external economic factors

HOWEVER...I believe examiners like this word :wink:

in an attempt to reduce costs, firms will reduce their capital goods/human resources, this will reduce AS and LRAS which will induce further inflationary pressure

Furthermore

The impact of falling GDP on inflation depends entirely on where the economy is curently operating, if the economy is operating with spare capacity and a negative output gap, then its likely that inflationary pressure is not even occuring, so a fall in GDP will have little affect on inflation, simply because, there isn't any inflationary pressure

At the same time, fellow EU countries were also experiencing GDP contraction, therefore their imports would decrease, Irelnds and Slovenias exports would decrease, AD would fall further reducing inflationary pressure

hope this helps

(edited 12 years ago)

Reply 195

ajayhp

Original post by viksta1000

k, ty also u said high unemployment, which should reduce the quantity of the labourforce = reduction AS may cause cost-push

Reply 196

dothe_DANCE

I was just wondering if anyone could help me answer this question:

Discuss the extent to which a “two speed” Euro area will affect the viability of the monetary union. (20 marks)
I don't think I really understand the idea of two speed Euro area in general or how it could not effect the viability of the monertary union?

Reply 197

viksta1000

Original post by ajayhp

k, ty also u said high unemployment, which should reduce the quantity of the labourforce = reduction AS may cause cost-push

indeed...I said that under the however bit

I think the key to these sort of questions are just asking yourself...'then what'...'then what'

and eventually you'll find tonnes more impacts of inflation of GDP

for example, higher unemployment means automatic stabilisers kick into gear

more benefits = higher government spending = increased AD which will infact create demand pull inflation

on the other hand, if the multiplier is small, this increase in government spending would have little effect

in the 2008-2009 period, ECB increased interest rates...this would spark investment (FDI), this would increase AD causing demand pull inflation

on the other hand, the economic instability in the area could drive investment out of the EU which would reduce AD and relax inflation

etc etc

I've just noticed its only a 6 marker...so it probs wants 2 impacts and explanations and then an opposing argument :biggrin:

Reply 198

viksta1000

Original post by dothe_DANCE

two speed euro is to do with the fact that european union members have a lack of convergence in their economic activity...for example, Germany, Austria and Netherland saw an explosive boom period whereas the 'PIIGS' were racking up debts the size of their GDP

A monetary union is the strongest form of economic integration, it involves reducing/eliminating trade barriers, allowing labour and capital mobility, sharing a currency and having a single monetary policy...as controlled by the ECB

So what are the reasons for a monetary union?

•

Increased inter regional trade

•

cheaper interegional trade

•

increased competition - can also be a negative

•

more 'choice'

•

single currency reduces risk and cost

but what about the againsts?

•

monetary policy is eliminated as controlled by the ECB

•

have to agree to tariffs for importing from countries outside the trade bloc

•

menu costs of switching

•

can cause monopolies as some countries may see trade booms whilst other countries experience trade loss to their counterparts

OK so what about the two speed euro?

•

well it means that the economies of EU member are at different stages of the economic cycle

•

some experience booms whilst others experience recessions

•

this leaves the ECB in a dilemma as to what to do with the monetary policy

Ok so now we get onto the analysis:

•

the ECB can increase interest rates to reduce inflation in the 'booming economies' but this would reduce AD in the slow economies further hindering their economic recoveries

•

the lack of convergence due to the 'two speed euro' means that ECB decisions may benefit some economies whilst being a hinderence on others...would perhaps contradict with the ECB objective of price stability

•

being part of a monetary union means member countries are respobsible for fiscal transfers - i.e. paying for the debts of other member countries through their own tax revenue - will the booming economies like this? I think not

•

Member countries now can only use fiscal policy to change economic policies (tax, spending, investment)...but the Stability and Growth Pact limits the extent to which countries can borrow and create debt (so a booming economy such as germany is limited to borrow only 3% of its GDP)

OK so now we've analysed the 'bad' bits, what about the pros to the monetary union and the two speed euro

•

perhaps a two speed euro is good for the overall Euro economy...is it better to have a few booming economies and a few bust economies rather than have all of the economies to be in boom then all of the economies to be in a recession?

•

having a two speed euro means that the economies that are not performing can be supported by the booming economies

•

being part of the monetary union promotes tariff free trading and labour/capital mobility

•

price transparency makes it easier for firms and consumers to import goods at the 'right price'

•

trade creation and diversion means that economies can benefit from importing good that their own economies cannot produce

•

economies of scale means that economies can trade with larger markets, reducing prices increasing demand

so to conclude, sure the two speed euro has some consequences to the monetary union of the EU, however the benefits that economies part of the european union receive perhaps outweigh the negatives

quote a shoddy 20 marker I must say...perhaps sway it more to the impacts of the monetary union in general rather than from a two speed euro perspective

Reply 199

dothe_DANCE

Original post by viksta1000

•

Increased inter regional trade

•

cheaper interegional trade

•

increased competition - can also be a negative

•

more 'choice'

•

single currency reduces risk and cost

but what about the againsts?

•

monetary policy is eliminated as controlled by the ECB

•

have to agree to tariffs for importing from countries outside the trade bloc

•

menu costs of switching

•

can cause monopolies as some countries may see trade booms whilst other countries experience trade loss to their counterparts

OK so what about the two speed euro?

•

well it means that the economies of EU member are at different stages of the economic cycle

•

some experience booms whilst others experience recessions

•

this leaves the ECB in a dilemma as to what to do with the monetary policy

Ok so now we get onto the analysis:

•

the ECB can increase interest rates to reduce inflation in the 'booming economies' but this would reduce AD in the slow economies further hindering their economic recoveries