How The Macreoeconomy Works

Question 1

What is national income

Answer 1

The flow of new outpost produced by the economy in a time period

Question 2

How is the flow of national output produced

Answer 2

The economy must process a stock of physic capital goods and human capital goods (land and entrepreneurship)

Question 3

What is national capital stock

Answer 3

All physical assists owned by the nations residents as well as owned by the state e.g. schools and rosds

Question 4

How do national income, output and expenditure measure the flow of new output produced by the economy

Answer 4

Output - measures the goods and services produced
Income - income earned by labour
Expenditure - shows amount of consumption/ spending

Question 5

Draw a simplified circular flow model

Answer 5

Page 163

Question 6

2 flows between households and firms

Answer 6

Labour
Goods

Question 7

2 economic transactions between households and firms

Answer 7

Consumption
Income/ wage

Question 8

What is a closed economy

Answer 8

No international trade

Question 9

What is a withdrawal

Answer 9

A leakage of spending power out of the circular flow of income

Question 10

Examples of withdrawals of the circular flow

Answer 10

Savings
Imports
Taxes

Question 11

What are injections

Answer 11

Spending power entering the circular flow of income

Question 12

Examples of injections

Answer 12

Govern,ent spending
FDI
Exports

Question 13

When is national income in equilibrium

Answer 13

When planned saving equals planned investment

Question 14

What happens when withdrawal is less than the injection

Answer 14

The resulting net injections into economy causes output and income to rise and vice versa

Question 15

Macroeconomic equilibrium

Answer 15

AD = AS

Question 16

Draw a diagram for macro equilibrium

Answer 16

Pg 167 7.5

Question 17

What is an economic shock

Answer 17

An unexpected event hitting the economy
Demand or supply side
Favourable or unfavourable

Question 18

Example of UK economic shock

Answer 18

2014 flood and storm damage costs of. £15 billion
Heavy snow causing 0.5% reduction in national output in 2010

Question 19

Components of AD

Answer 19

Consumption
Investment
Government spending
Exports minus imports

Question 20

Aggregate consumption

Answer 20

Spending by all households in the economy on consumer goods and services

Question 21

Factors influencing consumption or saving

Answer 21

Interest rates
Level of income available
Expected future income
Wealth
Confidence in the economy

Question 22

How to calculate personal savings ratio

Answer 22

Actual personal saving ./. Personal disposable income

Question 23

What is investment in macro terms

Answer 23

Planned demand for capital goods
By improving education and training firms are investing in human capital

Question 24

Factors influencing investment decisions

Answer 24

Expected future sales revenue and costs of production
Future profits
Prices of capital and labour
The nature of technical progress
Adequacy of financial institution to supply the funds for invesmtnsg

Question 25

Where does the accelarator theory come from

Answer 25

The assumption that forms wish to keep a fixed capital:output ratio (accelerator coefficient)

Question 26

Why is it called the accelerator theory

Answer 26

-firms invest in same amount so level of investment is constant -if growth of output accelerates than investment increases as firms enlarge their capital stock and vice versa

Question 27

Link between AD and employment

Answer 27

As ad increases / output rises then firms employ more works to produce the additional goods and services

Question 28

National income multiplier

Answer 28

Measures relationship between initial change in component of AD and resulting change in level of national income

Question 29

Show the national income multiples on AD/AS curve

Answer 29

Page 178

Question 30

How to calculate multiplier

Answer 30

Change in Y / change in initial G

Question 31

Multiplier numerical example

Answer 31

G increases £10 billion tax revenue stays same Increases people’s incomes Everybody saves a small fraction Leads to smaller successes and further increases If multiplier was 2.5 than increase of national income was £25 billion 25/10=2.5

Question 32

Marginal propensity to consume

Answer 32

Fraction of the increase in disposable income that people plan to spend on goods E.g if plan to spend 20p of £1 income increase the MPC is 0.2

Question 33

Multiplier formula

Answer 33

K= 1/1- MPC If MPC 0.2 the multiplier is 1 / 0.8 = 1.25

Question 34

Nominal national income formulas

Answer 34

Real national income x average price level (Y=Py)

Question 35

Difference between SRAS and LRAS

Answer 35

SRAS- when the level of capital is fixed though utilisation of FOP can be altered to change real output LRAS- economy is producing at its productive potential, if more factors become available the curve shifts

Question 36

Draw increasing AD1,2,3,4 along SRAS curve and what each means

Answer 36

Page 181

Question 37

Two microeconomic assumptions to explain. Upwards SRAS

Answer 37

All firms aim to max profit In short run cost of producing extra units of output increases as firms produce more output

Question 38

Factors causing shift of SRAS curve right

Answer 38

Fall in business cost of production Fall in unit unit labour costs A reduction of indirect taxes Increases in granted subsidies to firms Improving quality of technical progress

Question 39

Where is the LRAS curve located

Answer 39

At the normal capacity level of output ( full production potential of economy occurs)

Question 40

Draw the LRAS and SRAS curve together

Answer 40

Page 183

Question 41

Factors that determine position oft the LRAS curve

Answer 41

State of technical progress Quantity of capital and labour Mobility of FOP Economic incentives Institutional structure e.g rule of law and efficiency of banking system

Question 42

Draw an shift in LRAS

Answer 42

Page 184

Question 43

Draw the Keynesian LRAS curve

Answer 43

Page 184 figure 7.18

Question 44

What does the horizontal part of Keynesian LRAS explain

Answer 44

That the economy can settle into an under full employment equilibrium

Question 45

demand side shocks

Answer 45

global financial crisis interest rate/tax cuts

Question 46

supply side shocks

Answer 46

volatile world commodity prices trade and investment deals geopolitical uncertainty climat change

Question 47

economic shock absorbers

Answer 47

monetary policy fiscal policy flexible labour market flexible product market