CHAPTER 1 IG

Question 1

What is a business cycle?

Answer 1

The business cycle is the pattern of upswing (expansion) and downswing (contraction) that can be discerned in economic activity over a number of years.

Question 2

What is GDP?

Answer 2

 Gross Domestic Product: it is the total value of all final goods and services produced in South Africa during one year. Therefore, GDP is one of the most important measures of performance of the economy

Question 3

What is the relationship between production, income and spending?

Answer 3

Production = Spending = Income

Question 4

what happens if net exports are greater than zero?

Answer 4

there is a trade surplus

Question 5

what happens when net exports is lesser than zero?

Answer 5

there is a trade deficit

Question 6

what is the difference between GDE and GDP?

Answer 6

1. GDE = C + I + G where as

GDP = C + I + G + (Exports - Imports).

2.  GDE includes imports and excludes exports.

GDP includes exports and excludes imports.

Question 7

What does it mean when GDP is greater the GDE?

Answer 7

If GDP is > GDE it means that Exports > Imports during that period. This means that the value of spending in the country was lower than the value of
production.

Question 8

What causes an increase in nominal GDP?

Answer 8

An increase in nominal GDP might increase over time due to an increase in the quantity or prices of goods and services produced.

Question 9

what is nominal GDP?

Answer 9

Nominal GDP measures these values using current prices (synonymous with GDP). Nominal value is the face value

Question 10

what is real GDP?

Answer 10

Real GDP or GDP at constant prices is a measure of GDP in which the quantities produced are valued at the prices in a base year rather than at current prices.

Question 11

how do you calculate real GDP per capita?

Answer 11

This is a total GDP divided by the population size

Question 12

what is real GDP per capita used for?

Answer 12

Widely used as a measure of economic welfare (standard of living) of citizens.

Question 13

what happens when real GDP per capita increases?

Answer 13

A rise in the real GDP per capita implies that people are better off. However there are factors that could give rise to an increase in the real GDP per capita without people becoming better off

Question 14

explain what happens during expansionary fiscal policy

Answer 14

Rising government spending

• Reduction in tax rate(s)
• Resulting in higher budget deficit
• AD rises

Question 15

explain what happens during contractionary fiscal policy?

Answer 15

• Rising tax rates
• Reduction in government expenditure
• Resulting in lower budget deficit or surplus
• AD declines

The multiplier process is in operation and the increase in government spending
stimulates production and income in the economy.

Question 16

what is fiscal policy?

Answer 16

Fiscal policy is the government’s policy in respect of the nature, level and composition of government spending, taxation and borrowing, aimed at pursuing particular economic goals.

Question 17

explain what happens during expansionary monetary policy?

Answer 17

• Reduction in interest rates
• Increase in money supply in the economy
• AD rises

Question 18

explain what happens during contractionary monetary policy

Answer 18

• Rising interest rates
• Reducing money supply in the economy
• AD declines

Question 19

what is the unemployment rate?

Answer 19

The unemployment rate is the percentage of people in the labour force who are unemployed.

Question 20

According to the International Labour Organisation, what are the 3 things that makesa person unemployed?

Answer 20

According to International Labour Organisation (ILO) the unemployed are those people
within the economically active population who

a) did not work during the 7 days prior to the interview

b) want to work and are available to start work within a week of the interview

c) have taken active steps to look for work or to start some form of self-employment in the
four weeks prior to the interview

Question 21

what does the economically active population consists of?

Answer 21

The economically active population consists of both those who are employed and those who are unemployed.

Question 22

what is the strict definition of unemployment?

Answer 22

the strict definition only includes people who are actively looking for work

Question 23

what is the broad definition of unemployment?

Answer 23

the broad definition also includes people who are not actively searching

Question 24

what is frictional unemployment?

Answer 24

This type occurs when individuals are temporarily unemployed while transitioning between jobs. It includes recent graduates entering the workforce and those voluntarily leaving their jobs to seek new opportunities.

Question 25

what is seasonal unemployment?

Answer 25

This type occurs when individuals are employed only during specific seasons or times of the year and are unemployed during off-peak periods.

Question 26

what is structural unemployment?

Answer 26

This happens when there are changes in the economy that make certain jobs disappear. For instance, if a factory closes because it uses robots instead of workers, those workers might need to learn new skills to find a different job.

Question 27

what is cyclical unemployment?

Answer 27

Cyclical unemployment is linked to the economic cycle and occurs during periods of economic downturns or recessions when demand for goods and services decreases. As businesses cut back on production, they often lay off workers, leading to higher unemployment rates

Question 28

explain full employment

Answer 28

Full employment is an economic condition where all individuals who are willing and able to work can find employment, with the exception of those experiencing frictional and structural unemployment.

It does not mean zero unemployment, but rather that the level of unemployment is at a natural rate, which is considered healthy for the economy.

Question 29

what are endogenous variables?

Answer 29

depends on other variables within the goods model

Question 30

what is autonomous consumption?

Answer 30

c0. which is the consumption independent of income
level and is the intercept or vertical component of the consumption curve

Question 31

what is induced consumption and disposable income?

Answer 31

cYd- is the induced consumption, the spending which is directly linked to income level

disposable income (Yd) - income remaining after paying taxes, receiving gov’t
transfer

Question 32

what is the consumption function and what is the formula for it?

Answer 32

This is the spending by private firms and households. C = co+ cYd

Question 33

what is the marginal propensity to consume and what’s the symbol for it?

Answer 33

The parameter c, called the marginal propensity to consume (MPC), specifies how much is consumed out of an income increase.

Question 34

what are the assumptions of the marginal propensity to consume?

Answer 34

It is assumed to be constant and known, and to lie in the interval 0 < b < 1. It is the slope of the consumption curve

Question 35

what are the assumptions about investments?

Answer 35

Investments I are assumed to be constant, in the sense of being independent of
production (or income).

Question 36

what happens when there is a bar on above I?

Answer 36

I = Ī
Placing a bar above the ‘I’ in investment, refers to the investment as a given, and does
not respond to changes in income.

Question 37

what are the chain of events that happen when government spending increases during expansionary fiscal policy?

Answer 37

G↑ → Z↑ → Y↑

Question 38

what happens to autonomous spending when taxation is low?

Answer 38

Lower taxation increases autonomous spending and the vertical intercept increases
equal to the marginal propensity to consume times the decrease in taxation and the
demand for goods curve shifts upwards.

Question 39

what are the chain of events that happens when government spending is low during contractionary fiscal policy?

Answer 39

G↓ → Z↓ → Y↓

Question 40

how do you calculate the unemployment rate?

Answer 40

unemployment/labour force

Question 41

explain economic growth?

Answer 41

Economic growth takes place when the total output (production) of goods and services in an economy increases. It is traditionally defined as the annual rate of increase in total output (production) or income in the economy.

Question 42

what is the main instrument is fiscal policy and the main policy variables?

Answer 42

The main instrument of fiscal policy is the budget, while the main policy variables are government spending and taxation.

Question 43

what is an expansion/upswing?

Answer 43

This phase is marked by an increase in economic activity, where real GDP rises, unemployment decreases, and consumer spending grows

Question 44

what is a peak?

Answer 44

At this stage, the economy operates at maximum output, and growth rates start to level off

Question 45

what is a contraction/recession?

Answer 45

Real GDP falls, unemployment rises, and consumer spending decreases as businesses respond to reduced demand by cutting back on production and laying off workers.

Question 46

what is a troughs?

Answer 46

Lowest point; stabilization before recovery begins