Chap 25

Question 1

Main government aims for the economy

Answer 1

1. Economic growth
2. Low unemployment
3. Price stability
4. Balance of payments stability
5. Redistribution of income

Question 2

Define Economic growth

Answer 2

An increase in the output of an economy and in the long run, an increase in the economy’s productive potential

Question 3

Define Actual economic growth

Answer 3

an increase in the output of an economy

Question 4

Define Potential economic growth

Answer 4

an increase in an economy’s productive capacity

Question 5

How can the productive potential of the economy be increased ?

Answer 5

Rise in the quantity and/or quality of factors of production.

Question 6

Define Aggregate demand

Answer 6

The total demand for a country’s product at a given price level.

It consists of consumer expenditure, investment, government spending and net exports (exports – imports)

C + I + G + (X - M)

Question 7

Define consumption (C)

Answer 7

Spending by households on goods and services

Question 8

Define Investment (I)

Answer 8

Spending by the private and public sectors on capital goods

Question 9

Define government spending (G)

Answer 9

Government spending on state-provided goods and services

Question 10

Define net exports (X - M)

Answer 10

Value of exports minus imports

Question 11

What causes an extension in aggregate demand?

Answer 11

A fall in the country’s price level

(a) households and firms would have more purchasing power
(b) it increases the international competitiveness of the country’s product

Question 12

Causes of an increase in aggregate demand (shift to the right of the AD curve)

Answer 12

1. Increase in population
2. Cut in the rate of interest
3. Lower exchange rate
4. Greater confidence

Question 13

Define Aggregate supply

Answer 13

The total amount of goods and services that domestic firms are willing to supply at a given price level

Question 14

Reasons why governments aim for economic growth

Answer 14

1. Raise people’s living standards
2. Transform people’s lives and enable them to live longer because of better nutrition, housing and healthcare
3. Help a government achieve its other economic aims

Question 15

How does economic growth help a government achieve its other economic aims ?

Answer 15

Employment: As output increases

Low price level: If output increases to match higher demand

Trade position: Extra output is exported

Extra tax revenue: Poor may gain jobs and some may be helped

Question 16

Determinant of a country’s possible economic growth rate

Answer 16

Level of output, in relation to its current maximum possible output and its growth in productive capacity

Growing rate + productive capacity = possible economic growth rate

Question 17

Define Full employment

Answer 17

the lowest level of unemployment possible

Question 18

Define Economically active

Answer 18

being a member of the labour force
(willing and able to work at the going wage rate)

Question 19

Define economically inactive

Answer 19

They include children, the retired, those engaged in full-time education, home makers, the sick/disabled who are dependent on those in the labour force.

Question 20

Unemployment rate formula

Answer 20

(Unemployment/Labour force)* 100

Question 21

Define Unemployment rate

Answer 21

the percentage of the labour force who are willing and able to work but are without jobs

Question 22

Reasons why governments aim for low unemployment

Answer 22

1. Unemployment is a waste of resources
2. Unemployed can suffer low income
3. Government tax revenue may have to be spent supporting the unemployed

Question 23

Why is it not possible to achieve 0% unemployment?

Answer 23

There will always be some workers changing jobs and being unemployed for short periods

Question 24

Define Price stability

Answer 24

the price level in the economy not changing significantly over time

low and stable inflation

Question 25

Reasons why governments aim for price stability

Answer 25

1. Ensures greater economic certainty

Firms will not raise their prices because they expect their costs to be higher

Households will not bring forward purchases for fear that items will be more expensive in the future

Workers will not press for wage increases just to maintain their real disposable income

2. Prevents the country’s products from losing international competitiveness.

Question 26

Define Inflation rate

Answer 26

The percentage rise in the price level of goods and services over time

Question 27

Why don’t they aim for unchanged prices?

Answer 27

1. Measures of inflation tend to overstate rises in prices
2. Slight rise in prices can provide some benefits

Question 28

How do measures of inflation tend to overstate rises in prices?

Answer 28

People buy some products at reduced prices in sales and also make second-hand purchases

Price rises can also hide the improvements in products

Question 29

How can a slight rise in prices provide some benefits?

Answer 29

1. Can encourage producers to increase their output, as they may think that higher prices will lead to higher profits
2. Can enable firms to cut their wage costs by not raising wages in line with inflation/ cut in employment

Question 30

Why do governments try to avoid a fall in the price level?

Answer 30

(caused by a fall in aggregate demand)

This is because it could result in a decline in output and a rise in unemployment.

Question 31

Define Balance of payments

Answer 31

The record of a country’s economic transactions with other countries.

Question 32

Key part of a country’s balance of payments

Answer 32

Record of revenue received from selling exports and its expenditure on imports.

Question 33

Reasons why governments aim for balance of payments stability

Answer 33

Imports > Exports: Country will be living beyond its means and will get into debt

Export > Import : The inhabitants of the country will not be enjoying as many products as possible.

Question 34

Reasons for a deficit of export revenue

Answer 34

1. Increase in the import of raw materials and capital goods
2. Fluctuations in income at home and abroad.

Question 35

Why would an increase in the import of raw materials and capital goods not be of concern ?

Answer 35

The products purchased may increase the economy’s ability to produce more goods and services to sell at home and abroad.

Question 36

How does the government redistribute income?

Answer 36

The rich are taxed more than the poor.

Some of the money raised is spent directly on the poor by means of benefits such as housing benefit and unemployment benefit.

Other forms of government expenditure, such as that on education and health, particularly benefit the poor. Without the government providing these services free of cost or at subsidised prices, the poor may not find them accessible.

Question 37

Reasons why governments may seek to redistribute income

Answer 37

1. Hardships it causes
2. Can also cause social unrest as the poor may feel a sense of social injustice.
3. Inequality can grow- Rich tend to marry the rich and benefit from better education and have more opportunity to save.

Question 38

Governments are unlikely to aim for a perfectly equal distribution of income because

Answer 38

Taxing the rich too heavily may act as a disincentive to enterprise

Providing too generous benefits may act as a disincentive to effort

Question 39

Why would full employment conflict with stable prices ?

Answer 39

A low level of unemployment is likely to push up wages as firms compete for workers. The resulting higher costs of production are likely to result in inflation.

Question 40

Why would full employment and economic growth conflict with balance of payments stability?

Answer 40

Rise in employment is likely to increase incomes and spending on imports may increase by more than export revenue.

To produce a higher output, firms may also import more imported raw materials and capital goods.