Definitions

Question 1

What is meant by an ‘output gap’?

Answer 1

A measure of the difference between actual and potential growth

Question 2

What are the two tools of the fiscal policy?

Answer 2

Government spending

Taxation

Question 3

What are the three tools of the monetary policy?

Answer 3

Interest rates
Government easing
Credit controls

Question 4

What is the multiplier effect?

Answer 4

-identified by Keynes

Where and initial increase in spending leads to a greater increase in output

Question 5

The multiplier

Answer 5

The number of times a rise in national incomes exceeds the rise in injections that cause it

Question 6

Productivity

Answer 6

Is output per unit of input

Question 7

Standard of living

Answer 7

A measure of welfare of people living in an economy

Question 8

Circular flow of income

Answer 8

A model of the economy which shows the movement of goods and services between households and firms

Question 9

Supply side policies

Answer 9

Measures by the government to increase productive capacity of the economy

Question 10

Examples of supply side policies

Answer 10

Reduction in corporation tax - can produce more cheaper more supply
Improved education
Improved training
Cut benefits - incentive
Reduce income tax - incentive
Infrastructure - reduce industries costs improves access to market

Question 11

what is an economy?

Answer 11

a system which attempts to resolve the basic economic problem of scarce resources in a world of infinite wants

Question 12

what is an economic system

Answer 12

a mechanism for deciding what is to be produced, how production is to take place and who is to receive the benefit of that production

Question 13

define economic growth

Answer 13

the rate of change of output (GDP)

Question 14

define inflation

Answer 14

the increase in average prices in an economy

Question 15

define aggregate demand

Answer 15

the total of all demands or expenditures in the economy at any given price

Question 16

define average propensity to consume

Answer 16

the proportion of a total income spent.

C/Y

Question 17

define average propensity to save

Answer 17

the proportion of a total income which is saved

S/Y

Question 18

define consumption

Answer 18

total expenditure by households on goods and services over a period of time

Question 19

define marginal propensity to consume

Answer 19

the proportion of a change in income which is spent

AC/AY

Question 20

define marginal propensity to save

Answer 20

the proportion of a change in income which is saved

AS/AY

Question 21

define the wealth effect

Answer 21

the change in consumption following a change in wealth

Question 22

define gross investment

Answer 22

the addition to capital stock, both to replace the existing capital stock which has been used up and the creation of additional capital

Question 23

define investment

Answer 23

the addition to the capital stock of the economy

Question 24

define net investment

Answer 24

gross investment minus depreciation

Question 25

define retained profit

Answer 25

profit kept back by a firm for its own use which is not distributed to shareholders or used to pay taxation

Question 26

define net exports or the net trade balance

Answer 26

exports minus imports

Question 27

marginal propensity to import (MPI)

Answer 27

increase in imports divided by the increase in income that caused them (AM/AY)

Question 28

marginal propensity to save (MPS)

Answer 28

increase in saving divided by the increase in income that caused it (AS/AY)

Question 29

marginal propensity to tax (MPT)

Answer 29

increase in tax revenues divided by the increase in income that caused them (AT/AY)

Question 30

marginal propensity to withdraw (MPW)

Answer 30

increase in withdrawals from the circular flow (S+T+M) divided by increase in income that caused them (AW/AY)

same as the sum of the marginal propensity to save, tax and import

Question 31

multiplier or national income multiplier ir keynesian multiplier of real multiplier

Answer 31

the figure used to multiply a change in an injection into the circular flow

such as investment, to find the final change in income

Question 32

multiplier effect or process

Answer 32

an increase in investment or other injection will lead to an even greater increase in income (assuming the injection is not determined by income)