7. Economic Factors

Question 1

economics is…

what is the difference between micro and macroeconomics?

Answer 1

the study of wealth creation.

micro: study of economic behaviour of individual firms.
macro: aggregate behaviour and the study of the economy as a whole.

Question 2

the main conditions that effect demand are… (4)

Answer 2

• income
• taste
• substitutes
• population

Question 3

elasticity of demand formula and results

Answer 3

(% change in QD) / (% change in P)

> 1: price inelastic: % change in QD smaller than % change in P
=1: unit elasticity
<1: price elastic: % change in P greater than % change in QD

Question 4

factors that effect PED (4)

Answer 4

• income
• substitutes
• time
• market
• necessity/luxury
• habit

Question 5

XED formula

Answer 5

(% change in QD of A) / (% change in price of B)

Question 6

government minimum prices cause …. (3)

Answer 6

• misallocation of resources
• excess supply
• wasted resources

Question 7

government imposed maximum prices cause…

Answer 7

• misallocation of resources
• shortages of supply
• arbitrary ways of allocating products

Question 8

in the short run, the total cost curve is U-shaped because…

in the long run, the total cost curve is U-shaped because…

Answer 8

SR: of the law of diminishing returns

LR: of dis-economies of scale

Question 9

AD =

the trade cycle =

Answer 9

C + I + G + X - M

boom, peak, recession, depression, trough, recovery.

Question 10

economic growth

2 +
2 -

Answer 10

+ job creation
+ disposable income
+ higher quality of living

• inequality
• environment
• goods may become scarce

Question 11

inflation

2 +
2 -

Answer 11

+ boosts growth
+ better than deflation

• worse real income
• imported goods look cheaper
• consumer confidence knocked

Question 12

unemployment

2 +
2 -

Answer 12

+ large pool of workers for recruitment
+ staff can be paid lower

• costly
• loss of income tax

Question 13

components of the BoP (3)

Answer 13

• current account: imports and exports
• capital account: ownership of foreign assets, such as loans
• financial account: cash flows

Question 14

a budget deficit is…

this is referred to as…

it is used to..

Answer 14

• when government expenditure exceed income.
• They have to borrow money, referred to as the Public Sector Net Cash Requirement.
• boost AD

Question 15

a budget surplus is…

this is referred to as…

it is used to…

Answer 15

• when government expenditure is less than its income.
• contractionary policy
• when AD is higher than the country can supply.

Question 16

what is a fractional reserve system?

quantitative easing is…

Answer 16

banks only keep a small % of deposits in cash, assuming customers will not all cash out at once.

• an unconventional monetary policy in which a country’s central bank buys government assets using money it has generated electronically.

Question 17

classical theory says (3)

Answer 17

• no government intervention
• market will sort itself
• economy will naturally move to equilibrium point

Question 18

Keynesian economics suggests (3)

Answer 18

• government should manipulate AD
• done through borrowing money and injecting it into economy
• budget surplus

Question 19

monetarists suggest…

Answer 19

that the economy does not find equilibrium point because of market imperfections.

remove imperfections, market will clear on its own.

Question 20

unemployment types (4)

Answer 20

• cyclical unemployment: demand deficient unemployment caused by a ‘bust’ in the trade cycle.
• frictional unemployment: short-term unemployment, likely moving between jobs.
• structural unemployment: the skills set of those requiring jobs does not match those of job vacancies available.
• real wage unemployment: unions keep wage artificially high; employment thus remains low.

Question 21

types of inflation (6)

Answer 21

• demand-pull inflation: demand grows faster than output.
• cost-push inflation: input costs rise so in turn, manufacturers also have to raise prices.
• imported inflation: if the national currency weakens, the cost of imports will rise, leading to domestic inflation.
• monetary inflation: caused by expansionary monetary policy.
• expectations effect: wages and prices increase due to expected later inflation. This creates inflation sooner and increases the value of it.
• stagflation: inflation while economic growth slows.