M06 - M 06 P1 2 a) Explain the difference between...

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M06 P1 2 a) Explain the difference between demand-side and supply-side economic policies. [10] • explanation of demand-side policies in terms of monetary and fiscal policy • explanation of supply-side policies in terms of particular policies, e.g. tax cuts, welfare cuts, privatisation, deregulation and an outward shift of the LRAS curve • use of AD/AS diagram to illustrate the difference Reward references to the Keynesian/Monetarist debate. b) “Higher economic growth can only be achieved through the implementation of supply-side policies.” Discuss. [15] Answers may include: • definition of economic growth • importance of AD • illustration of economic growth in terms of an outward shift of the PPC/LRAS curve • explanation of linkages between supply side policies and growth • Reward references to the Keynesian Monetarist debate • interdependence of supply/demand side policies • distinction between actual and potential growth • demand side policies and the multiplier effect 3. a) Explain why an improvement in a country’s terms of trade does not always lead to an improvement in its balance of payments on current account. [10] • definition of terms of trade • definition of current account • explanation of improvement in terms of trade • importance of PED • impact of higher export prices/lower import prices on the current account b) An economy is currently experiencing a deficit on the current account of its balance of payments. The government is considering either allowing the exchange rate to fall or reducing AD. Evaluate the relative advantages and disadvantages of these two policies. [15] Exchange rate fall answers may include: • explanation of how the exchange rate can fall (depreciation/devaluation) • impact on other goals of economic policy, i.e. inflation, unemployment and economic growth • reference to expenditure switching policies • importance of PED/Marshall Lerner • importance of J curve effect • possibility of competitive depreciations • exports cheaper/imports more expensive , increase in demand for exports fall in demand for imports Reducing aggregate demand answers may include: • reference to expenditure – reducing policies • problems of time lags
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• use of fiscal and monetary policy to reduce demand • linkage between less AD and the current account • impact of higher interest rates, higher taxation and less government spending on growth, employment and inflation • problem of discriminatory nature of higher taxes and interest rates Reward the use of AD/AS diagrams M06 P2 4. Using AD/AS diagrams, analyse the likely impact on an economy of the following: a) a general rise in wage costs - a general rise in wage costs will shift the SRAS to the left; illustration of the effect and analysis (some answers may point out that an increase in wages could also result in an upward shift of the AD curve) b) the discovery of new raw material resources - the discovery of new raw material sources will shift the LRAS to the right; illustration of the effect
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This note was uploaded on 02/12/2010 for the course ECON 201 taught by Professor Smith during the Spring '10 term at Whittier.

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M06 - M 06 P1 2 a) Explain the difference between...

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