Chapter 9

Question 1

What is a policy objective

Answer 1

A target or goal that policy makers aim to hit

Question 2

What is short run economic growth

Answer 2

Growth of real output resulting from using idle resources, including labour thereby taking up the slack in the economy

Question 3

What is long run economic growth

Answer 3

An Increase in the economy’s potential level of real output, and an outward movement of the economy’s production possibility frontier

Question 4

What is gross domestic product

Answer 4

The sum of all goods and services or level of output produced in an economy over a period of time eg a year

Question 5

What is real GDP

Answer 5

a measure of all the goods and services produced in an economy adjusted for price changes or inflation. The adjustment transforms changes in nominal GDP which is measured in money terms into a measure that reflects changed in the total output of the economy

Question 6

What is nominal gdp

Answer 6

GDP measured at current market prices without removing the effects of inflation

Question 7

What is a recession

Answer 7

6 months or more of negative economic growth or declining real national output

Question 8

What is full employment

Answer 8

Bevridge’s definition- full employment means means 3% or less of the labour force unemployed.
Free market - the level of employment occurring at the market clearing real wage rate where the number of workers whom employers wish to hire equals the number of workers wanting to work

Question 9

What is the claimant count

Answer 9

The method of measuring unemployment according to those people who are claiming unemployment related benefits

Question 10

What is the Labour force survey

Answer 10

A quarterly sample survey of household in the uk. It’s purpose is to provide information on the UK labour market. The survey seeks information on respondents personal circumstances and their labour market status during a period of 1-4 weeks

Question 11

What is inflation

Answer 11

A persistent or continuing rise in the average price level

Question 12

What is deflation

Answer 12

A Continuing tendency for the average price level to fall

Question 13

What is disinflation

Answer 13

When the rate of inflation is falling but still positive

Question 14

What is price index

Answer 14

An index number showing the extent to which a price or a basket of prices has changed over a month, quarter or year in comparison with the prices in a base year

Question 15

What is a consumer price index

Answer 15

The official measure used to calculate the rate of consumer price inflation in the uk . It calculates the average price increase of a basket of 700 different consumer goods and services

Question 16

What is indexation

Answer 16

The automatic adjustment of items such as pensions and welfare benefits to changes in the price level, through the use of price index

Question 17

What is the balance of payments

Answer 17

A record of all currency flows into and out of a country in a particular time period

Question 18

What is current account

Answer 18

Measures all the currency flows into and out of a country in a particular time period in payment for exports and imports of goods and services, together with primary and secondary income flows

Question 19

What are exports

Answer 19

Domestically produced goods or services sold to residents of other countries

Question 20

What are imports

Answer 20

Goods or services produced in other countries and sold to residents of this country

Question 21

What is the balance of trade

Answer 21

The difference between money value of a country’s imports and its exports. Balance of trade is the largest company of a country’s balance of payment on current account

Question 22

What is balance of trade deficit

Answer 22

When the money value of a country’s imports exceeds the money value of its exports

Question 23

What is the balance of trade surplus

Answer 23

When the money value of a country’s exports exceeds the money value of its imports

Question 24

What is balancing the budget

Answer 24

When government spending equals government revenue

Question 25

What is a budget deficit

Answer 25

Occurs when government spending exceeds government revenue. This represents a net injection of demand into the circular flow of income and hence a budget deficit is expansionary

Question 26

What is trade off between policy objectives

Answer 26

Although it may be impossible to achieve two desirable objectives at the same time policy makers maybe be able to choose an acceptable combination lying between the extremes.

Question 27

What is a policy conflict

Answer 27

Occurs when two policy objectives cannot both be achieved at the same time: the better the performance in achieving each objective the worse the performance in achieving the other

Question 28

What are Keynesian economists

Answer 28

Followers of the economist John Maynard Keynes who generally believe that governments should manage the economy particularly through the use of fiscal policy

Question 29

What are pro free market economists

Answer 29

Opponents of Keynesian economists who dislike government intervention in the economy and who much prefer the operation of free markets

Question 30

What is monetary policy

Answer 30

The use by the government and it’s agent the Bank of England of interest rates and other monetary instruments to try to achieve the governments policy objectives

Question 31

What is fiscal policy

Answer 31

The use by the government of government spending and taxation to try to achieve the governments policy objectives

Question 32

What is the balance of payments equilibrium

Answer 32

A situation in which a deficit or surplus on the current account of the balance of payments is exactly matched by capital inflows or outflows in the other parts of the balance of payments

Question 33

What is a macroeconomic indicator

Answer 33

Provides information from recent economic performance for judging the success or failure of a particular type of government policy

Question 34

What is an index number

Answer 34

A number used in an index such as the CPI to enable accurate comparisons over time to be made

Question 35

What is national income

Answer 35

The flow of new output produced by the economy in a particular period eg a year measured by the flow of factor incomes

Question 36

What is national product

Answer 36

The flow of new output produced by different industries in a particular period eg a year

Question 37

What is national capital stock

Answer 37

The stock of capital goods eg buildings and machinery in the economy that has accumulated o we time and is measured at a point in time

Question 38

What is human capital

Answer 38

The skills knowledge and experience possessed by the population

Question 39

What is national wealth

Answer 39

The stock of all goods that exists at a point in time that have value in the economy

Question 40

What is consumption

Answer 40

Total planned spending by households on consume goods and services produced within the economy

Question 41

What is the hidden economy

Answer 41

All the economic transactions conducted in cash which are not recorded in the national income figures because of tax evasion

Question 42

What is the purchasing power parity exchange rates

Answer 42

The rates of currency conversion that equalise the purchasing power of different currencies by eliminating the differences in price levels between countries

Question 43

What are the main uk policy objectives

Answer 43

-Achieve economic growth improve living standards and levels of economic welfare - create and maintain full employment or low unemployment. Limit or control inflation Attain a satisfactory balance of payments

Question 44

What objective has become very important since the 2008-09 recession

Answer 44

Balancing or at least reducing the governments budget deficit

Question 45

What are the main policy conflicts and their associated policy trade off

Answer 45

Full employments and growth —> achieving a satisfactory balance of payments Achieving full employment—> controlling inflation Increasing rate of economic growth —> achieving a more equal distribution of income and wealth High living standards now—> future living standards

Question 46

What do pro free market economists argue in terms of policy conflicts in the long run

Answer 46

If appropriate and and successful supply side policies are implemented the main objectives of macroeconomic policy are compatible with each other

Question 47

How can macroeconomic indicators divided

Answer 47

Into lead and lag indicators Lead provide information about the future state of the economy - survey of consumer and business confidence, investment intentions indicate the existence of a feel good or feel bad factor Lag provides information about the past and possibly current economic performance recent unemployment factors figures level of gdp

Question 48

What does net investment do

Answer 48

Only net investment increases the size of the capital stock thereby facilitating long run economic growth

Question 49

What happens if spending on replacement investments doesn’t take place

Answer 49

The national capital stock shrinks in size negative economic growth occurs and the economy’s production possibility frontier shifts inward

Question 50

What are the problems when using national income statistics to measure living standards

Answer 50

The non monetised economy The hidden economy Quality changes Negative externalities

Question 51

What limitations does national income date have when comparing living standards in different countries

Answer 51

Relative importance of the non monetised economy Exchange rates Traded and non traded goods

Question 52

What is the economists big max index

Answer 52

Big mac index as a light hearted guide to whether currencies are at their correct level