Chapter 9

Question 1

Define policy objective

Answer 1

A target or goal that policy makers aim to hit

Question 2

What are the governments policy objectives

Answer 2

• Achieve economic growth
• Maintain low unemployment
• Limit inflation
• Attain satisfactory balance of payments

Question 3

Difference between short and long run economic growth

Answer 3

Short run- Growth of using idle resources

Long run- employment of more factors of production causing an outward movement of the PPF

Question 4

Define GDP

difference between nominal and real

Answer 4

Sum of all goods and services produced in an economy over a particular period of time
Nominal- not adjusted to inflation
Real- adjusted to inflation

Question 5

Define recession

Answer 5

6 months or more of negative economic economic growth

Question 6

How is employment measured

Answer 6

• Claimant count (amount collecting benefits)

- Labour force survey (quaternary survey)

Question 7

What is full employment defined as

Answer 7

3% or less unemployment

Question 8

Define inflation

Answer 8

Persistent or continuing rise in average price level

Question 9

Define disinflation and deflation

Answer 9

Disinflation; rate of inflation is falling but still positive
Deflation: Continuing tendency for average price level to fall

Question 10

What is the target inflation

Answer 10

2%

Question 11

What is used to measured inflation

Answer 11

Price index

CPI (consumer price index)

Question 12

Define indexation

Answer 12

Automatic adjustment of items like pensions and benefits in changes in price level through price index

Question 13

Explain satisfactory balance of payments

Answer 13

Current account is at equilibrium, or when there is a small surplus of small deficit

Question 14

Define balance of payments and current account

Answer 14

BoP: record of all currency flowing into and out of a country in a particular period

Current account: record of all currency flowing into and out of a country for exports and imports of goods and services

Question 15

Difference between exports and imports

Answer 15

Exports: Domestically produced products sold
Imports: Produced in other countries and bought for domestic use

Question 16

Explain when there is a balance of trade deficit and surplus

Answer 16

• Value of imports exceeds exports (deficit)

- Value of exports exceeds imports (surplus)

Question 17

Define balance of trade

Answer 17

Difference between money value of country’s imports and its exports

Question 18

Explain another macroeconomic objective

Answer 18

Balancing the budget

Gov spending=gov revenue

Question 19

Define trade off

Answer 19

When two policies oppose each other, policy conflict occurs

Question 20

Example of policy conflicts

Answer 20

Full unemployment ~ control of inflation

Question 21

What do Keynesian economists believe

Answer 21

That gov should manage economy especially through fiscal policy

Question 22

What do pro free market economists believe

Answer 22

No gov intervention and like the operation of free markets

Question 23

Define fiscal policy

Answer 23

Use by gov of gov spending and taxation to achieve gov policy objectives

Question 24

Define monetary policy

Answer 24

Use of gov and it’s agent , Bank of England, of interest rates and other monetary policies to achieve gov objectives

Question 25

What is a macroeconomic indicator

Answer 25

Provides information about recent economic performance, judging the success and failure of particular gov policies

Question 26

Examples of macroeconomic indicators

Answer 26

Real GDP, CPI, Measures of unemployment

Question 27

What are the two categories macroeconomic indicators split into

Answer 27

Lead: provide information about future state of the economy
Lag: provide information about the past, and what not to do perhaps

Question 28

Define national income

Answer 28

Flow of new output produced by the economy in a period of time

Question 29

What must an economy possess in order to be able to produce national income

Answer 29

• National capital stock (part of national wealth)

- Human stock

Question 30

Define national wealth

Answer 30

All physical assets owned by a nation’s residents that has value

Question 31

Define consumption

Answer 31

Total planned spending by households on consumer goods and services produced within an economy

Question 32

limitations of using national income data to assess changes in living standards

Answer 32

• Non monetised economy (living standards may improve just not through money)
• Hidden economy (illegal activities)
• Quality changes (house may become more expensive)
• Negative externalities, so national income over estimates as does not portray the real effects

Question 33

limitations of national income data to compare living standards between countries

Answer 33

• Non monetised economy
• Are the exchange rates accurate?
• Traded and non traded goods may cost differently

Question 34

Define Purchasing power parity

Answer 34

The rate of currency conversion that equalise purchasing power of difference currencies eliminating price levels between countries