cramp paper

Question 1

Structural employment?

Answer 1

Lower unemployment does not have to be accompanied by higher inflation the reduction in unemployment comes from reducing structural unemployment, so reducing the natural rate. Indeed reducing structural unemployment involves an increase in labour mobility which has a variety of beneficial impacts including not just reducing the natural rate, but boosting teh capacity of the economy and making control of inflation easier

Question 2

Frictional unemployment?

Answer 2

Lower unemployment does not have to be accompanied by higher inflation if it is achieved through a reduction of frictional unemployment, for example through improved provision of information which helps job seekers to find work and helps firms too fill vacancies.

Question 3

Trade unions eval?

Answer 3

Lower unemployment does not have to be accompanied by higher inflation if it is achieved by reducing classical unemployment, for example by removing minimum wages or union power. Lower wages help to control inflation and would lead to an extension of labour demand and lower unemployment although removing worker protections will probably not be seen as desirable.

Question 4

advanatehs of FDI

Answer 4

• FDI leads to creation of capital and boost to an economy’s productive potential. This can lead to higher output and higher living standards.
• FDI may boost exports through surplus output from the production facilities created.
• FDI creates jobs, incomes and multiplier effects as it is an injection into the circular flow.
• FDI can help bridge savings gaps, which otherwise would have prevented countries meeting their growth and development objectives (explained via the Harrod-Domar model)
• FDI may involve training local workers to boost their human capital.
• FDI may generate more tax revenue through income tax and corporation tax - the tax base is increased.
• FDI may encourage spending on infrastructure by the government and induce the growth in forward and backward linkages in the supply-chain.
• FDI by one major company may encourage other firms to locate there - “crowding in”

Question 5

disadvantages of FDI

Answer 5

• It may not be possible to attract FDI due to infrastructure and corruption problems, for example (the stem of the question says that some say that “investing in Africa is only for the brave” and “countries such as Liberia enjoy little FDI”).
• FDI may have be attracted by natural resources in a country, such as oil. FDI may then become a source of depletion of these resources (common according to the stem of the question)
• FDI may prevent an economy from diversifying if it is focused on areas in which the country already has a strong resource endowment and/or specialises in. This may leave the country over-specialised and dependent on one income stream.
  The firms that undertake FDI may parachute in their own staff rather than training local workers. This is important as training would be more helpful in meeting development objectives rather than just growing the economy.
  Furthermore, staff may simply send their wages home as remittances, reducing the impact on the economy of the host country.
• Profits may be repatriated, acting as a leakage from the circular flow.
• FDI can be environmentally damaging, especially if the MNC is attracted to the host country by relatively low environmental standards (eg in relation to emissions) than elsewhere.
• MNCs are often accused of exploiting workers with low wages and long hours. This may not be compatible with development objectives.

Question 6

Expectation and inflation eval/kaa cramp?

Answer 6

Raising the bank rate may help to lower inflation expectations leading to lower wage settlements and helping to control inflation

Question 7

Stagflation eval?

Answer 7

If inflation is supply side/cost push the economy may already be experiencing stagflation. Rising the interest rate may do more damage to the output of the economy but do little to control inflation if it is caused by international factors.

Question 8

Expectation eval two BANK of England?

Answer 8

Raising interest rates might be seen as necessary in the context of the high uk inflation to maintain the credibility of the bank of England and to avoid the costs of inflation.

Question 9

Explain one reason why it is difficulty in estimating the size of teh output gap?

Answer 9

It is difficult to measure the potential output of the economy
The potential output of the economy is influenced by a multicellular of factors that affect the quantity and quality of factors of production available

Question 10

Economic invactity meaning? And are they counted as employed?

Answer 10

Economic inactivity consist soft those who are not actively seeking work
Those who are economically inactive are not counted as unemployed so when inactivity rises unemployment falls

Question 11

Explain why income output and experinduture are identical two one another?

Answer 11

Income, output and expenditure relate to the circular flow of income, therefore income output and expidture measure the same flow at different points

Question 12

Explain one way in which regulation can be used to reduce the risk of banks failing?

Answer 12

Regulation to enforce greater liquidity can reduce risks of banks failing, when banks hold more liquidity they are less vulnerable to a run on the bank