E4 Macroeconomics

Question 1

explain the ROLES OF GOVT

Answer 1

collect TAX → fund SPENDING → EG, LS, PE, redistribute income

REGULATION → correct market failure (PE, NE, monopoly, environment)

Question 2

what are the MACROECONOMIC GOALS of govt?

Answer 2

EGlow UElow IFBP (balance of payment/current account)income redistributionenvironment

Question 3

define ECONOMIC GROWTH

how can govt achieve it?

Answer 3

annual increase in output/GDP

through increase AD or AS

Question 4

define INFLATION, DEFLATION, DISINFLATION

Answer 4

IN-: sustained INCREASE in price level over a period of time
DE-: sustained DECREASE in price level over a period of time
DISIN-: price level still INCREASE but SLOWER

Question 5

causes of INFLATION?

Answer 5

income, tax, IR, confidence → AD → demand-pull inflation

income, tax → COP → cost-push inflation

Question 6

define UNEMPLOYMENT

Answer 6

willing + able + actively looking, but can’t find a job

Question 7

effects of UE

Answer 7

no income
→ AD 
→ poverty + health problem → LS
→ crime, drug... → NE
→ G spending on UE benefit + healthcare + correct NE → budget deficit!

Question 8

define REDISTRIBUTION OF INCOME

how can govt achieve it?

Answer 8

take money from rich, transfer to poor

tax → G spending (welfare, benefits, merit/public g/s)

Question 9

define BALANCE OF PAYMENT

how can govt achieve it?

Answer 9

difference in payments into & out of a country over a period of time

through price stability, tariff, subsidy, quota

Question 10

define ACTUAL and POTENTIAL growth

Answer 10

ACTUAL: OUTPUT increases (inside → on PPC curve)
POTENTIAL: PC increases (PPC curve shifts outwards)

Question 11

how do you calculate AD?

Answer 11

C + I + G + (X-M)

Question 12

calculate and define UNEMPLOYMENT RATE

Answer 12

(unemployed / labor force) x 100%

% of labor force who are willing+able+actively looking but can’t find jobs

Question 13

define govt BUDGET, budget DEFICIT and budget SURPLUS

Answer 13

budget: govt’s financial plans for revenue and spending

deficit: revenue < spending
surplus: revenue > spending

Question 14

define FISCAL policy

Answer 14

using TAX and G SPENDING to influence economic activity and achieve economic goals

Question 15

REASONS for govt SPENDING?

Answer 15

💵Redistribute income (welfare, benefits)

👍PE/SB (merit, public)

Question 16

CONS of govt SPENDING?

Answer 16

budget deficit
funded by increased tax
DP inflation

Question 17

define DIRECT TAX and INDIRECT TAX

Answer 17

DIRECT: on individual/firms (eg. income, profit, wealth)
INDIRECT: on consumption (eg. GST, VAT)

Question 18

define TAX RATE

Answer 18

% of income paid as tax

Question 19

pros and cons of DIRECT TAX?

Answer 19

+ progressive
+ high revenue
- reduce incentive

Question 20

pros and cons of INDIRECT TAX?

Answer 20

• regressive
• low tax revenue
  + discourages demerit g/s

Question 21

define PROGRESSIVE, REGRESSIVE, and PROPORTIONAL tax

Answer 21

PROGRESSIVE: higher income higher tax rate
PROPORTIONAL: same tax rate for everyone
REGRESSIVE: lower income higher tax rate

Question 22

what’s the difference between tax EVASION and tax AVOIDANCE?

Answer 22

evasion - illegal (eg. under-declaring profit)

avoidance - legal (eg. non-smokers don’t pay tobacco tax)

Question 23

reasons for TAXATION

Answer 23

💰Fund G spending → redistribute income
🚬Discourage c/p of demerit goods → correct NE
🚢Discourage import (tariff) → correct CA deficit, protect domestic firms

Question 24

qualities of good tax

Answer 24

Efficient/Effective
Flexible
Fair
Convenient 
Certain

Question 25

define MONETARY POLICY

Answer 25

using IR, XR and MS to influence economic activity and achieve economic goals

Question 26

define IR

Answer 26

reward for saving + cost of borrowing

Question 27

define SUPPLY-SIDE POLICY

Answer 27

aims to increase AS + PC → EG

includes E&T, subsidy, investment, deregulation, privatization…

Question 28

define GDP and real GDP

Answer 28

GDP: total output

REAL GDP: total output adjusted to inflation

Question 29

how do you measure GDP?

Answer 29

income + spending + output

Question 30

define RECESSION

Answer 30

fall in real GDP over more than half a year

caused by decrease in AD/AS

Question 31

define EMPLOYMENT

Answer 31

work + receives payment

Question 32

define FULL EMPLOYMENT

Answer 32

lowest UE possible

Question 33

define LABOR FORCE

Answer 33

working age + able + willing to work

Question 34

calculate LABOR MARKET PARTICIPATION RATE

what can this be influenced by?

Answer 34

labor force / working age population

influenced by wage, women’s participation, ppl who continue even higher education

Question 35

define CYCLICAL unemployment

Answer 35

caused by lack of AD

Question 36

define STRUCTURAL unemployment

Answer 36

caused by immobility of labor

Question 37

define FRICTIONAL unemployment

Answer 37

caused by ppl change between jobs (temporary)

Question 38

how do you calculate INFLATION?

Answer 38

CPI

(average P current year) / (average P base year) x 100