Chapter 6

Question 1

What is Macroeconomics

Answer 1

Macroeconomics focuses on the performance of the whole economy. It deals with the economic problem from the societies Point of View.

Question 2

What is the circular flow of income

Answer 2

The Circular flow of income is a macroeconomic model that describes the flows of resources, goods, and services and income and expenditure between the parts of the economy. There are 5 sectors: Households, firms, financial, government, overseas sector.

Question 3

What are households

Answer 3

Households are the owners of the productive resources (land, labour, capital and enterprise) and the buyers of final goods and services.

Question 4

What is the factor market

Answer 4

Where firms hire resources (natural, human, capital) owned by households, in return for which they provide various types of income as payments. It is made up by the two flows are the very top between firms and households.

Question 5

What is the product market

Answer 5

In the product market, households spend their income in exchange for goods and services produced by the firms sector.

Question 6

What is interdependence

Answer 6

The idea that we all depend on one another to provide the goods and services that satisfy our wants and needs.

Question 7

What is savings

Answer 7

Savings is the portion of household income that is not spent on goods and services for current consumption. Households deposit their funds into financial institutions such as banks (these financial institutions make up the capital market). Savings are a leakage from teh circular flow model, as it reduces the flow of money and goods between households and firms.

Question 8

What is investment

Answer 8

Defined as expenditure on goods and services which are not intended for current consumption. Includes spending by firms on production equipment and machinery, and spending on buildings and factories. It is an injection that offsets the savings leakage in the circular flow.

Question 9

What is the government sector

Answer 9

The government sector plays a significant role in teh economy as the producer of goods and services such as education, health, welfare services, and defence. To do this, the government purchases resources in teh factor market. The government is also a consumer as it buys goods and services from businesses.

Question 10

What is the role of the government sector in the Circular Flow Model:

Answer 10

Households pay some of their income to the government (the taxation leakage) which is returned ot the circular flow thorugh teh government expenditure injection. Many of the collective goods and services in our community are provided by teh government sector.

Question 11

What is GDP

Answer 11

Gross Domestic Product is defined as the total market value of all final goods and services produced in a country during a period of time, usually a year.

Question 12

What are the components of GDP Expenditure? What does GDP measure the total expenditure on final goods and services through?

Answer 12

1. Consumption: Expenditure on non-durable goods (food, clothing). Expenditure on Services (plumbers, accountants.) Expenditure on consumer durables (white goods, furniture, motor vehicles)
2. Investment: Business expenditure on new capital exuipment which will produce final goods and services in the future - machines, factories, etc.
3. Government: G1 - Current expenditure associated with day-to-day functions of gov. G2 - Capital expenditure to provide for infrastructure, such as schools roads power and comms.
4. Net Exports (X-M): The value of goods and services sold to overseas, minus the value of goods and services bought from overseas.

Question 13

What is GDP expenditure

Answer 13

GDP expenditure involves measuring the total expenditure on final goods and services produced by four major sectors of the economy: Households (consumption), private investment spending by firms, government spending, net exports.

Question 14

Factors affecting consumption expenditure:

Answer 14

• Levels of disposable income.
• Cost of Credit (interest rates): Lower interest rates, tend to have positive effect on aggregat econsumption for two reasons: interest repayments fall, and the opporutnity cost of expenditure on consumer items fall.
• Expectations.
• Government Policies: Such as raising tax rates.

Question 15

Factors Affecting investment expenditure

Answer 15

Investment is the expenditure on producer or capital goods that are used to produce final goods and services in the future.
- Profitability: Businesses retain profits for expansion, if profit has been low, there is less money for expansion, meaning they need sources of finance.
- Rate of interest: same as before
- Business expectations: IF future sale expectations are positive, investment increase.
- Gov policies: Taxation, subsidies, overseas trade promotion.

Question 16

Factors affecting gov expenditure

Answer 16

Government policy objectives e.g. social welfare, health education employment, etc.

Question 17

Factors affecting net expots

Answer 17

• domestic and overseasbusiness cycle.
• exchange rates
• Commodity prices
• Terms of trade

Question 18

What is the overseas sector

Answer 18

All households spend some of their income on goods and services imported from overseas. Similarly, people in other countries purchase Australian-made goods and services. These are known as imports and exports. Imports are classified when money flows from within Australia to overseas nations, while exports are classified when the flow of money is from overseas to Australia.

Question 19

What is an open economy

Answer 19

Overseas sector is an example of an open economy.T

An open economy is an important contributor to our economic well-being, because trade allows us to purchase items we cannot produce ourselves, and foreigners to purchase items that they cannot produce from Australia.