Tutor profile: Tom B.
What are the disadvantages of a strengthening currency?
A strengthening currency makes a country’s exports appear more expensive in a foreign currency. This can reduce demand for exports and therefore reduce export revenue. This can reduce AD and consequently, lower economic growth and increase unemployment.
What is the difference between automatic stabilisers and discretionary fiscal policy?
Fiscal policy refers to changes in government spending and taxation designed to influence aggregate demand. This can be sub-divided into automatic stabilizers and discretionary policy. Automatic stabilizers are changes in government spending and tax that occur automatically as the economy moves through the economic cycle (AKA business cycle). When the economy is in recession government spending on unemployment benefits will automatically increase as more people are unemployed. This results in higher consumer spending (as incomes are boosted by unemployment benefits) and therefore prevents the recession as being as deep as it otherwise would have been. This helps to stabilise the economy. So automatic stabilizers are automatic because they happen 'automatically' as the economy moves through the business cycle. And they are stabilizers because they are countercyclical - they help stabilize the economy by 'pushing back' against the economic cycle. In contrast, discretionary fiscal policy refers to decisions taken by a government. This type of fiscal policy is not automatic. An example would be, an increase in government spending on infrastructure or a tax cut to boost AD during a recession.
How does the law of diminishing returns explain the shape of the marginal product and marginal cost curves?
Let's start with some definitions. The law of diminishing returns only applied in the short run. This means one factor of production, usually capital, is fixed. The law states that each additional variable factor will produce less output than the factor that preceded it. For example, if a restaurant hires a 2nd chef and she produces 5 pizzas per hours and they then hire a 3rd chef who only produced 4 pizzas per hour then this is diminishing returns. This occurs because chefs only have access to a fixed amount of capital - the 3rd chef is trying to use the same pizza ovens as the first 2 chefs so is less productive. Marginal product (MP) is the additional output produced by an additional worker. As the business hires more workers the law of diminishing returns states that each extra worker will produce less output than the previous worker hired. So MP declines as output rises. Marginal cost (MC) is the additional cost of producing one more unit. If MP is declining and we assume that each worker is paid the same hourly wage then MC will rise with output. This is because each additional worker is less productive and so is being paid the same amount to produce less output.
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