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Chapter 14 Flashcards

expenditure switching policy tutor2u

Devaluation was the last resort. The United States is the most significant nation in the world when it comes to international trade. If the economy is growing at above its capacity this is likely to cause inflation and balance of payments problems. Capital expenditures are often used to undertake new projects or investments by a company. The disadvantages of public spending Time lags There may be a considerable time-lag between spending and the benefits that arise.


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Fiscal Policy

expenditure switching policy tutor2u

The main reason for this overshoot was the rescue package for the banking sector, following the global. Lower wages A policy used by many Eurozone economies facing a large current account deficit but unable to devalue within single currency is to reduce wages. If policy-makers rely exclusively on gathering and using past statistics, they are unlikely to make very accurate predictions. Income tax may have an effect on people's incentives to work. Evaluation In the short run, trade barriers may help to reduce imports and help improve the current account.

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Government spending

expenditure switching policy tutor2u

Free market economists argue that higher government spending will tend to be wasted on inefficient spending projects. Lower wages will reduce costs of production and improve competitiveness. Higher inflation can reduce the countries competitiveness. Inflation is another method which can be use to correct the balance of payment disequilibrium by neither control excess demand within the economy to prevent demand pull or to control costs and prevent cost push inflation. I believe that this indicates a low domestic demand. Anyone can cure a current account deficit by having a recession or cure high inflation for that matter - see the last two recessions! They argue that the only way to influence economic performance in the long run is by improving the conditions of supply rather than trying to create economic growth by increasing demand. Finally, the aggregate output adjusts to the changes in aggregate demand.

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Trade problems and policies

expenditure switching policy tutor2u

A devaluation of the exchange rate Of course, in a world of floating exchange rates, a currency should automatically change in response to a current account surplus or deficit. This can improve the current account position, but it may take considerable time to have an effect. This case is depicted in Fig. Agriculture is also an industry which receives large government subsidies. Tariffs generally cause import prices to rise. Deflation is completely out of the question given the risk of recession and its political difficulties. Fiscal policy as a supply-side tool Supply-side policies are policies that aim to increase the capacity of the economy to produce.

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Policies to correct balance of payments disequilibrium by Pam and Kat

expenditure switching policy tutor2u

However, it is also possible for fiscal policy to act on the level of supply and government will often use fiscal policy as one of their key supply-side policy tools. In this situation, they will use their fiscal policy to give a boost to the economy. Singapore relays on purchasing raw goods and refining them for re-export. Both these measures would have the impact of reducing imports and therefore improve the current account. Borrowing, which can be short term or long term, involves selling government or bills. Expansionary fiscal policy may be either in the form of increase in government expenditure or cut in taxes.

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Balance of Payments

expenditure switching policy tutor2u

To conclude, in case of lower interest-responsiveness of demand for money expansionary fiscal policy is not very effective in bringing about a sufficient increase in real national income. The governments of the time tended to try all other policies to reduce the deficit. Government borrowing also rose because of the recession leading to lower tax revenue When the new coalition government came into power in May 2010, they argued the deficit was too high and then announced plans to reduce government borrowing. This will lead to a fall in import demand. When the government pursues an expansionary fiscal policy, it finances its deficit spending by borrowing funds from the nation's credit market.


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How does a Government Reduce a Current Account Deficit?

expenditure switching policy tutor2u

The second factor causing ineffectiveness of monetary policy occurs in the third step of transmission mechanism, namely, changes in aggregate spending or demand in response to changes in interest rate. During periods of economic slowdown, tax yields fall and welfare payments rise, pushing the economy towards a fiscal deficit. The main problem is that supply-side policy may take decades to work and is not a quick-fix. An example of this would be China. When searching on a term with more than one word it is worth checking the 'Match your phrase exactly? The same is true of the economy, although, when it is over-expanded, instead of bursting, we get other problems such as higher inflation and a larger balance of payments deficit. First, it makes your country attractive.

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Trade problems and policies

expenditure switching policy tutor2u

Indeed, the full benefits may never be measured and recorded because of information failure. Therefore, this will reduce their consumption of imports, improving the current account. Capital expenditures represent major investments of capital that a company makes to maintain or, more often, to expand its business and generate additional profits. In this case deflationary policy is called for. The import line is upward sloping, assuming a positive marginal propensity to import mpm this means that as income Y increases, imports M will increase.

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Policies to reduce a current account deficit

expenditure switching policy tutor2u

Where does the spending go? It totally depends on each government which they think would be the most beneficial for the country. The cross diagram - showing devaluation We can also use the cross diagram to illustrate the impact of devaluation. This situation also seems to have occurred in India in 2008-09 following the global financial crisis. Again managed flow will make the currency stable. So investment in the country will be more attractive.


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