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

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    (Original post by FullyGrown)
    COMMENT ON THE EXTENT TO WHICH THE INTERNATIONAL COMPETITIVENESS OF THE PIIGS CAN BE TACKLED BY MONETARY POLICY (10 Marks)

    Anyone have any ideas on how to go about answering this type of question ?

    I've got ideas about adding :

    -For and Against Monetary Policy
    -Inter and Intra Trade (anyone got any info on these two i heard a brief description about them but cant find them in the textbook)
    -Expansionary and Unorthodx Monetary Policy...

    Any help appreciated,

    Thanks
    Oooh thats a strange one.

    If anyone's paying attention to this thread, here's my answer.
    I know this is waaaay too long, but heh.
    Rip it apart please, I could do with some constructive criticism on my points and exam technique.

    Comment on the extent to which the international competitiveness of the PIIGS economies can be tackled by monetary policy (10)

    Spoiler:
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    The lack of competitiveness of the PIIGS economies may be largely due to high inflationary pressure and rising relative unit labour costs, in which case, monetary policy could be effective in restoring the international price competitiveness of PIIGS economies.
    An increased base interest rate - and, by extension, the expectation of higher interest rates – would help to control currently high inflation in the PIIGS economies. Lower inflation, relative to that of the economies’ trading partners, would cause the price of exports from these economies to fall, somewhat restoring the international competitiveness of the PIIGS. Moreover, lower inflation may cause a fall in relative unit labour costs. This would reduce the PIIGS output prices; further lowering the price of their exports in international markets, and increasing the PIIGS firm’s ability to compete against imports in the domestic markets.
    However, there are significant problems with this. Firstly, as the PIIGS economies are part of the Euro single currency, they do not have the freedom to control monetary policy within their economies. The European Central Bank sets interest rates in order to control inflation across the Euro, meaning that conflictions in what is best for the PIIGS economies and the rest of the Euro zone economies would prevent this from happening.
    Furthermore, a higher interest rate would cause a fall in consumption in the PIIGS economies, and would discourage investment. As these are both significant components of aggregate demand, such a rise in interest rates would reduce or dispel economic growth, and could cause the PIIGS to experience a double dip recession; or in the case of Ireland and Portugal – prolong their current recession. None of the PIIGS economies have the fiscal freedom to increase government spending in order to offset such a fall in short run growth, thus such a rise in interest rates at the present time could be terminal for their economies.
    Alternatively, the PIIGS could choose to leave the Euro single currency and to use their own, new currencies. This would tackle the problem of an overvalued exchange rate and allow their currencies to depreciate. Also, this would give them the freedom to use monetary policy to tackle rising inflation and high relative unit labour costs.
    Such a move would be extremely expensive to the PIIGS economies, and considering their vast budget deficits, may be out of the question. Moreover, such a move could cause economic instability and a loss of confidence in the economies, which potentially would jeopardise the economic recovery of the PIIGS.

    Finally, the use of monetary policy would only be effective in tackling international competitiveness if high inflation is a major contributor to their lack of competitiveness. Rising relative unit labour costs indicates that wages are rising faster than productivity – This could mean that it is due to the lack of essential supply side reforms in PIIGS economies. Portugal, Italy, Ireland, Greece and Spain are somewhat characterized by their over generous welfare systems and large state sectors. In this case, In order to fully tackle the problem, the PIIGS will need to undergo crucial reforms such as tax and benefit reform, trade union reform and privatisation in order to restore efficiency in their economies and to see real decreases in relative unit labour costs.
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    (Original post by Boobies.)
    Oooh thats a strange one.

    If anyone's paying attention to this thread, here's my answer.
    I know this is waaaay too long, but heh.
    Rip it apart please, I could do with some constructive criticism on my points and exam technique.

    Comment on the extent to which the international competitiveness of the PIIGS economies can be tackled by monetary policy (10)

    Spoiler:
    Show
    The lack of competitiveness of the PIIGS economies may be largely due to high inflationary pressure and rising relative unit labour costs, in which case, monetary policy could be effective in restoring the international price competitiveness of PIIGS economies.
    An increased base interest rate - and, by extension, the expectation of higher interest rates – would help to control currently high inflation in the PIIGS economies. Lower inflation, relative to that of the economies’ trading partners, would cause the price of exports from these economies to fall, somewhat restoring the international competitiveness of the PIIGS. Moreover, lower inflation may cause a fall in relative unit labour costs. This would reduce the PIIGS output prices; further lowering the price of their exports in international markets, and increasing the PIIGS firm’s ability to compete against imports in the domestic markets.
    However, there are significant problems with this. Firstly, as the PIIGS economies are part of the Euro single currency, they do not have the freedom to control monetary policy within their economies. The European Central Bank sets interest rates in order to control inflation across the Euro, meaning that conflictions in what is best for the PIIGS economies and the rest of the Euro zone economies would prevent this from happening.
    Furthermore, a higher interest rate would cause a fall in consumption in the PIIGS economies, and would discourage investment. As these are both significant components of aggregate demand, such a rise in interest rates would reduce or dispel economic growth, and could cause the PIIGS to experience a double dip recession; or in the case of Ireland and Portugal – prolong their current recession. None of the PIIGS economies have the fiscal freedom to increase government spending in order to offset such a fall in short run growth, thus such a rise in interest rates at the present time could be terminal for their economies.
    Alternatively, the PIIGS could choose to leave the Euro single currency and to use their own, new currencies. This would tackle the problem of an overvalued exchange rate and allow their currencies to depreciate. Also, this would give them the freedom to use monetary policy to tackle rising inflation and high relative unit labour costs.
    Such a move would be extremely expensive to the PIIGS economies, and considering their vast budget deficits, may be out of the question. Moreover, such a move could cause economic instability and a loss of confidence in the economies, which potentially would jeopardise the economic recovery of the PIIGS.

    Finally, the use of monetary policy would only be effective in tackling international competitiveness if high inflation is a major contributor to their lack of competitiveness. Rising relative unit labour costs indicates that wages are rising faster than productivity – This could mean that it is due to the lack of essential supply side reforms in PIIGS economies. Portugal, Italy, Ireland, Greece and Spain are somewhat characterized by their over generous welfare systems and large state sectors. In this case, In order to fully tackle the problem, the PIIGS will need to undergo crucial reforms such as tax and benefit reform, trade union reform and privatisation in order to restore efficiency in their economies and to see real decreases in relative unit labour costs.
    Yeah I think that's a really good answer - I think this sort of question is likely to come up.

    I need 72/100 for an A and 94 for an A* in econ so I'm revising like mad (and retaking both AS units).

    There are some areas of the syllabus which are hardly mentioned in the stimulus materials such as the pros/cons of a fixed exchange rate. I also noticed that there was a 10 marker on this last year - does anyone think its safe to leave this out of revision?

    One more thing: does anyone have access to the Feb 2011 F585 paper? I can't find it anywhere so I only have two past papers to go on :/
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    (Original post by Wasnerello)
    Yeah I think that's a really good answer - I think this sort of question is likely to come up.

    I need 72/100 for an A and 94 for an A* in econ so I'm revising like mad (and retaking both AS units).

    There are some areas of the syllabus which are hardly mentioned in the stimulus materials such as the pros/cons of a fixed exchange rate. I also noticed that there was a 10 marker on this last year - does anyone think its safe to leave this out of revision?

    One more thing: does anyone have access to the Feb 2011 F585 paper? I can't find it anywhere so I only have two past papers to go on :/
    Bit pointless doing past papers isn't it? Considering that every paper will relate different bits of the spec. Better to just do questions from toolkit
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    (Original post by loki276)
    Bit pointless doing past papers isn't it? Considering that every paper will relate different bits of the spec. Better to just do questions from toolkit
    True, but they have to cover the whole syllabus over a certain period of time so by looking at past papers I can make an educated guess as to what will come up, especially for the 20 marker. I'll still revise everything just in case but I can revise topics that are likely to come up more thoroughly.
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    Are the suggested questions on the tutor2u toolkit very likely to come up? Does anyone think i should just learn plans for those so i can adapt the knowledge if the question is similar on the exam??
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    Heyyy
    Does anybodyyy mind sendin me d toolkit
    Strugglin =(
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    (Original post by Wasnerello)
    Yeah I think that's a really good answer - I think this sort of question is likely to come up.

    I need 72/100 for an A and 94 for an A* in econ so I'm revising like mad (and retaking both AS units).

    There are some areas of the syllabus which are hardly mentioned in the stimulus materials such as the pros/cons of a fixed exchange rate. I also noticed that there was a 10 marker on this last year - does anyone think its safe to leave this out of revision?

    One more thing: does anyone have access to the Feb 2011 F585 paper? I can't find it anywhere so I only have two past papers to go on :/
    Haha, I need the same UMS as you, but I've barely done any revision. :sad:
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    l reckon the 20 marker will be on the last extract, if you see past papers the last 20 marker is on the last extract which shows a trend. i will probably on free trade and may be globalisation. Any ideas of essay topics on the last extract. Also are there any theories you could include in the stimulus material.
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    On a comment do you:

    • Define key words
    • provide the cons - Analyse
    • provide the benefits - Analyse
    • evaluate
    Also do relative unit labour costs increase due to inflation, because i was thinking surely if there is inflation, workers will put pressure on employers to increase their wage. this increase in wage would casue an income effect and lead to lower productivity.
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    (Original post by ajayhp)
    On a comment do you:

    • Define key words
    • provide the cons - Analyse
    • provide the benefits - Analyse
    • evaluate
    Also do relative unit labour costs increase due to inflation, because i was thinking surely if there is inflation, workers will put pressure on employers to increase their wage. this increase in wage would casue an income effect and lead to lower productivity.
    Yes wage price spiral, from last year?
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    (Original post by ajayhp)
    l reckon the 20 marker will be on the last extract, if you see past papers the last 20 marker is on the last extract which shows a trend. i will probably on free trade and may be globalisation. Any ideas of essay topics on the last extract. Also are there any theories you could include in the stimulus material.
    evaluate the benefits of trade liberalisation
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    (Original post by loki276)
    Yes wage price spiral, from last year?
    The reason why Germany is doing so well and is achieving growth is because of the supply-side reforms it made which increase the productive capacity of the economy. this increase in the productive capacity of the economy reduce cost-push inflation which was caused by emerging markets. This reduced unit labour costs and product output prices. However, the ECB has increased the interest rate which will really damage Germany's growth, as it may possibly reduce AD. however the ECB is know for it credibility on inflation targeting so the rise in interest rates will possibly reduce demand-pull inflation. it will damage the growth of PIIGS due to lower C and I and lower foreign investment in the PIIGS due to the growth prospectus and uncertainty that they may default on their debts
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    (Original post by ajayhp)
    The reason why Germany is doing so well and is achieving growth is because of the supply-side reforms it made which increase the productive capacity of the economy. this increase in the productive capacity of the economy reduce cost-push inflation which was caused by emerging markets. This reduced unit labour costs and product output prices. However, the ECB has increased the interest rate which will really damage Germany's growth, as it may possibly reduce AD. however the ECB is know for it credibility on inflation targeting so the rise in interest rates will possibly reduce demand-pull inflation. it will damage the growth of PIIGS due to lower C and I and lower foreign investment in the PIIGS due to the growth prospectus and uncertainty that they may default on their debts
    No the reason Germany is doing so well is because it has kept inflation in check kept wages constant and increased productivity. ECB increasing interest rates is good for core nations but not peripeheral
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    sorry private supply-side reforms

    http://www.voxeu.org/index.php?q=node/463

    (Original post by loki276)
    No the reason Germany is doing so well is because it has kept inflation in check kept wages constant and increased productivity. ECB increasing interest rates is good for core nations but not peripeheral
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    I think the Euro was a bad idea.

    • Loss of monetary policy
    • loss of fiscal policy due to SGP
    • more exposed to external shocks
    • Wage differentials - remittances Spain vs Portugal
    • Single currency
    • not an ODA
    • lack of convergence
    • The need for fiscal transfers which can be alot
    • Trade diversion


    Benefits:
    • greater price transparency
    • reduces uncertainty
    • Support of fiscal transfers
    • Highly integrated so the transfers of of fofp are more smooth
    • Trade creation
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    (Original post by ajayhp)
    sorry private supply-side reforms

    http://www.voxeu.org/index.php?q=node/463
    This article is from August 2007 our case study focuses on 2008 onwards mainly. Obliviously what happened before that is still important and I guess you can argue that the benefits of the suppy side policies (which are acquired in the long run) are now showing however not just this has helped Germany but also keeping wages low after the recession etc.
    And an increase in the interest rate is rather benefical for Germany due to the inflation in Germany eventhough this may reduce AD (which it's suppose to) it will not really harm the economy.
    You could say that the ECB incresed the interest rate as this would be best for the core and the core provides the biggest share of GDP for the eurozone.
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    (Original post by FaithChild)
    This article is from August 2007 our case study focuses on 2008 onwards mainly. Obliviously what happened before that is still important and I guess you can argue that the benefits of the suppy side policies (which are acquired in the long run) are now showing however not just this has helped Germany but also keeping wages low after the recession etc.
    And an increase in the interest rate is rather benefical for Germany due to the inflation in Germany eventhough this may reduce AD (which it's suppose to) it will not really harm the economy.
    You could say that the ECB incresed the interest rate as this would be best for the core and the core provides the biggest share of GDP for the eurozone.
    totally agree with you, the PIIGS should of uses supply-side policies
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    Maybe I'm being dense and missing something really obvious but I can't see the answer to this.

    "Explain how, in normal circumstances, inflation results in a reduction in th exchange rate".

    Anybody?
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    (Original post by Doughnuts!!)
    Maybe I'm being dense and missing something really obvious but I can't see the answer to this.

    "Explain how, in normal circumstances, inflation results in a reduction in th exchange rate".

    Anybody?
    High inflation will reduce the international competitiveness of domestic firms due to higher prices, therefore demand for their exports (and hence currency) will fall, leading to a depreciation of the exchange rate.

    I really want an A* for this and this exam looks like a killah tbh...plus revising is sooo boring lol
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    (Original post by therealOG)
    High inflation will reduce the international competitiveness of domestic firms due to higher prices, therefore demand for their exports (and hence currency) will fall, leading to a depreciation of the exchange rate.

    I really want an A* for this and this exam looks like a killah tbh...plus revising is sooo boring lol
    yeh revisng for economics is very boring, i dunna why, where as science and maths are more interesting you learn new thing more
 
 
 

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