Macro 6

Question 1

What are demand side shocks ?

Answer 1

unexpected changes in the economy that directly impact on aggregate demand

Question 2

What are possible causes of a demand side shock ?

Answer 2

Economic fluctuations experienced by a trading partner ,Domestic or foreign civil unrest , Unprecedented fluctuations in stock market prices, Changes to banking practices, Government policies

Question 3

What is the result of a demand side shock ?

Answer 3

The result of a demand side shock is an unexpected change in the economic cycle.

Question 4

What is a supply side shock ?

Answer 4

unexpected changes in the economy that directly impact on aggregate supply

Question 5

WHat is the result of a supply side shock ?

Answer 5

The result of a supply side shock is an unexpected change in the country’s short term aggregate supply

Question 6

What are the possible causes for a supply side shock ?

Answer 6

Changes to world commodity prices, e.g oil ,Government policy , taxation and spending , Trade union action , Shifts in net migration patterns

Question 7

What is the multiplier effect ?

Answer 7

Households only ever spend a proportion of their income so the £20 eventually fizzles out but it has generated spending in the economy.

Question 8

What is the accelerator theory ?

Answer 8

A rise in GDP will lead to a proportionally larger increase in investment . It shows the relationship between GDP and the rate of investment.

Question 9

What is the formula for the accelerator theory ?

Answer 9

I=A(Yt-Yt-1 )
I is investment in a time period
Yt-Yt1 is the change in real income during year t
A is the accelerator coefficient and is the capital output ratio

Question 10

What is the negative output gap ?

Answer 10

anywhere where we are not operating on trend GDP

Question 11

What does it mean to be on the negative output gap ?

Answer 11

This means the economy is working below full capacity , resources are not fully being utilised , aggregate demand is falling , potentially creating deflationary pressure.

Question 12

What is the positive output gap ?

Answer 12

the actual level of GDP is above that indicated as the productive potential of the economy of the trend line.

Question 13

What does it mean to be on the positive output gap ?

Answer 13

This means the economy is working above the full capacity , resources are stretched and aggregate demand is rising.

Question 14

What is a cost push ?

Answer 14

demand for scarce resources is high

Question 15

What is a demand pull ?

Answer 15

economic is high creating demand for goods