MACRO 2 - How the Macroeconomy works

Question 1

What is national income?

Answer 1

the total value of goods and services a country produces, the output in one year

Question 2

Whats is real GDP?

Answer 2

the value of GDP adjusted for inflation

Question 3

What is nominal GDP?

Answer 3

the value of GDP without being adjusted for inflation

Question 4

What is GNP?

Answer 4

the market of all products produced in an annum by labour and property supplied by the citizens of that country

Question 5

What is GNI?

Answer 5

the sum value added by all producers who reside in a nation

Question 6

What is the circular flow of income?

Answer 6

a model that illustrates how money circulates through economic agents around an economy

Question 7

What does the circular flow of income show?

Answer 7

the interconnections and relationships between economic agents

Question 8

Firms to households (2 sector economy)

Answer 8

• goods and services
• income (wages and rent)

Question 9

Households to firms (2 sector economy)

Answer 9

• consumption
• factors of production

Question 10

What are injections?

Answer 10

money which enters the economy

Question 11

Examples of injections:

Answer 11

investment, exports, government spending

Question 12

What are withdrawals?

Answer 12

money which leaves the economy

Question 13

Examples of withdrawals:

Answer 13

taxation, imports, savings

Question 14

What are net injections?

Answer 14

expansion of national output

Question 15

What are net withdrawals?

Answer 15

contraction of production, decrease of output

Question 16

When is equilibrium reached?

Answer 16

rate of withdrawals = rate of injections

Question 17

What is the expenditure method?

Answer 17

consumption + investment + exports + government spending

Question 18

What is the income method?

Answer 18

wages + rent + interest + profits

Question 19

What is the output method?

Answer 19

value of all output produced

Question 20

What is aggregate demand?

Answer 20

total demand in the economy

Question 21

What does AD measure?

Answer 21

spending on goods and services by consumers, firms, government and overseas firms / consumers

Question 22

Why does the AD curve slope downwards?

Answer 22

at a lower price level, more output is demanded

Question 23

What is the equation for AD?

Answer 23

AD = C + I + G + (X-M)

Question 24

What is consumption?

Answer 24

the total amount spent by households on goods and services (not firms)

Question 25

How much % is consumption of AD?

Answer 25

70% (roughly)

Question 26

Factors that affect consumption:

Answer 26

- income / employment - interest rates - consumer confidence - taxes - wealth effects

Question 27

What is investment?

Answer 27

the addition to the capital stock by firms e.g. machinery

Question 28

How much % is investment of AD?

Answer 28

15% (roughly)

Question 29

Factors affecting investment:

Answer 29

- risk - government incentives - interest rates & access to credit - technical advances - business confidence

Question 30

What is government spending?

Answer 30

the money spent by the government on public goods and services e.g. NHS

Question 31

How is government spending financed?

Answer 31

through taxations

Question 32

When is the budget in a deficit?

Answer 32

GS > revenue

Question 33

When is the budget in a surplus?

Answer 33

GS < revenue

Question 34

What does a budget surplus lead to?

Answer 34

overall withdrawals

Question 35

What does a budget deficit lead to?

Answer 35

overall injections

Question 36

What are exports?

Answer 36

goods and services bought by another country (injection) (inflow of money)

Question 37

What are imports?

Answer 37

goods and services bought in by a country (withdrawal) (outflow of money)

Question 38

When is there a trade surplus?

Answer 38

exports > imports

Question 39

When is there a trade deficit?

Answer 39

exports < imports

Question 40

Factors affecting exports + imports:

Answer 40

- exchange rates - changes in international economies - degree of consumption - non price factors

Question 41

What is aggregate supply?

Answer 41

the quantity of real GDP which is supplied at different levels of price in an economy

Question 42

Why does the aggregate supply slope curve upwards?

Answer 42

at higher price levels, producers are willing to supply more so they can earn more profit

Question 43

When does the SRAS curve shift?

Answer 43

when there are changes in the condition of supply: - cost of employment - cost of other inputs - government regulations / intervention

Question 44

What is LRAS?

Answer 44

represents the maximum output when all factors of production are fully + efficiently employed (long run)

Question 45

What is SRAS?

Answer 45

when the prices + quantity of capital is fixed, it is the quantity of supply firms will produce in an economy at a given price level (labour & raw materials can be changed) (immediate / short run)

Question 46

What is an LRAS curve the same as?

Answer 46

a PPF

Question 47

Determinants of LRAS:

Answer 47

- technology - enterprise - labour and quality of inputs - infrastructure improvements

Question 48

Determinants of SRAS:

Answer 48

- wage rates - raw materials - tax / subsidies / grants - productivity - exchange rates

Question 49

What is macroeconomic equilibrium?

Answer 49

rate of withdrawals = rate of injections AND/OR AD = AS

Question 50

Factors that influence economic activity:

Answer 50

- employment - confidence - events - taxes + interest rates

Question 51

What is the multiplier process?

Answer 51

new demand leads to an injection of more income, which leads to economic growth

Question 52

What is the multiplier ratio?

Answer 52

the ratio of the increase in national income to the initial rise in AD

Question 53

What is marginal propensity to consume? (MPC)

Answer 53

how much a consumer changes their spending following a change in income

Question 54

What is marginal propensity to save? (MPS)

Answer 54

the proportion of an increase in income that gets saved instead of spent on consumption

Question 55

What is the equation for MPC and MPS?

Answer 55

MPC + MPS = 1

Question 56

What is the equation for the multiplier?

Answer 56

1 / (1 - MPC)

Question 57

What is the multiplier effect?

Answer 57

when an individual increase in one of the components of AD leads to an overall larger increase in AD

Question 58

What is the accelerator effect?

Answer 58

the positive relationship between changes in AD and investment