Macro 1 and 2 REVISION

Question 1

Actual growth

Answer 1

The increase in actual (observed) output

Question 2

Potential growth

Answer 2

The increase in the economy’s capacity

Question 3

Business cycle

Answer 3

The periodic growth and decline of a nation’s economy

Question 4

Demand-side policies

Answer 4

Increasing government spending
Lowering taxes
Monetary policy

Question 5

Supply-side policies

Answer 5

Active labour market policies
Increasing technology
Encouraging investment

Question 6

Benefits of economic growth

Answer 6

Increased consumption
Reduces other macroeconomic issues
Scope of redistribution

Question 7

Costs of economic growth

Answer 7

Effects on distribution of income
Environmental costs
Depletion of resources

Question 8

Workforce (labour force)

Answer 8

Those available and willing to work

Question 9

Forms of unemployment

Answer 9

Frictional - inefficient job search - fluidity of labour market
Structural - Economic structure or regional effect
Seasonal - Interruption of economic activity depending on the season

Question 10

Inflation

Answer 10

The continuous rise in prices of goods and services (measure the percentage change in price level)

Question 11

Real flows

Answer 11

Trade in goods and services through the action of importing and exporting

Question 12

Monetary flows

Answer 12

Transfers of capital that must exist to facilitate the real flows, plus other flows required to maintain exchanges in assets

Question 13

Floating exchange rate regime

Answer 13

Exchange rate is determined freely by demand and supply in the foreign exchange (FOREX) market

Question 14

Types of economic agents

Answer 14

Firms - average firm in the economy
Consumer - average consumer in the economy
Policymaker - a monetary authority

Question 15

Types of markets

Answer 15

Labour market - between workers and firms
Goods market - between the consumer and the firm
Financial market - between the policymaker and both firms and consumers

Question 16

Circular Flow Model

Answer 16

Two agents - Firms and households
Money flows from firms to workers (wage)
Money flows from households to firms (consumption)

Speed of flow can be influenced by:

1) Injections (investment (I), government spending (G), exports (X))
2) Withdrawals (Savings (S) , taxes (T) , imports (M) )

Equilibrium: Injections = Withdrawals
Equilibrium condition:
S+T+M = I+G+X

Question 17

Keynesian Model

Answer 17

Argues the economy is demand led and firm’s production decision is based upon that demand

Aggregate production (Y) is determined by aggregate demand (E) - Y = E

In a closed economy the expenditure function (E) is written in terms of consumption (C), Investment (I) and Government spending (G):
Y = C + I + G

Question 18

Aggregate Supply / Aggregate Demand Model

Answer 18

Demand curve represents average consumer - shows a negative relation between price and output (e.g. higher price means lower demand)

Supply curve represents average firm - predicts positive relation between price and production (e.g. higher price means more supply)

Question 19

Money supply

Answer 19

Total amount of money in the economy

Question 20

Role of Central Bank

Answer 20

Maintains nation’s currency and foreign exchange reserves
Responsible for monetary policy
Raises cash required for government borrowing’s and printing money when required

Question 21

Types of monetary policy

Answer 21

Expansionary - actions that increase the money supply

Contractionary - actions that decrease the money supply

Question 22

Tools of the Central Bank

Answer 22

Open market operations (buying or selling bonds)
Lending reserves to commercial banks
Changing required reserve ratio

Question 23

Money market equilibrium

Answer 23

The supply and demand for money determine the money market equilibrium

Question 24

Interest rate

Answer 24

The price of money - how much you have to pay extra of one currency to get a particular amount of a different currency

Question 25

Expenditure

Answer 25

Consumption (C) Investment (I) Government Expenditure (G) Y = C+I+G (represents market for goods and services)

Question 26

Budget Surplus

Answer 26

Income exceeds expenditure

Question 27

Budget Deficit

Answer 27

Expenditure exceeds income

Question 28

Public Sector Borrowing Requirement (PSBR)

Answer 28

Amount of money the government requires to borrow in order to finance a budget deficit

Question 29

Working age population

Answer 29

Number of citizens of working age

Question 30

Natural rate of unemployment

Answer 30

The normal rate in the absence of shocks

Question 31

Participation rate

Answer 31

Percentage of the working age population in the labour force

Question 32

Labour market

Answer 32

Place where workers and firms interact to determine and equilibrium wage rate and amount of labour employed in the economy

Question 33

Equilibrium unemployment

Answer 33

Unemployment that exists in all states of the economy

Question 34

Disequilibrium unemployment

Answer 34

Unemployment 'depending' on the state of the labour market (e.g. due to demand deficiency)

Question 35

Price

Answer 35

Nominal value at which a good is sold Price of x = Market Fundamentals + Expected price of x in previous period

Question 36

Aggregate price

Answer 36

Average price of a good in the economy

Question 37

Trade off between price stability and economic activity

Answer 37

Inflation = Expected inflation + Market Fundamentals To reduce inflation we can either try to make impact upon the MF or change our expectations of inflation

Question 38

Market Fundamentals (MF)

Answer 38

The discounted present value of the stream of future cash flows attached to the asset - also described as the 'items that have a direct impact on future income streams of a security'

Question 39

Keynesian Cross approach to inflation

Answer 39

If equilibrium output is below full employment output then there is a deflationary gap If equilibrium out is above employment output then there is an inflationary gap

Question 40

Deflationary gap

Answer 40

Amount that national income exceeds aggregate expenditure (at full employment)

Question 41

Inflationary gap

Answer 41

Amount that aggregate expenditure exceeds national income (at full employment)

Question 42

Phillips curve

Answer 42

Maps out relationship between wage inflation and unemployment Policymakers face a choice between inflation and unemployment: 1) To reduce inflation the central bank can increase interest rates - raises unemployment 2) To reduce unemployment the central bank can lower interest rate - raises inflation Relationship appeared to be negative (downward sloping) CONCEPT BROKE DOWN IN THE 1970s

Question 43

Friedman's Natural Rate Hypothesis (NRH)

Answer 43

Unemployment will deviate in the short run around its long run natural rate Theory separates short run observations from the long run using the difference between inflation and 'expected' inflation: When inflation is at its expected level, unemployment is at its 'natural' level Deviations of unemployment from the natural rate are assumed short run Reaction of unemployment to expansionary economic policy: - Increase in aggregate demand decreases unemployment but creates unexpected inflation - Increase in money supply causes movement along SRPC - unemployment declines and inflation is higher than expected - over time expectations adjust, SRPC shifts up and economy returns to natural state