Lecture 28: Introduction to Macroeconomics

Question 1

What is macroeconomics?

Answer 1

the study of the economy as a whole

Question 2

What is the goal of macroeconomics?

Answer 2

to explain the economic changes that affect many households, firms and markets at once

Question 3

What is GDP?

Answer 3

the market value of all final goods and services produced within a country in a given time period

Question 4

What does GDP add together?

Answer 4

many different types of products using market prices to create a common unit of account for each good

Question 5

What are the four main components of GDP?

Answer 5

• consumption (C)
• investment (I)
• government purchases (G)
• net exports (NX)

Question 6

What does the C stand for in the components of GDP and what does this mean?

Answer 6

consumption

this is the spending by households on goods (eg. cars, appliances and food) and services (eg. haircuts and medical care)

Question 7

What does the consumption component of GDP not include? Where is it included instead?

Answer 7

the purchase of new housing

it is included under investment

Question 8

What does the I stand for in the components of GDP and what does this mean?

Answer 8

Investment
this is the purchase of goods (eg. capital equipment, structures, inventories and household purchases of new houses) that will be used in the future to produce other goods and services

Question 9

What does the G stand for in the components of GDP and what does this mean?

Answer 9

Government purchases

This is the spending on goods and services by local and central governments

Question 10

What things doe government spending include and what does it not include?

Answer 10

it includes the salaries of government employees and government workers but does not include transfer payments, as these payments do not reflect the economy’s production

Question 11

What does the NX stand for in the components of GDP and what does this mean?

Answer 11

net exports
this is the foreign purchase of domestically produced goods (exports) minus domestic purchases of foreign goods (imports)

Question 12

Are exports added to the equation determining the value of goods produced domestically? What does this mean?

Answer 12

they are not included and so they must be added to the equation

Question 13

Are imports added to the equation determining the value of goods produced domestically? What does this mean?

Answer 13

they are included and so they must be subtracted from the equation

Question 14

What is fiscal policy?

Answer 14

Government revenue collection (mainly taxes) and expenditure (spending) to influence the economy.

Question 15

What is Keynesian economics

Answer 15

The government changes in taxation and government spending can influence aggregate demand and the level of economic activity.

Question 16

What is the purpose of fiscal policy?

Answer 16

to stabilise the economy over the business cycle

Question 17

What is monetary policy?

Answer 17

monetary authorities control the supply of money, often targeting an inflation rate or interest rate to ensure price stability

Question 18

What is nominal GDP?

Answer 18

This uses current prices to value the economy’s production of goods and services in that year. Changes reflect both changes in the quantities of goods and services and their prices

Question 19

What is real GDP?

Answer 19

This uses constant (base year) prices o value production of goods and services. Changes in real GDP only change in the quantity of goods and services

Question 20

GDP is used as a measure of what? (2)

Answer 20

economic activity and economic well-being

Question 21

Although GDP can be used as a measure of economic well-being, what are four aspects of wellbeing that GDP does not take into account?

Answer 21

leisure time
non-market activities
Environmental quality
the distribution of income

Question 22

What does negative economic growth mean in terms of the size of the cake?

Answer 22

it shrinks the size of the cake

Question 23

What is GDP used as a key measure of?

Answer 23

a country’s living standards and economic development

Question 24

What things does depend on?

Answer 24

• nutrition
• health and longevity
• the distribution of income
• education levels and knowledge
• gender equality
• more broadly the ability of all people to participate ni society
• happiness

Question 25

Increase in GDP often means an increase in

Answer 25

income inequality

Question 26

Why do we care about GDP per capita?

Answer 26

1. GDP is highly correlated with most things we are interested in such as life expectancy, adult literacy rate, school enrolment rate
2. GDP is a cardinal measure, not just an ordinal measure so it makes sense to make comparisons across countries or through time

Question 27

GDP is a cardinal measure not an ordinal measure. What does this mean?

Answer 27

we can use the number to compare across time and countries

Question 28

Is there a positive or negative correlation between GDP and life expectancy?

Answer 28

positive

Question 29

Is there a positive or negative correlation between GDP and adult literacy?

Answer 29

positive

Question 30

Is there a positive or negative correlation between GDP and internet usage?

Answer 30

positive

Question 31

During a recession, you have __________ economic growth

Answer 31

negative

Question 32

Out of a recession you have ____________ economic growth

Answer 32

positive

Question 33

You typically see higher economic growth being achieved is _______ developed countries who are going into a

Answer 33

growth process

Question 34

What is the overall trend of the business cycle? What does this show?

Answer 34

it is increasing which shows that the economy is growing

Question 35

Where is a recession on the business cycle?

What is it defined as?

Answer 35

it is the period between a peak and a trough

it is defined as two quarters of negative growth in real GDP, a period with economic growth significantly below normal

Question 36

What happens to output and unemployment during a recession?

Answer 36

Output falls and unemployment rises

Question 37

What is a growth recession?

Answer 37

this is when GDP grows but GDP per capita falls and unemployment rises

Question 38

What happens to inflation during a recession?

Answer 38

there is less inflation (not deflation

Question 39

What is a depression?

Answer 39

this is a deep, long recession