CGMA BA1 Fundamentals of Business Economics - Macroeconomic context of business I

Question 1

What does low unemployment mean in economic terms?

Answer 1

It means that anyone who wants a job but doesn’t have one will only be unemployed for a short period, resulting in low overall unemployment levels.

Question 2

How is inflation commonly defined?

Answer 2

Inflation is a sustained rise in the general level of prices and is technically measured as the annual rate of change of the Retail Price Index (RPI).

Question 3

What is the RPIX

Answer 3

The RPIX is the Retail Price Index excluding mortgage interest payments.

Question 4

How is economic growth measured?

Answer 4

Economic growth is typically measured by the rate of change of real GDP (Gross Domestic Product).

Question 5

What does “real” mean when referring to economic statistics?

Answer 5

When a statistic is labeled “real,” it means the effects of inflation have been removed.

Question 6

What is GDP (Gross Domestic Product)?

Answer 6

GDP is a measure of the annual output, income, or expenditure of an economy.

Question 7

How does GNP (Gross National Product) differ from GDP?

Answer 7

GNP is very similar to GDP but includes net income from abroad, whereas GDP focuses only on domestic production.

Question 8

What is Fiscal Policy?

Answer 8

government spending and taxation

Question 9

Monetary policy

Answer 9

supply of money

Question 10

What is the equation for total expenditure in an open economy?

Answer 10

E = C + I + G + (X - M), where:
C = Consumption
I = Investment
G = Government spending
X = Exports
M = Imports (subtracted because they represent spending on foreign goods/services)

Question 11

How is Aggregate Demand (AD) defined in an open economy?

Answer 11

AD = C + I + G + (X - M), where imports (M) are subtracted to account for domestic spending on foreign goods.

Question 12

What are withdrawals (leakages) in the circular flow of income?

Answer 12

Withdrawals are S (savings), T (taxation), and M (imports)—these reduce the flow of income within the economy.

Question 13

What are injections in the circular flow of income?

Answer 13

Injections are I (investment), G (government spending), and X (exports)—these add to the flow of income in the economy.

Question 14

What condition must be met for an economy to be in equilibrium?

Answer 14

The economy is in equilibrium when planned injections equal planned withdrawals (I + G + X = S + T + M).

Question 15

What happens if injections exceed withdrawals?

Answer 15

If injections > withdrawals, more money enters the circular flow than leaves, leading to economic growth (e.g., lower interest rates increasing investment).

Question 16

What happens if withdrawals exceed injections?

Answer 16

If withdrawals > injections, more money leaves the circular flow than enters, leading to economic slowdown (e.g., higher interest rates increasing saving).

Question 17

What are the three methods of measuring economic activity?

Answer 17

Output method – Total amount of goods and services produced in a year.
Expenditure method – Total spending by consumers, firms, government, and foreigners.
Income method – Total income earned by factors of production in one year.

Question 18

What is another name for GDP?

Answer 18

GDP is sometimes called Gross Value Added (GVA).

Question 19

What are the two components of consumption (C)?

Answer 19

Autonomous consumption – Spending that occurs regardless of income (e.g., food, rent).
Income-induced consumption – Spending that increases with income, determined by the Marginal Propensity to Consume (MPC).

Question 20

What is Marginal Propensity to Consume (MPC)?

Answer 20

The proportion of additional income that is spent on consumption.

Question 21

What is the Average Propensity to Consume (APC), and how is it calculated

Answer 21

APC = Total Consumption ÷ Total Income
It measures what proportion of income is spent on consumption.

Question 22

What is the consumption function formula?

Answer 22

C = a + bY
Where:

a = Autonomous consumption (not income-dependent).
b = Marginal Propensity to Consume (MPC).
Y = Income.

Question 23

What is the formula for the multiplier?

Answer 23

Multiplier = Initial change in aggregate demand ÷ Final change in national income
It measures how an initial increase in spending leads to a larger overall increase in national income.

Question 24

What are the two types of capital investment?

Answer 24

Replacement investment – Replacing old capital without increasing productive capacity.
Net investment – Expanding productive capacity by investing beyond replacement needs.

Question 25

What is the Marginal Efficiency of Capital (MEC)?

Answer 25

The percentage return generated by each additional unit of capital investment. If MEC is greater than the interest rate, the investment is profitable.

Question 26

How does the Marginal Efficiency of Capital (MEC) relate to interest rates?

Answer 26

MEC has an inverse relationship with interest rates – as interest rates rise, investment decreases.

Question 27

What factors can shift the MEC curve outward (increase investment)?

Answer 27

New technology improving capital productivity. Higher labor costs making automation more attractive (substitution effect). Improved economic conditions boosting business confidence.

Question 28

What are the main phases of the economic cycle?

Answer 28

The economic cycle includes: Recession – Two consecutive periods of declining growth. Depression (slump) – A prolonged and severe downturn. Recovery – Economic activity begins to increase. Boom – Growth above long-term sustainable levels.

Question 29

How do the multiplier and accelerator effects contribute to economic cycles?

Answer 29

Downturn: Lack of confidence → lower spending → reduced investment (accelerator) → amplified income drop (multiplier) → potential recession. Boom: Initial spending increase → higher national income (multiplier) → more investment (accelerator) → rapid economic expansion.

Question 30

What policies are used during a boom to slow down economic growth?

Answer 30

Raising taxes (Fiscal Policy) Reducing government spending (Fiscal Policy) Raising interest rates (Monetary Policy)

Question 31

What policies are used in a recession to stimulate economic growth?

Answer 31

The opposite of boom policies: Lowering taxes Increasing government spending Reducing interest rates

Question 32

How do higher interest rates impact firms?

Answer 32

Increases interest payments on debt. Reduces borrowing for investment. Can slow economic growth.

Question 33

What are automatic stabilizers in the economy?

Answer 33

Mechanisms that help smooth economic fluctuations without direct government intervention.

Question 34

Give two examples of automatic stabilizers.

Answer 34

Welfare benefits – Maintain minimum spending during a recession. Progressive tax system – Higher earners pay more tax during booms, reducing excessive growth.

Question 35

What is real wage unemployment?

Answer 35

A form of disequilibrium unemployment that occurs when real wages are forced above the market-clearing level.

Question 36

What is classical unemployment?

Answer 36

Unemployment that results when real wages are above the market-clearing level, leading to an excess supply of labor.

Question 37

What is cyclical unemployment?

Answer 37

Involuntary unemployment due to a lack of aggregate demand for goods and services, also known as Keynesian "demand deficient" unemployment.

Question 38

What is frictional unemployment?

Answer 38

Transitional unemployment due to people moving between jobs, such as newly redundant workers or university graduates entering the labor market.

Question 39

What causes frictional unemployment to be worse?

Answer 39

Imperfect information in the labor market can make frictional unemployment worse if job seekers are unaware of available opportunities.

Question 40

What is structural unemployment?

Answer 40

Unemployment caused by capital-labor substitution or a long-term decline in demand in certain industries, leading to a mismatch between the unemployed workers' skills and available job opportunities.

Question 41

What can cause structural unemployment?

Answer 41

Major changes in technology, leading to technological unemployment, or industries like heavy manufacturing declining, leaving workers without the necessary skills for new jobs.

Question 42

What is occupational immobility?

Answer 42

When workers from industries in decline, such as coal or steel, face difficulties finding re-employment without investing in retraining.

Question 43

What is discouraged unemployment?

Answer 43

People who have given up searching for jobs, often due to long-term unemployment, loss of motivation, and a lack of required skills.

Question 44

What is hidden unemployment?

Answer 44

People who are interested in working but are not classified as unemployed, often due to financial disincentives or discouragement from applying for jobs.

Question 45

What is the poverty trap?

Answer 45

A situation where jobless workers do not apply for jobs due to the financial disincentives created by the interaction of income tax and state benefits.

Question 46

What are some negative effects of high levels of unemployment?

Answer 46

Increased need for welfare payments, higher crime rates, a widening gap between the rich and poor, lost workplace skills, and a slowdown in economic output.