Assessment 1 (Ch 8+9)

Question 0

What are four characteristics associated with a boom phase?

Answer 0

• Consumer confidence
• High consumption
• Cyclical unemployment low
• Inflation high
• High interest rates but still high level of borrowing

Question 1

What is the business cycle?

Answer 1

A regular oscillation of economic activity.

Question 2

What is the average length of a business cycle?

Answer 2

52 months

Question 3

What is the average length of a downswing?

Answer 3

19 months

Question 4

What is the average length of an upswing?

Answer 4

32 months

Question 5

What is an economic indicator?

Answer 5

Refers to the data or info that helps us describe and measure the current state of the economy.

Question 6

What is a leading indicator?

Answer 6

Predicts changes in economic activity before they occur.

Question 7

Define a coincident indicator

Answer 7

An indicator that moves in line with the level of economic activity

Question 8

Define a lagging indicator

Answer 8

Indicators that show change after trends in the rest of the economy have occurred.

Question 9

What is GDP?

Answer 9

(Gross Domestic Production)

The total value of final goods and services produced in the economy.

Question 10

What is the equation for Aggregate Expenditure?

Answer 10

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

Question 11

Describe the “Consumption” of aggregate expenditure

Answer 11

• The largest component of AE (52-55%)
• Expenditure on non-durable goods, durable goods and services.
• Services largest component of “Consumption”

Question 12

What are the factors that affect consumption?

Answer 12

• Level of disposable income (Yd)
• Cost of credit
• Stock of wealth
• Consumer expectations
• Government policy (fiscal and monetary)
• Demographic

Question 13

Define Investment (I) as a component of AE

Answer 13

Spending on new capital goods and additions to inventory.

Question 14

Describe the “Investment” component of AE

Answer 14

Includes:

• business investment (spending on capital goods)
• housing investment (NEW housing)
• Inventories (unsold goods)
• Most volatile component with 14-26%

Question 15

What are the factors affecting investment?

Answer 15

• Interest rates
• Business expectations
• Profitability
• Government policy

Question 16

Define a “pro-cyclical” indicator

Answer 16

An indicator that moves in the same direction as the level of economic activity (e.g. Real GDP)

Question 17

Define a “counter-cyclical” indicator

Answer 17

Moves in the opposite direction to the economy (e.g. UE rises as economic activity slows)

Question 18

Describe Net Exports as a component of AE

Answer 18

• +2 to -2% of GDP
• Exports of goods and services
• Imports of goods and services

Question 19

What are the factors affecting net exports?

Answer 19

• Economic conditions domestically
• Economic conditions overseas
• Terms of Trade (tariffs/ quotas)
• Exchange Rates

Question 20

What is the MPC?

Answer 20

(Marginal Propensity to Consume)

The fraction of the change in income that is spent on consumption.

Question 21

What is MPS?

Answer 21

(Marginal Propensity to Save)

The fraction of a change in income that is saved.

Question 22

Describe “Government expenditure” as a component of AE

Answer 22

• G1= local, state and federal spending on final goods and services.
• G2= public investment on capital equipment and infrastructure.
• G takes up 24% of GDP.

Question 23

What are the factors affecting government expenditure?

Answer 23

• Discretionary changes in social policy
• Automatic changes due to business cycle
(AUTOMATIC STABILISERS
= higher UE leads to more welfare spending and less income tax revenue)

Question 24

What does a steeper consumption function mean?

Answer 24

Households spend a greater proportion of any increase in income (Y)

Question 25

When income is less than C+I, what affect does that have in inventories?

Answer 25

when Y< C+I, inventories are negative. (There’s inventory disinvestment. Stocks fall)

Question 26

Define the multiplier

Answer 26

Ratio of the change in income caused by the initial change in spending.

Question 27

According to Y=C+S, what happens to savings when Y>C?

Answer 27

When Y>C savings is positive

Question 28

Distinguish between discretionary and automatic forms of spending

Answer 28

Discretionary is dependent on income

And automatic essential and independent

Question 29

As MPC increases what happens to the multiplier? And what makes the multiplier greater than 1?

Answer 29

The MPC increases and the multiplier increases

The MPC must be must be >0 and <1