Macro 2

Question 1

Economic agent - definition

Answer 1

> An individual or company that influences an economy by producing, selling or buying goods and services or investing money.

Question 2

What are the 3 key economic agents?

Answer 2

1. Firms.
2. Government.
3. Households.

Question 3

Households

Answer 3

> Role: to supply factors of production and purchase goods and services.
Objective: maximise personal satisfaction.
Incentive: price changes.

Question 4

Firms

Answer 4

> Role: to convert factors of production into goods and services.
Objective: maximise satisfaction.
Incentive: cost changes.

Question 5

Government

Answer 5

> Role: to generate revenue to provide an essential economic framework.
Objective: maximise personal welfare.
Incentive: votes.

Question 6

In theory what does an increase in goods and services mean?

Answer 6

> An increase in economic activity leads to increased utility in theory.

Question 7

Difficulty on the island.

Answer 7

> Placing value on production.

Question 8

Economic activity - info

Answer 8

> When money is being used within the economy, the amount that is being spent by consumers or received by producers is a good measure of how much economic activity there is.
The model presented by the circular flow of income is a useful tool to explain how trade and production occur within an economy and to aid us in measuring the level of economic activity in an economy.

Question 9

What 3 things might economists measure to see economic activity in an economy?

Answer 9

1. Total production of goods and services.
2. Total household income.
3. Total expenditure.

Question 10

What might an economist do to calculate a measure of the size of an economy?

Answer 10

> An economist will measure the amount of money spent on goods and services, the total value of goods and services or the total income earned through factor payments over the course of the year to calculate a measure of the size of an economy.

Question 11

Nominal vs real GDP

Answer 11

> Nominal GDP will include apparent increases in income and expenditure that arise merely because of inflation whereas real GDP is adjusted to account for inflation.

Question 12

Nominal national income - definition

Answer 12

> The total income of an economy.

Question 13

Real national income - definition

Answer 13

> The total income of an economy adjusted for inflation.

Question 14

National income - definiton

Answer 14

> The total monetary value of the output of goods and services within an economy over a given period of time. Also, the total income earned in an economy over time.

Question 15

Investment - definition

Answer 15

> Money spent by firms on capital goods to aid production. Often funded through borrowing from financial institutions.

Question 16

Imports - definition

Answer 16

> Value of goods and services bought from outside an economy.

Question 17

Exports - definition

Answer 17

> Value of goods and services produced within a national economy and sold abroad.

Question 18

Injection - definition

Answer 18

> Money entering the circular flow of income.

Question 19

Withdrawal/leakage - definition

Answer 19

> Money leaving the circular flow of income.

Question 20

Population increase and GDP

Answer 20

> If the population of a country increases then it’s very likely that the consumption and output of goods and services within the country will increase but this doesn’t mean that the average person is consuming more than before.
This is why economists often will refer to GDP per capita when discussing economic growth.

Question 21

Circular flow - basic form

Answer 21

> The households and firms in the CF form a closed loop.
With no other agents present, money that is earned by households can only be put back into the economy to buy goods and services and revenue from sales can only go back into paying for more factors of production.
When we add the government, banks and the foreign sector, this loop is no longer closed and money can leave and enter the economy.
When injections or leakages increase, the rate of flow will change, which affects the GDP of the economy.

Question 22

GDP Formula - short

Answer 22

GDP = C + I + G + (X-M).

Question 23

GDP Formula - what the letters stand for

Answer 23

1. C = consumption/household expenditure.
2. I = investment.
3. G = government spending.
4. X = total value of exports.
5. M = total value of imports.
6. (X-M) = net exports.

Question 24

Ceteris Paribus - definition

Answer 24

> Latin term meaning ‘other things equal’.

>E.g. all variables, which could affect outcome remain the same.

Question 25

Q. Explain a fall in interest rates affect on GDP.

Answer 25

1. Fall in cost of borrowing = fall in cost of investment = rise in chance of profit for firms = rise in income = GDP formula = rise in capital goods = rise in exports = rise in GDP.
2. Fall in cost of borrowing = fall in cost of payments for buying on credit = rise in purchases of expensive items = rise in consumption = rise in GDP.
3. Fall in reward for saving = lower OC from spending = increase in buying = rise in goods and services = rise in income = rise in GDP.
4. Fall in currency’s exchange rate = rise in UK exports = decrease in UK imports = increase in balance of payments = rise in GDP.

Question 26

Base rate of interest for Bank of England

Answer 26

0.75%