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Paper 2 revision session Saturday 20th AHMEDMultiplier = 1/1-MPC OR 1/MPW
- MPW = MPT (taken through tax) + MPS (save) +MPM (import)
- So, MPC+MPW = 1
- If MPC is getting bigger, the MPW is falling
Pros and cons of joining a monetary union – 15 marker
Define = free trade within, common external tariff, free movement of labour and capital,
share common currency
Analysis 1 = Trade creation. Firms will not be worried about unfavourable exchange rate
movements effecting profit margins. Therefore confidence increases so investment in the
economy may rise.
Analysis 2 = Likely to result in higher levels of FDI, why?
- Firms will want to take adv of free trade
- Avoid the common external tariff as trade with others in the union
- FDI will increase investment. Investment is a comp of AD, also an injection into the
CFI so there will be pos mult effect – this is the amount of times the rise in national
income exceeds the initial injection = double shift – DRAW and explain
Eval 1 = Loss of monetary independence.
- As only one central bank which sets a base (interest) rate, however one size doesn’t
fit all as e.g. Germany booming, Greek economy was in recession. Therefore
Germany will be operating at or near full capacity, therefore need high interest rate
to lower inflation. However Greece will need a low interest rate to shift AD out from
consumption as they need to stimulate growth.
Eval 2 = Countries become too interdependent on each other. For example if Greece
mismanages economy, impacts all members in the union as others have to bail them out. (if
25 give EG France and Germany gave over 100million to bail out Greece)
- Further external shocks can spread more rapidly as free movement of labour
(COVID19)
, Evaluate effect of the growth of trading blocs such as the TFTA on global trading patterns –
25 marks June 2019 (don’t choose)
Analysis 1 = growth of trading blocs e.g. the EU may result in trade diversion. This is were
trade is diverted from more efficient members outside bloc to inside. Why? As by joining =
free trade within and tariff for those outside = goods from abroad are more expensive. So
trade pattern changes as change from outside to inside trade
Eval 1 = even with tariff pattern of trade may not occur as countries outside may have huge
comparative adv so goods will be cheaper and higher quality than inside
Analysis 2 = massive volume of trade within the bloc as trade creating = higher trade when
bloc grows. This is as barriers to trade decreases and common currency increases confidence
of trading (contracts)
Eval 2 = depends on number of countries within the bloc, therefore trade patterns won’t be
changed hugely if it grows
Exchange rates questions: always do through S and D perspective
High inflation = less internationally P competitive = decrease in demand for goods = decrease
in demand for currency = demand shift inwards = depreciation
OR: Higher inflation = higher demand for imports as foreign goods are cheaper = increase
supply of pound = supply shift out = depreciation
How CB can intervene: They can either shift D or S OUTWARD
- Devalue: To do so supply has to shift outwards = sell currency in foreign exchange
market and buy FR.
- Revalue: Need to shift D outwards = buy their own currency in foreign exchange
market and sell FR.
- Can increase or decrease interest rates as Hot money
Two factors which may have cause depreciation of Ghana’s currency – 10 marker
Analysis 1 = Increase in public sector salaries = higher demand for imports = sell more
currency and buy other currencies = demand shift outwards.
Analysis 2 = rapid inflation = less p comp = decrease D for their goods = less demand for
currency = demand shift inwards
Eval = if neighbours have higher inflation relative to them = wont change demand for their
goods – still p comp
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