Economics-Macroeconomics

Question 1

Define Macroeconomics

Answer 1

The study of how resources are allocated in the national economy and how they are used to meet the government’s macroeconomic objectives

Question 2

What are the governments objectives?

Answer 2

.Economic growth- a steady increase in national output (GDP)
.Price stability- a low and stable rate of inflation
.Low unemployment
.Reduce the national debt/budget deficit
.Balance of payments- value of exports = value of imports
.Equitable distribution of income
.Environmental sustainability

Question 3

How is the value of an economy calculated?

Answer 3

1. Output method- product of the value of goods and services produced in an economy
2. Income method- product of the value of any incomes earned in the economy
3. Expenditure method- measures the value of all spending on goods and services in the economy

Question 4

What does the two-sector circular flow of income model show?

Answer 4

Factors of production into an economy brings Income (income method) which is Spending on goods/services (expenditure method) which gets Goods and services (output method)

Question 5

What does the four-sector circular flow of income model show?

Answer 5

The impact of leakages and injections into the economy

Question 6

What ways can money enter (injections) an economy?

Answer 6

. Investments
. Government spending
. Spending on exports

Question 7

What ways can money leave (leakage/withdrawal) an economy

Answer 7

. Savings
. Taxes
. Spending on imports

Question 8

What are the limitations of the national income data?

Answer 8

.Inaccuracies- data from some resources are unreliable
.Improving quality- new technology is not included in the GDP
.Unrecorded economic activity- jobs such as child care is not recorded in the GDP because it is private
.Illegal activity (shadow market) is not included- e.g. drug dealing raises the GDP but is not included
.External costs- Negative externalities are not taken into account

Question 9

What is the equation for GDP per capita?

Answer 9

Total GDP ÷ Population

Question 10

Define aggregate demand

Answer 10

The total of all expenditures in an economy- equivalent to expenditure method

Question 11

What are the components of aggregate demand?

Answer 11

.Consumption (C) - spending by households on goods and services
.Investment (I) - spending by firms on capital goods e.g. machinery
.Government spending (G) - spending by the government on capital goods e.g hospitals
.Net exports (X-M) - the value of exports minus imports into the UK

Question 12

What is the equation for aggregate demand?

Answer 12

AD = C + I + G + (X - M)

Question 13

What affects consumption?

Answer 13

.Reduction/rise in income
.Increase/decrease in taxes
.Increase/decrease in wealth
.increased/decreased consumer confidence

Question 14

What affects investment?

Answer 14

.Increased/decreased business confidence
.Rise/fall in interest rates
.Advances in new technology

Question 15

What affects government spending?

Answer 15

.Ageing population
.Rise in population levels
.Policies

Question 16

What affects exports and imports?

Answer 16

.Rise in income in other countries
.Better quality manufacturing in the UK
.Fall in exchange rates

Question 17

Why is the aggregate demand curve down sloping?

Answer 17

.Wealth effect- as price increases wealth decreases in value
.As price increases interest rates increase so investment falls
.As price increases price of exports increase so fewer people buy them

Question 18

What is aggregate supply?

Answer 18

The sum of all planned production in the economy, equivalent to the output method of calculating GDP.

Question 19

What is short run aggregate supply?

Answer 19

When at least one factor of production cannot be varies.

Question 20

What factors shift the SRAS curve?

Answer 20

1. Increase in wage rates
2. A change in the cost of raw materials
3. A change in the exchange rate altering import prices
4. Changes in government subsidies and indirect taxes

Question 21

What is the long run aggregate demand?

Answer 21

When all factors of production can be varied

Question 22

What do classical economists believe about the LRAS

Answer 22

When supply is equal to demand in every market in the economy there is only one level of GDP that can exist, the LRAS. It represents the full employment level of output.

Question 23

How does the LRAS similar the PPF curve?

Answer 23

The LRAS is equal to producing on the PPF of an economy, all resources are fully employed.

Question 24

What do classical economists believe about the LRAS curve?

Answer 24

They believe that the LRAS curve is vertical at the full employment level of output. The only way to improve the LRAS is to improve the quality/quantity of factors of production.

Question 25

What factors shift the LRAS curve?

Answer 25

1. Privatisation- individuals own the firm
2. Deregulation-
3. Reducing the nun wage
4. Remaining legal barriers on businesses

Question 26

What will an increase in the AD lead to on the SRAS?

Answer 26

An increase in the real GDP and the price level

Question 27

What will an increase in the AD lead to on the LRAS?

Answer 27

An increase in the price level

Question 28

What will an decrease in the AD lead to on the SRAS?

Answer 28

A decrease in real GDP and the price level

Question 29

What will an decrease in the AD lead to on the LRAS?

Answer 29

A decrease in the price level

Question 30

What is the negative output gap?

Answer 30

Deflation- when the price level decreases

Question 31

What is the positive output gap?

Answer 31

Inflation- when the price level increases

Question 32

Why is the Keynesian curve so shaped?

Answer 32

ut7utu