Key Definitions

Question 1

Supply

Answer 1

The quantity of a good or service that producers are willing and able to supply at a given time period and price

Question 2

Demand

Answer 2

The quantity of a good or service that consumers are willing and able to purchase at a given time period and price

Question 3

Elasticity

Answer 3

A measure of the sensitivity of one variable to changes in another variable

Question 4

Positive/Negative Externalities

Answer 4

The possible positive/negative spillover effect to an innocent third party not involved in the production or consumption of a good for which they receive no compensation

Question 5

Inflation definition

Answer 5

A general sustained and persistent rise in the price level of an economy over a given time period

Question 6

Deflation definition

Answer 6

A general sustained and persistent fall in the price level of an economy over a given time period at a negative figure

Question 7

Disinflation definition

Answer 7

A general sustained and persistent fall in the price level in comparison to the last measure of an economy over a given time period

Question 8

Price elasticity of demand

Answer 8

A measure of the sensitivity of quantity demanded in response to a change in its price

Question 9

Cross-Price elasticity of demand

Answer 9

A measure of the sensitivity of quantity demanded for one good in response to the change in price of another good or service

Question 10

Income Elasticity of demand

Answer 10

A measure of the sensitivity of quantity demanded in response to a change in consumer income

Question 11

Price elasticity of supply

Answer 11

A measure of the sensitivity of quantity supplied in response to a change in its price

Question 12

Indirect Tax

Answer 12

A tax levied on expenditure on goods or services

Question 13

Direct Tax

Answer 13

A tax levied directly on income

Question 14

Subsidy

Answer 14

A grant given by the government to producers to encourage its production

Question 15

Aggregate Demand

Answer 15

The total amount of effective demand in an economy

Question 16

Aggregate Supply

Answer 16

The total amount of effective supply in an economy

Question 17

Sticky prices

Answer 17

Pricing that is resistant to changing market conditions;

due to shoe leather costs, menu costs, unit of account costs

Question 18

Fiscal Policy

Answer 18

Use of taxation and government spending to manage AD in order to achieve the government’s macroeconomic aims

Question 19

Fiscal Drag

Answer 19

Inflation or income growth moves taxpayers into higher tax brackets

Question 20

Consumer surplus

Answer 20

A buyers willingness to pay for a product minus what they actually pay

Question 21

Producer surplus

Answer 21

The difference between the amount the producer is willing to supply goods for and the actual amount received for the good

Question 22

Deadweight loss

Answer 22

Excess burden, a measure of lost economic efficiency

Question 23

Supply side policies

Answer 23

Government policies designed to increase the rate of economic growth across the whole economy

Question 24

Monetary policy

Answer 24

A policy laid by the central bank, making changes to the management of the money supply and interest rate

Question 25

Balance of payments

Answer 25

Consists of current account*, capital account and financial account

• further consists or trade in goods, trade in services, investment income and transfers

Question 26

Current Account

Answer 26

Trade in goods/services, investment income, transfers

Question 27

Capital Account

Answer 27

Reflects net change in national ownership of assets

Question 28

Financial Account

Answer 28

Transactions in financial assets and liabilities

Question 29

Exchange Rate

Answer 29

The rate at which one currency can be converted into another

Question 30

Terms of trade

Answer 30

A measure of the ratio of export prices and import prices

Question 31

Absolute advantage

Answer 31

One country has an absolute advantage over the other country if it can produce the same amount of goods with fewer resources

Question 32

Comparative advantage

Answer 32

A country has a comparative advantage in the production of a commodity that it produces at a lower opportunity cost than its trading partners

Question 33

Assumptions about comparative advantage

Answer 33

No transport costs
Factors are perfectly mobile
No tariffs or trade barriers
Perfect knowledge

Question 34

Order of economic integration

Answer 34

Increasing integration ^
1. Political Union
2. Fiscal Union
3. Monetary Union
4. Common Market
5. Customs Union
6. Free Trade Area
7. Preferential Trade Area
8. Independant Economy