M07 - M07 P1 2. (a) Explain why a government might find it...

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M07 P1 2. (a) Explain why a government might find it difficult to maintain a low rate of inflation as the economy approaches full employment. [10] - definition of inflation and full employment - use of the Phillips Curve (PC) to illustrate the trade off between full employment and price stability (short-run and/or long-run). A relevant diagram referring to AD/AS is also acceptable -explanation of the PC relationship in terms of possible demand pull factors -explanation of the PC relationship in terms of possible cost push factors -explanation in terms of AD/AS analysis -explanation in terms of the natural rate of unemployment (b) Evaluate the proposition that the priority in economic management should be the maintenance of low unemployment. [15] - explanation of economic management in terms of fiscal and monetary policies - support of the proposition in terms of the costs of high unemployment, e.g. the economic, social, financial and personal costs - use of long run PC and the concept of the natural rate of unemployment to illustrate the possible inflationary implications - other possible policy conflicts, e.g. with the balance of payments and economic growth - the importance of the other goals of economic policy, i.e. low inflation, economic growth and a satisfactory balance of payments - significance of the use of supply-side policies 3. (a) Explain the various factors which may affect an exchange rate in a floating exchange rate system. - definition of exchange rate and floating exchange rate system - explanation in terms of the demand for, and supply of, a currency - an appropriate diagram - trade flows - inflation - speculation - use of foreign currency reserves - significance of purchasing power parity - capital flows/interest rate changes - changes in the level of national income (b) Evaluate a government decision to adopt a floating exchange rate as opposed to a fixed exchange rate system. - distinction between a floating and fixed exchange rate system - support of the decision in terms of the possible advantages of floating/disadvantages of fixed exchange rates, which may include – benefits of market forces setting exchange rates rather than governments – no need to keep substantial foreign exchange reserves – impact on domestic economic policies – automatic adjustment of the balance of payments – possibility of forward trading to hedge against currency movements – greater incidence of crises under fixed schemes - arguments against the decision in terms of the possible disadvantages of floating/advantages of fixed, which may include – exchange rate volatility and the impact on business and confidence – exchange rate volatility and the impact on inflation and unemployment – fixed exchange rates may represent a move towards monetary union with trading partners
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M07 P2 4. “Macroeconomic equilibrium does not necessarily occur at full employment.” Explain this statement using the concepts of inflationary and deflationary gaps. - definition of macro-equilibrium: when
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M07 - M07 P1 2. (a) Explain why a government might find it...

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