more p2 stuff

Question 1

MPC EQUATION

Answer 1

1/1-MPC

Question 2

INCOME

Answer 2

Income is money received as payment for
work

Question 3

GFC demand side policies

Answer 3

Interest Rate Cuts:
The Bank of England (BoE) significantly reduced the base interest rate to lower borrowing costs and encourage spending and investment. The interest rate was cut from 5.0% in October 2008 to 0.5% by March 2009, a historically low level.

. Quantitative Easing (QE):
The BoE introduced a quantitative easing program to increase the money supply and encourage lending. The first round of QE started in March 2009, with the BoE purchasing government and corporate bonds. The initial QE program involved purchasing £200 billion worth of assets, and subsequent rounds increased this amount

• To increase household disposable income and encourage spending, the government implemented tax cuts and rebates. One notable measure was the temporary reduction of the Value Added Tax (VAT) from 17.5% to 15% between December 2008 and January 2010
• Bank Bailouts and Capital Injections:
  To stabilize the banking sector and restore confidence, the UK government provided substantial support to major banks. This included capital injections into banks such as Royal Bank of Scotland (RBS) and Lloyds Banking Group, as well as guarantees on bank liabilities

Question 4

how does quantitave easing work

Answer 4

• The BoE creates new electronic money, which it uses to purchase financial assets, such as government and corporate bonds
• The BoE buys large quantities of these assets from financial institution
• This increases the price of these assets and lowers their yield, reduces long-term interest rates
• The money paid to the bank increases their liquidity, encouraging them to lend more to businesses and consumers
• The increased lending and investment lead to higher spending by businesses and consumers, which helps to boost aggregate demand, support economic growth,

Question 5

explain the concept of hot money

Answer 5

• Higher interest rates in a country attract hot money inflows as investors seek better returns on deposits and investments.
• Increased demand for a country’s assets due to higher interest rates can lead to currency appreciation, making the country’s exports more expensive and imports cheaper.
• If interest rates are lowered or more attractive rates are available elsewhere, hot money can quickly flow out, causing currency depreciation
• investors borrow in low-interest-rate countries and invest in high-interest-rate countries

Question 6

ev point for bank baillouts

Answer 6

moral hazard - Bailouts may create expectations of government support in future crises, encouraging risky behavior by financial institutions.
- Reduced market discipline can lead to greater systemic risk and potential future crises

• Bailouts can be expensive, funded by taxpayer money or increased government borrowing
  - The fiscal burden can impact public finances and lead to higher public debt levels, with long-term economic consequences

Question 7

what is a bank baillout

Answer 7

when the government provides financial support to a struggling bank to prevent it from failing. This support can include direct funding, loans, or guarantees to help stabilize the bank and maintain confidence in the financial system.

Question 8

purchasing power

Answer 8

It represents the real value of money and reflects how much a currency can buy in terms of goods and services

Question 9

what are weights

Answer 9

weights are assigned in proportion to the amount of money spent on each item

Question 10

what are exports

Answer 10

goods or services produced domestically and sold to customers in other countries

Question 11

why are purchasing power parities used

Answer 11

• compared cost of living between countries
• improves accuracy when comparing between countries

Question 12

investment definition

Answer 12

• increase in the capital stock of the economy
• increase in spending on capital goods

Question 13

disadvantages of comparative advantage

Answer 13

Assumption of Constant Opportunity Costs

Comparative advantage assumes constant opportunity costs when determining the best use of resources.

In reality, opportunity costs may change with the scale of production or over time.

This means that the model might not always reflect the real-world situation where industries experience economies of scale or diminishing returns.

As a result, comparative advantage might lead to an inefficient allocation of resources if the cost structures are not as simplified as assumed.

Externalities

Comparative advantage doesn’t account for externalities, such as environmental damage or social costs.

A country might specialize in a product that generates pollution or depletes natural resources.

While it could be efficient in terms of production, the social and environmental costs are not considered.

This may undermine the long-term benefits of comparative advantage if negative externalities are not internalized.

Short-Term vs. Long-Term Gains

Comparative advantage can promote specialization and efficiency in the short term.

However, countries may become overly reliant on a limited number of industries, exposing them to risks from global shocks.

Long-term economic development may suffer as a result of lack of diversification or a failure to build new sectors.

This issue arises when comparative advantage encourages countries to focus on primary goods or low-value-added industries, hindering growth in more advanced sectors.

Income Inequality

Specializing in industries where a country has comparative advantage might increase income inequality.

Certain sectors (e.g., agriculture) may continue to be low-wage, while others (e.g., technology or services) might generate higher earnings.

As resources are reallocated to the comparative advantage industries, workers in less competitive sectors could face lower wages or job losses.

This exacerbates income inequality, especially in developing countries where certain regions or groups may miss out on the benefits of globalization.

Vulnerability to External Shocks

Comparative advantage encourages countries to specialize in the production of certain goods and services.

However, global economic volatility can lead to price fluctuations or disruptions in global supply chains.

If a country specializes in a few key areas, it can be vulnerable to these external shocks, leading to instability and economic downturns.

The risk is particularly high for developing countries whose comparative advantage lies in primary commodities or other volatile sectors.