Question & Answer

Will there be any cost to the UK economy from a decline in the demand for exports resulting from a world recession?

If this is the case, need firms worry about losing competitiveness in world markets if domestic inflation is higher than world inflation?

To what extent do Keynesians and new classicists agree about the role of fixed exchange rates?

Why will excessive international liquidity lead to international inflation?

When the UK joined the ERM in 1990, it was hoped that this would make speculation pointless. As it turned out, speculation forced the UK to leave the ERM in 1992. Can you reconcile this with the argument that fixed rates discourage speculation?

Trace through the short-run and long-run internal and external effects (under a fixed exchange rate) of (a) a fall in domestic saving; (b) a rise in the demand for exports.

How would raising interest rates in this way affect the balance between the current and financial accounts of the balance of payments?

Under what circumstances would (a) contractionary and (b) expansionary policies cause no conflict between internal and external objectives?

Describe the open-market operations necessary to sterilise the monetary effects of a balance of payments surplus. Would this in turn have any effect on the current or financial accounts of the balance of payments?

What adverse internal effects may follow from

(a) a depreciation of the exchange rate;

(b) an appreciation of the exchange rate?

By looking at the nominal and real exchange rate changes in Table 25.1 can we identify periods during which the UK’s terms of trade rose?

1. Assume that there is both internal and narrow external balance. Now assume that as a result of inflation being below target, the central bank cuts interest rates. Into which of the four quadrants in Figure 25.2 will the economy move?

2. Imagine that there is an inflationary gap, but a balance of payments equilibrium. Describe what will happen if the government raises interest rates in order to close the inflationary gap. Assume first that there is a fixed exchange rate and then that there is a floating exchange rate.

What particular sectors might a distributional analysis of the impact of trade consider?

Can we incorporate trade effects into endogenous growth models?

If there have been clear benefits from the single market programme, why do individual member governments still try to erect barriers, such as new technical standards

Why may the newer members of the Union have possibly the most to gain from the single market, but also the most to lose?

Is trade diversion more likely or less likely in the following cases?

(a)  European producers gain monopoly power in world trade.

(b)  Modern developments in technology and communications reduce the differences in production costs associated with different locations.

(c)  The development of the internal market produces substantial economies of scale in many industries.

Has the problem of adverse regional multiplier effects been made better or worse by the adoption of a single European currency? (This issue is explored in section 26.3.) (Clue: without a single currency, how would the devaluation of the drachma (the former Greek currency) have affected a depressed Greek economy?)

Would the adoption of improved working conditions necessarily lead to higher labour costs per unit of output?

What would be the economic effects of

(a) different rates of VAT,

(b) different rates of personal income tax and

(c) different rates of company taxation between member states if in all other respects there were no barriers to trade or factor movements?

How would you set about assessing whether or not a country had made a net dynamic gain by joining a customs union? What sort of evidence would you look for?

Under which of the following circumstances is there likely to be a net gain from trade diversion (refer to Figure 24.14):

(a) a small difference between the EU price and the Russian pre-tariff price, and a large difference between the EU price and the Russian price with the tariff, or vice versa;

(b) Elastic or inelastic Polish demand and supply curves;

(c) The Polish demand and supply curves close together or far apart?

Could US action to protect its steel industry from foreign competition be justified in terms of the interests of the USA as a whole (as opposed to the steel industry in particular)?

What determines the size of this world multiplier effect?

1. What would be the ‘first-best’ solution to the problem of an infant industry not being able to compete with imports?

2. Protection to allow the exploitation of monopoly/monopsony power can be seen as a ‘first-best’ policy for the country concerned. Similarly, the use of tariffs to counteract externalities directly involved in the trade process (e.g. the environmental costs of an oil tanker disaster) could be seen to be a first-best policy. Explain why.