Notesale: Turn your study into money

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Exchange Rate Systems:


Discuss the benefits of adop2ng a floa2ng exchange rate system (15)
KAA1:
Floa2ng exchange rate creates balance of payments stability
Imbalances the balance of payments can lead to automa2c changes in the
exchange rates
...
A currency
devalua2on will only lead to an improvement of the balance of payments if the
sum of demand elas2city for imports and exports is greater than one
...

KAA2:
• The government can also use interest rates to cause a devalua2on of the dollar
• Lowering interest rates will cause decrease demand for USD and cause a
withdrawal of hot money
• Causes the dollar to weaken and see a deprecia2on
• Cousin goods to get cheaper and increase in exports
• Can also lead to an increase in FDI as it becomes cheaper to invest
EV2:
• If the currency continues to fall this can become an indication that an
economy has serious problems as can discourage investment within the
market
• Moreover this will also cause an increase in inflation as imports become
more expensive and the Net exports will also increase resining inflation
further
...
(15)
KAA1:
• TNC o`en offshore and outsource work in less developed na2ons as it has
cheaper produc2on costs
• This has led to more foreign countries receiving investment from larger TNCs
and helping to hire their labour to increase employment in countries
• Also allows tncs to have access to lower labour costs which make their goods
cheaper and more accessible to people around the world
EV1:
however, reduc2on in trade barriers - trade liberalisa2on
Linked to the work of the WTO in promo2ng trade between countries

Easier for countries to trade goods at cheaper rates
Led to an increase of globalisa2on
KAA2:
TNC’s also moved abroad due to the lower regula2ons around health, safety and
environmental in LEDC’s
Less red tape to get around and allows produc2on costs to decrease if they do
not need to spend extra money on eg cleaning factories or servicing machinery
EV2:
The opening up of economies to the world market is more the reason for
globalisa2on
Eeg china former communist state now the worlds largest exporter

To what extent do the costs of globalisa2on outweigh the benefits? (15)
KAA1:
• Globalisa2on has led to structural unemployment in many countries due to
specialisa2on and compara2ve advantage
• In order to gain economies of scale many countries closed down industries such as coal mines etc
• Le` many workers unemployed as jobs with their skill set were shut down and
moved to other countries
• This can create a large unemployment in a country leading to a decline in
par2cipa2on rates the longer they stay out of work
• Decreases the PPF of countries
• Creates less economic growth
EV1:
• Globalisa2on has allowed more free movement of labour
• Trading blocs such as common markets allow people to move to other
countries more easily to gain access to work with their abili2es
• People can access a wider range of jobs around the world that may pay more
• KAA2:

Globalisa2on has led to an increase in emissions from shipping and produc2on
in large scale of goods to be transported around the world
• Created many nega2ve effects for the environment
• Moreover most of the mass produc2on etc as been due to the monopoly
power of MNC which control most areas of the market

• Squeeze out smaller domes2c businesses and can lead to a decline in a c
countries economic growth as people are more likely to import cheaper goods
from abroad made in bulk by MNC
EV2:
• This has created more economies of scale which allows for consumers in
countries to buy more products and have larger purchasing power which
creates more economic growth as people are spending more
• Globalisa2on has also led to increased FDI in less developed na2ons such as
outsourcing and offshoring factories by MNCs which has led to an increase in
employment in countries as their labour o`en gets hired to produce the goods
Assess the effect of globalisa2on on inequality in the world economy
...

EV1:
• Impor2ng goods will become more expensive
• Consumers will have less purchasing power abroad and not be able to afford as
many goods as they will have to pay increased prices due to tariffs
• Producer who import materials for produc2on will see an increase in
produc2on costs as goods from abroad get more expensive
...

EV2:
• Increasing protec2onism would decrease the likelihood of specialisa2on and
countries would not be able to reap the benefits of increased economies of
scale
• Going against the compara2ve advantage theory which suggests net welfare
gain from free trade and no tariffs - crea2ng a net welfare loss
Patterns of Trade

Assess the economic effects of the growth of trading blocs on the
global economy
...
1 billion whereas
the USA recorded a trade in goods deficit of $737 billion and the UK a deficit of
£99
...
Assess the possible causes of such differences in trade
balances
...
(15)
KAA1:
Countries with surplus
Gov can take measures to s2mulate domes2c consump2on
Reduc2on in taxes such as VAT on domes2c products
Incen2ves to save can be reduced such as lowering interest rates and
encouraging consump2on
EV1:
KAA2:
EV2:

International Competitiveness

The UK fell from 9th to 12th place in The Global Compe22veness Index
between 2007 and 2008
...
(15)
KAA1:
Apprecia2on of currency
Leads to imports becoming cheaper and exports becoming more expensive
Demand for exports decreases
Ad shi`s in
EV1:
Compe22veness may not fall following a rise in exchange rate if exporters cut
profit margins in order to keep the price of goods down for foreign buyers
KAA2:
Decline in produc2vity rela2ve to other countries
As shi`s inwards
Prices rise not as adrac2ve to foreign consumers anymore
Demand for Bri2sh exports shi`s in
EV2:

Can be short term loose of produc2vity in firms beder train workers/buy new
machinery to speed up produc2on process
Good could invest more in educa2on to have more highly trained workers
Evaluate strategies which may be used by businesses and governments
to improve the compe22veness of a country’s goods and services
...
Assess the factors which might explain this trend in the public finances of a
country of your choice
...
5 in 2009 to 20% likely to have
increased revenue for the gov to manage the deficit in the long run
Evaluate the case for cuong public expenditure rather than raising taxes as a
means of reducing fiscal deficits
...
This creates three marginal tax rates of
20%, 40% and 50%, instead of two
...
(15)
KAA1:
Progressive tax with new 50% may discourage individuals from working
Larger propor2on of their earnings goes to the government
Laffer curver shows that a rise in tax does not necessarily lead to an increase in
tax rev
Laffer curve tax rev and tax rate
If tax rate set too high it will lead to a reduc2on in rev

Can also lead to people legally tax avoiding through taking income in the form of
share op2ons or working fewer hours
EV1:
However in reality not many people are disincen2vized to work at 50%
KAA2:
Can lead to people becoming tax exiles and moving to places like Switzerland etc
or moving their money out of the country and storing it elsewhere
Reduc2on in uk economic growth
Can decrease the labour force shi` as inwards
EV2:
Number of people affected by the tax rate would be very few and mostly limited
to certain types of sectors in the economy such as financial services who already
bring in a lot of revenue through corpora2on tax etc
To what extent is monetary policy the most effec2ve way of s2mula2ng
economic growth? Refer to at least one example of a developed economy in your
answer
...
1% in 2020 and lidle scope to reduce them
further
Interest rate policy has 2me lags and effect won’t be seen on economic growth
in the short run
KAA2:
QE - banks buy good bonds from banks to inject more cash into the economy
Increases the liquidity of banks and increases lending from banks to companies
and households
Li` incomes and consump2on in the economy
EV2:
May be more beneficial to use fiscal policy - cuong corpora2on and income tax
giving firms and consumers more income to spend in the economy more direct

and quick effect and does not have to rely on banks being willing to spend the
extra cash reserves by giving investments
Assess macroeconomic policies which might be used to respond to rising
commodity prices during a period of slow economic growth
...
Income than just
benefits
Discuss the possible reasons for a rise in size of the UK’s fiscal deficit (15)
KAA1:
Lower tax revenue due to
EV1:
Laffer curve
KAA2:
Increasing gov spending
EV2:
Increasing spending for things such as subsidies
Increase profit
Can lead to higher coopera2on tax
Balances out
2019 paper
With reference to Extract C, discuss the potential conflicts between macroeconomic
objectives when the central bank attempts to control inflation
...
1% in 2021
Low confidence in the market so growth increased slowly and inflation did not rise above
target even through low interest rates
KAA2:
The lowered IR to bring inflation to target will lead to an outflow of hot money and a
depreciation
More competitive exports and more expensive imports

This will in turn more the Uk trade deficit towards a surplus
But increase production to make more exports as more demanded
More transportation
Increase in emissions
Conflict between trade balance and environmental
EV2:
Maybe the environment isn’t actually going to be hurt
Extra profits being made by firms being spent on environmentally friendly processes and
production line said transport
Discuss whether providing substantial government financial support to the banks is
the best policy response during a financial crisis
...
(8)
KAA1:
• Fall in confidence due to the recession consumers were unwilling to spend large
amounts of money and were more likely to save meaning the MPC fell
• Firms were unwilling to invest as they thought they wouldn’t see significant returns
• Leads to a fall in investment
• Lead to an inward shift in AD and thus price falls
• Inflation decreases
KAA2:
• Fall in exports
• Global recession people were less willing to buy EU exports
• Reduce injections into the economy as well as a fall in x-m
• Inward shift in AD
• Worsened the effects of the fall in domestic consumption and investment
• Led to lower inflation
EV:
• Less likely to be as significant as consumption and investment falling as they make up
larger proportions of AD
• Also likely imports fell so the impact on net trade may have balanced out
• Depreciation of the EU value would have also helped competitiveness and thus may
have helped to increase exports

Since mid - 2015 the euro has appreciated
...
(10)
KAA1:
• Appreciation will cause imports to get cheaper and exports to get more expensive
worsening the current account
• EU countries will become less internationally competitive as their relative export prices
are higher
• Higher export prices lower demand and therefore worsen the current account as more
money will be leaving the EU due to low import prices than coming in
EV1:
• However this may be unlikely if the Marshall Lerner condition is applied
• States that the net price elasticity of exports and imports much be elastic in order for any
change to occur to the current account
...

KAA2:
Discuss the likely success of the ECB’s quantitative easing programme in moving
Eurozone inflation closer to the central banks ceiling of 2%
...
(15)
KAA1:
• Fiscal Policy - reduced corporation tax
• This will lower production costs for firms causing AS to shift outwards
• This will be beneficial as lower prices for consumers so increased consumption
• Extra revenue for firms to invest in better products
• Will also become more attractive to foreign buyers and increase exports as the goods get
cheaper
• AD shifts outwards causing economic growth
...




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