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Questions and Answers of Economics

Imagine that you had to determine whether a particular period of inflation was demand-pull, or cost-push, or a combination of the two. What information would you require in order to conduct your
Explain how the current account of the balance of payments is likely to vary with the course of the business cycle.
The overall balance of payments must always balance. If this is the case, why might a deficit on one part of the balance of payments is seen as a problem?
List some factors that could cause an increase in the credit items of the balance of payments and a decrease in the debit items. What would be the effect on the exchange rate (assuming that it is
What policy measures could the government adopt to prevent the exchange rate movements in question 11?
In what way will the nature of aggregate supply influence the effect of a change in aggregate demand on prices and real national income?
Criticize the classical theory that higher government spending will necessarily crowd out private spending.
Criticise the use of increasing government expenditure as a means of reducing unemployment.
In what way may short-term demand-management policies help to stabilise the economy? What problems occur in the use of such policies?
What explanations can you give for the increase in both unemployment and inflation in the 1970s?
What is meant by hysteresis when applied to unemployment? How do you account for this phenomenon in the 1980s?
What will cause people to expect higher rates of inflation? How will expectations of inflation affect the actual rate of inflation?
What is the relationship between the mpc, the mpcdand the mpw?
Why will the short-run consumption function be different from the long-run consumption function?
What factors could explain why some countries have a higher multiplier than others?
How can the interaction of the multiplier and the accelerator explain cyclical fluctuations in national income?
Why is it difficult to predict the size of the accelerator?
What is meant by the terms narrow money and broad money? Does broad money fulfill all the functions of money?
How does money aid the specialization and division of labor?
What enables banks safely to engage in both maturity transformation and risk transformation?
Why do banks hold a range of assets of varying degrees of liquidity and profitability?
What enables banks safely to engage in both maturity transformation and risk transformation? Discuss.
What were the causes of the credit crunch and the banking crisis of 2008?
If the government reduces the size of its public-sector net cash requirement, why might the money supply nevertheless increase more rapidly?
Why might the relationship between the demand for money and the rate of interest be an unstable one?
What effects will the following have on the equilibrium rate of interest? (You should consider which way the demand and/or supply curves of money shift.)(a) Banks find that they have a higher
Controlling the money supply is sometimes advocated as an appropriate policy for controlling inflation. What implications do different assumptions about the relationships between M and V, and M and
Why may an expansion of the money supply have a relatively small effect on national income? Why may any effect be hard to predict?
Why does the exchange rate transmission mechanism strengthen the interest rate transmission mechanism?
Explain how the holding of a range of assets in people’s portfolios may help to create a more direct link between changes in money supply and changes in aggregate demand.
Explain how financial crowding out can reduce the effectiveness of fiscal policy. What determines the magnitude of crowding out?
What determines the shape of the IS and LM curves?
Under what circumstances will (a) A rise in investment and (b) A rise in money supply cause a large rise in national income?
Using ISLM analysis, explain what would cause the aggregate demand curve to be steep.
What would cause (a) a steep ADI curve; (b) a gently sloping ADI curve? Compare the short-run and longrun effects of (i) a temporary adverse supply shock and (ii) a permanent supply reduction under
Under what circumstances would a rightward shift in the ADI curve lead to a permanent increase in real national income?
What are the problems of relying on automatic fiscal stabilisers to ensure a stable economy at full employment?
Does it matter if a country has a large national debt as a proportion of its national income?
If the government is running a budget deficit, does this mean that national income will increase?
What factors determine the effectiveness of discretionary fiscal policy?
Why is it difficult to use fiscal policy to ‘fine tune’ the economy?
Is it possible for the government to target the money supply over the longer term without targeting the PSNCR?
What are the mechanics whereby the central bank raises the rate of interest?
What is Good hart’s law? How is it relevant to(a) Monetary policy;(b) Using assignment grades to assess a student’s ability;(c) Paying workers according to the amount of output they produce;(d)
It is easier to control the monetary base than broader money, but it is less relevant to do so.’ Do you agree with this statement?
Is there a compromise between purely discretionary policy and adhering to strict targets?
Compare the relative merits of targeting (a) The money supply; (b) The exchange rate; (c) The rate of inflation.
For what reasons might the long-run aggregate supply curve be (a) Vertical; (b) Upward sloping; (c) Downward sloping?
How would you attempt to assess whether a particular period of inflation was the result of cost-push or demand-pull pressures?
What is the difference between adaptive expectations and rational expectations?
How can adaptive expectations of inflation result in clockwise Phillips loops? Why would these loops not be completely regular?
What implications would a vertical short-run aggregate supply curve have for the effects of demand management policy?
For what reasons may the NAIRU increase?
Given the Keynesian explanation for the persistence of high levels of unemployment after the recessions of the early 1980s and early 1990s, what policies would you advocate to reduce unemployment in
For what reasons do countries experience very different long-run rates of economic growth from each other?
Why do developed countries experience a degree of convergence over time? Would you expect there to be total convergence of GDP per head?
If increased investment (using current technology) does not lead to increased long-run economic growth, does it bring any benefits?
What determines the rate of depreciation? What would happen if the rate of depreciation fell?
What is meant by the ‘steady-state economic growth path’? What determines its slope?
What is the significance of the term ‘endogenous’ in endogenous growth theory? What, according to this theory, determines the long-run rate of economic growth?
Under what circumstances would a higher rate of investment lead to a higher rate of economic growth?
What determines the rate of growth in total factor productivity?
Define demand-side and supply-side policies. Sometimes it is said that Keynesians advocate demand-side policies and monetarists advocate supply-side policies. Is there any accuracy in this statement?
What is the relationship between ‘successful’supply-sidepolicies and unemployment in (i) the short run and (ii) the long run, according to (a) Keynesian and(b) Monetarist assumption?
Why might market-orientated supply-side policies have undesirable side-effects on aggregate demand?
What type of tax cuts is likely to create the greatest (a) incentives, (b) disincentives to effort?
Is deindustrialization necessarily undesirable?
In what ways can interventionist industrial policy work with the market, rather than against it? What are the arguments for and against such policy?
Compare the relative merits of pro-market and interventionist solutions to regional decline.
What are the arguments for and against relying entirely on discretionary regional and urban policy?
If capital moves from developed to less developed countries, and labor moves from less developed to developed countries, what effects will these factor movements have on wage rates and the return on
What factors determine a country’s terms of trade?
Go through each of the arguments for restricting trade (both those of general validity and those having some validity for specific countries) and provide a counterargument for not restricting trade.
If countries are so keen to reduce the barriers to trade, why do many countries frequently attempt to erect barriers?
What factors will determine whether a country’s joining a customs union will lead to trade creation or trade diversion?
Why is it difficult to estimate the magnitude of the benefits of completing the internal market of the EU?
Look through the costs and benefits that we identified from the completion of the internal market. Do the same costs and benefits arise from the enlarged EU of 27 members?
Compare the relative effectiveness of fiscal and monetary policy under (a) fixed; (b) free-floating exchange rates. How is the effectiveness influenced by the elasticity of supply of international
What will be the effects on the domestic economy under free-floating exchange rates if there is a rapid expansion in world economic activity? What will determine the size of these effects?
For what reasons might the exchange rate diverge from the purchasing-power parity rate over the longer term?
Why does exchange rate overshooting occur? What determines its magnitude?
Consider the argument that in the modern world of large-scale, short-term international capital movements, the ability of individual countries to affect their exchange rate is very limited.
If speculators had better information about future exchange rates, would their actions be more or less stabilizing than at present?
Under what circumstances does a growth in financial flows make exchange rates less stable?
Assume that countries in the Eurozone decide to pursue a deflationary fiscal policy. What effect is this likely to have on the UK economy?
It is often argued that international convergence of economic indicators is a desirable objective. Does this mean that countries should all seek to achieve the same rate of economic growth, monetary
Did the exchange rate difficulties experienced by countries under the ERM strengthen or weaken the arguments for progressing to a single European currency?
Assume that just some of the members of a common market like the EU adopt full economic and monetary union, including a common currency. What are the advantages and disadvantages to those members
Is the Eurozone an optimal currency area? Explain your answer.
How are asymmetric shocks dealt with within a country? To what extent can this process be mirrored within the Eurozone?
Would the world benefit from the general imposition of controls on the movement of international finance?
Compare the relative merits of using GNY statistics with those of various basic needs indicators when assessing both the level and the rate of a country’s economic development.
If a developing country has a comparative advantage in primary products, should the government allow market forces to dictate the pattern of trade?
What are the advantages and disadvantages for a developing country of pursuing a policy of ISI?
Should all developing countries aim over the long term to become exporters of manufactured products?
How would you attempt to assess whether the technology used by an industry in a developing country was ‘inappropriate’?
What policies could be adopted to reduce urban unemployment in developing countries?
To what extent was the debt crisis of the early 1980s caused by inappropriate policies that had been pursued by the debtor countries?
What are the advantages and disadvantages of debt swapping as a means of reducing the debts of developing countries?
If unit labor costs in Spain and Portugal rise, but unit labor costs in Germany decline and other producer prices remain unchanged, what effect should these factors, by themselves, have on export

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