Chapter 2 Theories of Balance of Payment
Exercises
1.Single-choice questions
cbb
2.True/False questions
TTF
3.Essay questions
(1)
a.elasticity approach:
If Marshall-Lerner condition is met in China, which means the sum of the elasticity of export supply and import demand must exceed unity, we can use the elasticity approach to deal with the BOP disequilibrium.If price is fixed, the appreciation of RMB can cause a reduced export and an increased import, in this way, the balance of current account can be improved.And the appreciation of RMB
b.absorption approach:
In the case of underemployment, the appreciation of RMB can enhance the import, and Y decreases, although there is a decrease in absorption, the decrease amount of Y is larger than A, thus B is decreased.
In the case of full employment, the Y is fixed, we can only expand our expenditure to increase A, then we can have a smaller B.
China is in the case of underemployment, we can combine these two methods to improve the balance of payment.
(2)
a.The price effect—exports become cheaper measured in foreign currency.Imports become more expensive measured in the home currency.
b.The volume effect—the fact that exports become cheaper should encourage an increased volume of exports, and the fact that imports become more expensive should lead to a decreased volume of imports.
(3)
The central message of the elasticity approach is that there are two direct effects of a devaluation on the current balance: one of which works to reduce a deficit whilst the other actually contributes to making the deficit worse than before.
(4)
There have been numerous reasons.Three of the most important are:
A time lag in consumer response
A time lag in producer response
Imperfect competition
(5)
Its fundamental basis is that the balance of payments is essentially a monetary phenomenon.Not only is the balance of payments a measurement of monetary flows, but such flows can only be explained by disequilibrium in the stock, demand for and supply of money.
(6)
a.A stable money demand function
b.A vertical aggregate schedule
c.Purchasing power parity (PPP)