L1 - Introduction

Question 1

What is fiscal and monetary policy?

Answer 1

Monetary - actions of central banks

Fiscal - polices of the governement

Question 2

What is unemployment rate?

Answer 2

The fraction of the labor force

that wants work but does not have a job

Question 3

How do budget and trade deficits occur?

Answer 3

Budget deficit - Government spending > Tax revenues

Trade deficit - value of imports > value of exports

Question 4

What are the three parts of an economic model?

Answer 4

Parameter, Exogenous variable, Endogenous variable

Question 5

How might you model supply and demand for pizza?

How might an increase in aggregate income or rise in material prices affect equilibrium?

Answer 5

Quantity demanded as a function of pizza price and aggregate income. Quantity supplied as a function of pizza price and cost of materials. Assume pizza price adjusts to bring supply = demand - market equilibrium

Question 6

List 4 things you should keep track of in a model.

Answer 6

Its assumptions, endogenous variable, exogenous variable, the questions it can help us understand (and those it cannot)

Question 7

What is market clearing?

Answer 7

The assumption that prices are flexible and adjust to equate supply and demand

Question 8

What does it mean for a price to be ‘sticky’?

Answer 8

It adjusts sluggishly to supply/demand imbalances - demand won’t always equal supply

Question 9

Which price type best describes short run economic behaviour? Which best describes long run behaviour?

Answer 9

Sticky - short run behaviour

Flexible - long run behaviour