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29 January – IB Economics
• Review• Inflation rates and exchange rates• Intro to Market Failure
Portfolio check on 27 February (Day 7)
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What is inflation?
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Inflation is a sustained increase in the general price level of an economy.
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Differences in inflation ratesIf…• The Euro inflation rate is 3% per year.• The British inflation rate is 1% per year.
What happens to the price of EU goods relative to British goods?What effects would this inflation differential have on the GBP/EUR exchange rate?
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Economics From a Global Perspective by Alan Glanville
“Inflation in a country will affect the exchange rate. As the price of goods and services rises imports become relatively cheaper and exports become relatively dearer [more expensive]. Thus the supply of the currency will rise and the demand for it will fall. Both of these forces will put downward pressure on the exchange rate (414-415).”
What would these shifts look like on a diagram? (Assume that before the inflation differential 1 EUR = 0.75 GBP.)
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In Macroeconomics – Section 2.3
• How inflation is measured• Problems with measuring inflation• Causes and consequences of inflation (e.g.
“damage to export competitiveness”)
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Syllabus Items 34 and 35• Analyse the concept of market failure as a failure of
the market to achieve allocative efficiency, resulting in an overallocation of resources (overprovision of a good) or an under-allocation of resources (under-provision of a good)
• Describe the concepts of marginal private benefits (MPB), marginal social benefits (MSB), marginal private costs (MPC) and marginal social costs (MSC)
• Describe the meaning of externalities as the failure of the market to achieve a social optimum where MSB = MSC
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What do these terms stand for?What do they mean?
How do they correspond to supply and demand?
• (MPB)• (MSB)• (MPC) • (MSC)
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Negative Externalities of Production - 1
• What are examples of negative externalities of production (NEP)?
• How can NEP be shown on a diagram?
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Negative Externalities of Production - 2
• How can a NEP be remedied? What are the advantages and disadvantages to each remedy?
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Syllabus
http://ibeconomics-isd.weebly.com/