Cambridge International as and a level Economics Ebook

Idle balances: 
the amount of money held temporarily as 
the returns from holding financial assets are too low.
KEY TERM
257
Chapter 9: The macroeconomy 

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TOP TIP
The concept of the liquidity trap can be brought into an 
assessment of the eff ectiveness of monetary policy. This 
is because when the rate of interest is very low, it may 
no longer be worthwhile cutting it further and so this 
particular policy measure may not be an option.
Types of aid
Developing countries that need to borrow oft en fi nd 
it relatively expensive to do so. A number have sought 
foreign aid
. Such aid can take a number of methods. It 
may be as a grant, a loan at reduced interest rate, technical 
assistance or direct provision of goods and services.
Foreign aid: 
assistance given to developing economies on 
favourable terms.
KEY TERM
Aid can be tied or untied, bilateral or multilateral. Tied aid is 
aid that comes with conditions. For example, a grant may be 
given provided that it is spent on buying products from the 
donor country. Untied aid is aid given without conditions. 
Bilateral aid is aid given by one country to another country. 
In contrast, multilateral aid is aid given by countries to 
international organisations such as the World Bank or UN 
agency, which then distributes it to other countries.
Dependency
Some economists suggest that the problems of developing 
economies arise from their continued 
dependence
on developed economies. International trade can be 
dominated by developed economies with terms of trade 
moving in their favour, as a result of them exercising more 
power in trade negotiations, and with the developing 
economies being forced to concentrate on primary 
products. Some forms of aid can result in developing 
economies becoming increasingly indebted. In some cases 
developing economies transfer more money to developed 
economies in terms of interest on past loans, even if given 
on favourable terms, than they are currently receiving 
in aid. Advice given and policies suggested or imposed 
on developing economies by international organisations, 
such as the