A2 Economics - F585 June 2013

Original post by will2348

This is what I thought too. Because in the boom times in this country, all the banks had really low interest rates because they were so competitive to the point of almost being unprofitable. That's why we have free current accounts and they rip you off with pointless insurance policies or when you use your overdraft.

Maybe both could be correct? But if interest rates are high, then yes more people will save, but why would anyone borrow to invest? High interest rates are used to slow down economic growth (

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Confidence can often outweigh interest rates, and also investment plans by big firms are often made a long way in advance so no matter what the interest rate is, a lot of firms will still invest, despite high interest rates.

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Original post by Spicey

Fixed ER - Adv.
- More certainty --> Increase in investment
- Higher incentive for domestic firms to be competitive --> Low prices, more efficiency and low inflation

Fixed ER - Disadv.
- Expensive to maintain (may have to use up reserves)
- If there is a BOP deficit it will continue to get worse if the fixed ER is high

Floating ER - Adv.
- Able to use interest rates to reduce unemployment etc. as they are not required to keep the ER fixed
- If a country is running a deficit this may be remedied as downward pressure is put on the ER

Floating ER - Disadv.
- Fluctuations in ER could lead to less exports and imports --> Therefore less trade overall
- More speculation --> Speculative attack is therefore more likely

Hope this helps.

Speculative attack is not more likely in a floating system, speculative attack happens when speculators see a currency to be over or under valued and therefore try get it to it's equilibrium price. A floating exchange rate is determined by forces of demand and supply and therefore is likely to reflect it's true value.

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Original post by Student8

if there was a question on advantages of a single market - you would talk about trade creation, trade diversion, gains from trade but would you mention single currency ?

no, unless the question asks about single currency

Reply 386

Cameron24

How would you answer this question: Comment on the factors that led to Estonia's quick recovery from the recession

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Original post by Student8

what would the depends on factors be?

-depends on the current state of the euro (euro crisis n all) should join when the euro is in a better position

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Original post by Cameron24

How would you answer this question: Comment on the factors that led to Estonia's quick recovery from the recession

Due to fiscal austerity during the recession, Estonian wages managed to be cut by nearly 10%, and they managed to keep their government debt incredibly low.

Their wage cuts made them more productive, therefore gave them an advantage of exporting to their rich Scandinavian neighbours after the recession.

Their low government debt also meant that FDI was still coming into Estonia instead of the capital flight that happened in economies such as Greece at the same time.

Reply 389

Original post by Robb_D

Can anyone please explain to me the advantages and disadvantages of a fixed exchange rate and a floating exchange rate? Thank you!

Ads for fixed
- reduces the need for hedging cost(insurance against volatile exchange rates)
- no exchange rate fluctuations - increased certainty, firms would find it easier budgeting/planning for the future - may increase investment
-may force firms to be more efficient as their inefficiency cant be covered by a devaluation of the exchange rate

Disads for fixed
- may be prone to speculative attack
-cant use monetary policy to influence AD

Ads for floating
- reduces need to hold foreign currency reserves
-less opportunity for speculative attack
-freedom of monetary policy

disads of floating
- increases hedging cost
-less likely to attract trade and investment

hope this helped :smile:

Reply 390

Original post by kellis94

Hey,

Just reading through the tutor2u pack and found a few questions I'm unsure of:

'What are the problems associated with a volatile exchange rate?'
'Examine the case for Latvia joining the single currency in 2014'

Can anybody help me?!

what are the problems associated with a volatile exchange rate

- basicallly list all the disadvantages of a floating exchange rate like increased hedging costs(insurance against volatile rates) etc

examine the case for latvia joining the single currency in 2014
-Advantages and disadvantages of the single currency (they are in the tutor2u pack)

Reply 391

Original post by fletchdd02

Due to fiscal austerity during the recession, Estonian wages managed to be cut by nearly 10%, and they managed to keep their government debt incredibly low.

Their wage cuts made them more productive, therefore gave them an advantage of exporting to their rich Scandinavian neighbours after the recession.

Their low government debt also meant that FDI was still coming into Estonia instead of the capital flight that happened in economies such as Greece at the same time.

wage cuts didn't make workers more productive, it just meant that there were lower labour cost for producers which reduced unit labour cost and increased their international price competitiveness (increased exports) :smile:

Reply 392

How would you guys answer this question

Discuss the extent to which Estonia has progressed towards sustainable development (20)

Reply 393

Original post by mrsmeagol

wage cuts didn't make workers more productive, it just meant that there were lower labour cost for producers which reduced unit labour cost and increased their international price competitiveness (increased exports) :smile:

It can do because productivity is the measure of output for every unit of input, and if there are lower wages then there's less input, and the same output, hence more productive.

Reply 394

bluestar333

what do people think the 4 markers will be on?
Trying to learn definitions now and trying to guess what they will be

Reply 395