2.2.4 - TRADE CYCLE + EQUILIBRIUM + factors of consumption

Question 1

Define Aggregate Supply

Answer 1

Total Amount of goods and services produced in an economy at a given time period

Question 2

What is Equilibrium in AD

Answer 2

AD = AS

Question 3

Define Interest rates

Answer 3

Cost of borrowing and reward for saving

Question 4

Define exchange rates

Answer 4

Currency expressed in terms of another

Question 5

What is the wealth effect

Answer 5

When assets Appreciate in value leading to consumers
‘‘feeling rich’’ so consume more

Question 6

What is the negative wealth effect

Answer 6

When assets depreciate in value so consumers ‘‘feel poorer’’
so consume less

Question 7

What is Confidence for consumers in economics

Answer 7

When a consumer has for eg. job security so more confidence to consume.

Question 8

What is anticipated inflation

Answer 8

Consumers predict that general price level will increase in future so they consume more.
For example, buy more houses

Question 9

Define gross investment

Answer 9

Investment before depreciation

Question 10

Define Net investment

Answer 10

Gross investment - capital depreciation - taxes

Question 11

Define confidence for firms in economics

Answer 11

Confidence of firms on future economic prospects and demand

Question 12

What is the animal spirit - keynes

Answer 12

Emotions of confidence and hope

Question 13

Define accelerator effect

Answer 13

Increase in economic growth leads to larger proportionate rise in investment

Question 14

Define easier access to credit

Answer 14

When financial institutions relax the laws and criteria for lending.

Makes access to credit easier

Question 15

Define price level

Answer 15

Average of current price across entire goods and services produced in an economy

Question 16

Define productivity

Answer 16

The output per worker over a period of time

Question 17

Define Fiscal Policy

Answer 17

A policy designed to achieve the macroeconomic objectives

Involves changing government spending, and tax

Question 18

Define Direct Tax

Answer 18

Tax on income, profits and wealth.

Eg. Income tax and NI + inheritance tax

Question 19

Define Indirect Tax

Answer 19

Taxes are placed on the value of goods and services,

Eg, VAT

Question 20

Define the trade cycle

Answer 20

The economic/trade cycle is the natural fluctuation of the economy between periods of expansion ( Growth) and contraction (recession).

Question 21

What is the Trend of Growth

Answer 21

Where economic growth should be based on previous years

So Predict based on past years

Question 22

Define BOOM in trade cycle

Answer 22

A period of rapid economic expansion, resulting in higher GDP, lower unemployment, higher inflation rate, trade deficit and rising assets prices

Question 23

Define Recession

Answer 23

A period of negative economic growth for two consecutive quarters.

This is when there is a contraction in growth resulting in higher unemployment, lower GDP, fall in inflation, trade surplus, and falling asset prices

Question 24

Define SLUMP in a trade cycle

Answer 24

Severe period of economic collapse associated with high unemployment, low prices, decline in business, consumer confidence.

Question 25

Define Recovery in trade Cycle

Answer 25

When GDP ( Growth) starts to rise, increasing in employment and confidence in an economy.

Question 26

How is fiscal policy and trade cycle linked

Answer 26

1. Government spending is likely to rise in a recession and slump, to increase growth and reduce unemployment
2. Taxes are likely to be lower in a recession/slump as growth is low, therefore lower taxes would increase consumption and increase economic growth

In a boom its the opposite

Question 27

Whys is AS curve sloping upwards

Answer 27

Because at a higher price, firms have a higher incentive to produce as there is more profit.

Question 28

What is one characteristic of a recession

Answer 28

Interest rates would fall to encourage economic growth.
Consumption decreases, so demand decreases, therefore inflation decreases too.