Intro to Macroeconomics

Question 1

Standard of Living (Material) refers to?

Answer 1

the amount of goods and services available for a country’s residents for consumption

Question 2

How can Material SOL be measured?

Answer 2

1. national output - amount of goods and services produced in the economy
2. per capita earnings - average income per person in the country

Question 3

What are the macroeconomic objectives governments will aim to achieve?

Answer 3

1. Sustainable and inclusive economic growth rate
2. Price stability (low and stable inflation)
3. Full employment (low unemployment rate)
4. Favourable balance of trade

Question 4

Definition of “Sustainable economic growth”

Answer 4

indicates a rate of positive and stable
growth that can be maintained without creating other significant economic
problems, particularly for the future generations (e.g. environmental problems, depleted resources)

Question 5

Definition of “inclusive economic growth”

Answer 5

indicates a rate of growth that is:
1. sustained over a period of time
2. broad-based across economic sectors
3. creates productive employment opportunities for the majority of the
country’s population

Question 6

Why do governments aim to achieve positive economic growth?

Answer 6

1. ensures growth in income
2. ensures creation of jobs for residents
3. residents are able to enjoy higher material SOL

Question 7

Why do governments aim to achieve sustainable economic growth?

Answer 7

1. ensures that the material standard of living of a country’s residents can
   increase continually, especially for future generations
2. no environmental problems (e.g. pollution) = higher non-material SOL of residents

Question 8

Why do governments aim to achieve inclusive economic growth?

Answer 8

1. ensures that improvement in material SOL is enjoyed collectively by the whole population

Question 9

What are the indicators for sustainable economic growth?

Answer 9

GDP, GDP per capita and GDP growth rate

Question 10

How do we determine a country’s actual economic growth rate?

Answer 10

rate of increase in real GDP

Question 11

What does a country’s potential economic growth rate refer to?

Answer 11

it refers to its improvement in productive capacity

Question 12

How is a recession indicated?

Answer 12

a trend of two consecutive quarters of negative GDP growth

Question 13

What does a gini coefficient of 0 indicate?

Answer 13

total income equality
(which means to say, the lower the gini coeff, the better)

Question 14

What does “full unemployment” refer to?

Answer 14

when all labour resources are utilised

Question 15

What is “natural rate of unemployment”?

Answer 15

the base level of unemployment that will exist in an economy, even at full employment

Question 16

Why does “natural rate of unemployment” exist?

Answer 16

1. seasonal fluctuations in the demand for labour
2. poor information in the labour market, hence, time lag in finding a suitable job

Question 17

What are the rationales behind the aim of achieving full unemployment?

Answer 17

1. to utilise all resources to produce at maximum possible output level –> realising economy’s potential output –> attains maximum SOL possible given the resources
2. more employment –> more workers able to earn income to spend on goods and services –> higher SOL
3. more employment –> larger population that can contribute to income tax –> tax revenue collected higher –> government has more financial resources to spend on sectors that can improve citizens’ SOL
4. reduce burden of govt bc govt often has to hand out unemployment benefits (spending large amounts on this)

Question 18

What does the unemployment rate represent?

Answer 18

The percentage of the labour force that are not working but actively searching for jobs

Question 19

What does “inflation” refer to?

Answer 19

a sustained increase in general price level

Question 20

What does “price stability” mean? What is its indicator?

Answer 20

it means that a country faces a low inflation rate, which means that there is a slow rise in the general price level
. (govts usually aim for 2-3%)

indicator: consumer price index (cpi)

Question 21

What are the rationales behind the aim of price stability?

Answer 21

1. keep households’ purchasing power strong –> maintain their SOL
2. stable rate of inflation = prices do not fluctuate excessively –> ensures predictability in current and future costs –> creates positive business sentiments –> firms will have more confidence to undertake investment projects –> –> thereby promoting economic growth –> improving SOL

Question 22

Is negative inflation/deflation undesirable? Why?

Answer 22

Yes, it reflects a slowing
economy. Deflation is often an indication that the economy is not doing
well. Economic growth is likely to slow or even turn negative because it
is very likely that consumers will postpone their purchases because they
expect to have to pay less for them in the near future. This leads to
lower standard of living.

Question 23

How can you tell if there is a higher rate of inflation using the Consumer Price Index (CPI)?

Answer 23

when CPI increases at larger rate over time, there is a higher
rate of inflation (price level increases at increasing rate)

Question 24

What is “balance of trade”?

Answer 24

X - M, for a given period of time (usually a year)

X = revenue earned from the sales of a
country’s EXPORTS of goods and services

M = expenditure
spent on a country’s total IMPORTS of goods and services

Question 25

When does a balance of trade (BOT) surplus occur? When does a BOT deficit occur? What does a BOT deficit indicate?

Answer 25

BOT surplus occurs when X > M

BOT deficit occurs when X < M. This suggests that the economy is not earning enough from its exports to pay for its imports.

Question 26

What are the rationales behind the aim of “favourable balance of trade”?

Answer 26

1. a favourable BOT suggests that an economy is not experiencing a large and persistent trade deficit. implies that the economy is earning enough from the sale of exports to pay for its spending on imports
2. when a country faces a large and persistent trade deficit, financing the
   imports could result in the government:

   a. borrowing from overseas (= country will be poorer bc govt has to repay loans with interest)

   b. spend foreign currency reserve to pay for the imports (= country poorer as country now has lower foreign currency reserves)

i.e. spend foreign currency reserve to pay for the imports.country is sacrificing future living
standards for spending on current living standards.

3. BOT surplus = net exports are increasing –> country can enjoy economic growth
4. country’s domestic currency rate will be stronger