Chapter 2 - The Investments Scene

Question 1

Define GDP

Answer 1

Gross Domestic Product (GDP)

• It is the value of goods and services produced in an
  economy in a given period.
• It comprises Consumption, Investment, Government
  spending and the value of exports less
  imports.
• It is widely used by economists to measure the health
  of an economy.
• It is measured four times a year in the UK.
• Its usefulness is often questioned as it does not
  include the “black economy” or full value of
  online business.

Question 2

List six possible effects of an increase in the money supply in an economy

Answer 2

• A lowering of interest rates
• An increase in economic activity
• A rise in stock markets
• An increase in consumer confidence
• Expansion of an economy
• A rise in prices
• Inflation

Question 3

What does the business cycle show and what are its five stages?

Answer 3

The business cycle shows changes in economic activity as measured by Gross Domestic Product
(GDP).

The five stages are:-

1. Growth (expansion)
2. Peak
3. Recession (contraction)
4. Trough

Question 4

Give an alternative name for perfect market theory then list the attributes of a “Perfect
market”.

Answer 4

The alternative name is efficient market theory.

Attributes:

• Homogenous commodity unit bought/sold is the same
  as any other unit
• Large number of buyers/sellers

* Buyers/sellers in close touch - generally satisfied in 
  global markets (some have 24hr dealing)

• No preferential treatment - no insider dealing/market
  abuse
• Transferability of a commodity -
  shares/bonds/commodities easily transferable
  although costs may arise