AD and AS

Question 0

Give the equation for A.D.

Answer 0

AD=C+G+I+(X-M)

Consumer expenditure+government spending+Investment from firms+(exports-imports)

Question 1

Define Aggregate Demand

Answer 1

The total demand for goods and services produced in an economy at a given price level in a given period of time

Question 2

Define GDP

Answer 2

The total value of goods produced within an economy over a given time period

Question 3

Define aggregate supply

Answer 3

Aggregate supply measures the volume of goods and services produced within the economy at a given price level

Question 4

What determines the slope of the short run aggregate supply curve

Answer 4

The degree of spare (underutilised) capacity in the economy

Question 5

What is a negative output gap

Answer 5

When you’re not running at full capacity, so there is room for GDP improvement

Question 6

What is a positive output gap

Answer 6

When the economy approaches full capacity, so any increase in aggregate demand only results in inflation

Question 7

What is the multiplier effect

Answer 7

The multiplier is the process in which an initial change in aggregate demand can have a much greater impact on real GDP than the original increase

Question 8

Why does the multiplier effect occur

Answer 8

Because injections of new demand for goods and services into the circular flow of income stimulate further rounds of spending as one person spending is another ones income

Question 9

How is economic growth measured

Answer 9

It is measured in terms of the rate of change of Real GDP

Question 10

Name three advantages of economic growth

Answer 10

Better quality-of-life, employment effects, government finances improved, increased profits for firms leads to increased growth and business confidence.

Question 11

Name three disadvantages of economic growth

Answer 11

Opportunity costs of using resources, inflation risk, environmental effects, worse income distribution, negative balance of payments

Question 12

How is GDP calculated

Answer 12

What totalling up the output, income or expenditure of the country

Question 13

Name the difficulties in measuring GDP and it’s reliability for using it as a measure of economic growth.

Answer 13

Informal economy (blackmarket), increasing population, pouncing income/expenditure in the circular flow of income twice, GDP does not account for inflation, GDP is largely calculated from tax revenue so things not declared for tax are not accounted for, GDP does not account for how income is distributed

Question 14

name the three withdrawals from the circular flow of income

Answer 14

Taxes, savings, imports

Question 15

Name the three injections into the circular flow of income

Answer 15

Grants/subsidies, loans, exports

Question 16

Define unemployment

Answer 16

The unemployed are people who are registered as able, available and willing to work and are actively searching for work

Question 17

Name five causes of unemployment

Answer 17

Frictional unemployment, structural unemployment, cyclical unemployment (demands deficient), real wage unemployment, hidden unemployment.

Question 18

What is frictional unemployment

Answer 18

Transitional unemployment due to people moving between jobs e.g. redundant workers, workers entering the labour market for the first time

Question 19

What is structural unemployment

Answer 19

Unemployment occurs when there is a long running decline in demand in an industry leading to a reduction in employment perhaps because of increasing international competition. This can cause a mismatch of workers skills and need for training

Question 20

What is cyclical unemployment

Answer 20

Involuntary unemployment caused by lack of demand for goods and services. Can because the economic downturn causing firm closures and work layoffs and redundancies

Question 21

What is real wage unemployment

Answer 21

Economists believe minimum wage risks creating unemployment in industries where international competition is severe from low labour cost nations

Question 22

What is hidden unemployment

Answer 22

Not included in unemployment statistics, many become discouraged workers have stopped looking for work

Question 23

What are the two methods of measuring unemployment

Answer 23

Claimant count and the Labour Force survey

Question 24

What is the claimant count

Answer 24

A headcount of people who are claiming unemployment benefit

Question 25

What is the labour force survey

Answer 25

People without a job but who have looked for work in the past month and are able to start work next two weeks. Measuring by taking a survey sample of households

Question 26

Which method for measuring unemployment tends to be higher

Answer 26

The Labour Force survey

Question 27

What is inflation

Answer 27

Sustained rise in the overall price level

Question 28

Name some costs of inflation

Answer 28

Prices change (can cause confusion), value of savings/pensions decrease, inflationary noise (it gets hard to keep track of prices and understand what’s going on), fiscal drag (incomes can be pushed into higher tax brackets), loss of international competitiveness

Question 29

Name some benefits of inflation

Answer 29

Encourages spending, encourages production, workers may like pay rises (psychological effect), easier to reduce real wage/interest rates, erodes value of debt

Question 30

What is a current account deficit

Answer 30

When more money is leaving the country and entering it, as a result of sales of its exports, income and current transfers from abroad being less than imports and current transfers going abroad.

Question 31

What are the two ways of measuring inflation

Answer 31

The consumer price index and the retail price index

Question 32

What is demand pull inflation

Answer 32

Increases in the price level caused by increases in aggregate demand

Question 33

What is cost push inflation

Answer 33

Increases in the price level caused by increases in the costs of production