Podcast
Questions and Answers
What is one way to stimulate exports in a country with a deficit in balance of payments?
What is one way to stimulate exports in a country with a deficit in balance of payments?
- By reducing government expenditure
- By imposing higher duties on imports
- By granting bounties to industrialists and exporters (correct)
- By granting subsidies to importers
Which method is used to restrict imports in a country with a deficit in balance of payments?
Which method is used to restrict imports in a country with a deficit in balance of payments?
- Quota system (correct)
- Reducing disposable income
- Devaluation of currency
- Increased government expenditure
What is the purpose of devaluation in correcting an adverse balance of payments?
What is the purpose of devaluation in correcting an adverse balance of payments?
- To increase government revenue
- To increase the price of exports
- To make imports cheaper
- To cheapen exports and make imports dearer (correct)
What is the result of deflation in a country with a deficit in balance of payments?
What is the result of deflation in a country with a deficit in balance of payments?
What is a risk of deflation in correcting an adverse balance of payments?
What is a risk of deflation in correcting an adverse balance of payments?
What is the objective of restricting imports in a country with a deficit in balance of payments?
What is the objective of restricting imports in a country with a deficit in balance of payments?
What is an exchange rate adjustment referred to as?
What is an exchange rate adjustment referred to as?
Which of the following is NOT a method to correct an adverse balance of payments?
Which of the following is NOT a method to correct an adverse balance of payments?
What can lead to disequilibrium in the balance of payments?
What can lead to disequilibrium in the balance of payments?
What happens when imports remain unaffected or increase, and exports do not equalize?
What happens when imports remain unaffected or increase, and exports do not equalize?
Why is it necessary to correct a deficit balance in perpetuity?
Why is it necessary to correct a deficit balance in perpetuity?
What was the mechanism of adjustment under the gold standard?
What was the mechanism of adjustment under the gold standard?
What can stimulate exports and discourage imports?
What can stimulate exports and discourage imports?
What can result from an inflow or outflow of gold?
What can result from an inflow or outflow of gold?
What can lead to a rise or fall in domestic costs and prices?
What can lead to a rise or fall in domestic costs and prices?
What can correct a deficit balance in perpetuity?
What can correct a deficit balance in perpetuity?
What does the permanent income hypothesis suggest that consumers will attempt to do?
What does the permanent income hypothesis suggest that consumers will attempt to do?
Which theory suggests that spending is dependent on current income, future expected income, and wealth?
Which theory suggests that spending is dependent on current income, future expected income, and wealth?
What is the acceleration principle concerned with?
What is the acceleration principle concerned with?
What is the result of the acceleration principle on the economy?
What is the result of the acceleration principle on the economy?
Why do companies invest in more factories and capital investments during a boom?
Why do companies invest in more factories and capital investments during a boom?
What happens to investment during a recession according to the acceleration principle?
What happens to investment during a recession according to the acceleration principle?
What is the result of reduced investment during a recession?
What is the result of reduced investment during a recession?
Flashcards are hidden until you start studying
Study Notes
Methods to Correct a Deficit in Balance of Payments
- To correct a deficit, a country must stimulate exports or discourage imports, or do both.
- Exports can be encouraged by:
- Lowering costs in the country
- Granting bounties or concessions to industrialists and exporters
- Imports can be restricted by:
- Adopting a quota system
- Imposing duties
- Reducing people's disposable income or government expenditure
- Total prohibitions
Deflation
- Deflation is used to correct an unfavorable balance of payments
- The currency authority reduces the quantity of money in circulation to lower prices
- This makes the country a good market to buy from and a bad market to sell in, encouraging exports and reducing imports
Devaluation
- Devaluation is a remedy used in extreme crises to correct an adverse balance of payments
- It involves lowering the exchange rate to cheapen exports and make imports dearer
- This raises exports and lowers imports
Other Theories of Consumption
Permanent Income Hypothesis
- Consumers' consumption is determined by current and future expected income
- They attempt to smooth consumption over their lifetime
Life Cycle Hypothesis
- Consumers' spending is dependent on current income, future expected income, and wealth
- They attempt to smooth consumption over their lifecycle
Acceleration Principle
- An increase in demand for consumer goods leads to a greater increase in demand for machines and investment necessary to make those goods
- This principle exaggerates booms and recessions in the economy
- Companies invest in more factories and capital investments during booms, and reduce investment during recessions, leading to job losses and prolonging the recession
Disequilibrium in Balance of Payments
- Disequilibrium arises when exports fall short of imports due to various reasons such as decreased production, stiffer competition, or appreciation in the currency
- Deficit in balance of invisible items can also lead to disequilibrium in the balance of payments
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
