Macro Definitions

Question 1

Define interest rate

Answer 1

Reward for saving

Cost of borrowing

Question 2

What is the change in national income following government spending

Answer 2

ΔY=ΔG*Mulitplier

Thus ΔY=ΔG*(1/(1-MPC))

Question 3

Define multiplier effect

Answer 3

An initial injection will lead to a greater increase in National Income

Question 4

Define the accelerator

Answer 4

related to investment within the aggregate demand curve and suggests that investment is dictated by the change of output

Question 5

How is the accelerator calculated

Answer 5

I(t)=a*(Y(t)-Y(t-1))

With
I(t): investment
a: capital-output ratio: capital you need to produce a certain level of output
Example: You need to spend £10 million on machinery to create an output of £2 million, a=(10million/2million)=5

Y(t): National Income in same year
Y(t-1): Income in last year

Question 6

Qualities of a good tax

Answer 6

Fair: should only apply to those who can afford to pay
Easy to understand
Easy to collect (ie cheap)
Enforceable (to minimize evasion)

Question 7

Progressive tax

Answer 7

Tax that has an increasing marginal rate of tax

Example: income tax

Question 8

What are the three ways to influence money supply?

Answer 8

Discount Rate: Rate at which banks can loan money from the central bank

Reserve Requirement: Percentage of savings that banks are not allowed to loan out

Open-market operations: Buying and selling of securities (mostly government securities) on the open market by the central bank

Question 9

Advantages of monetary policy

Answer 9

Quickly
Flexible
Independent from the government (as central banks make the decisions –> no pressure of winning elections)

Question 10

Implications of depreciation of currency

Answer 10

+ Rise in exports sold

• Cost-push inflation
• Money invested abroad (as low exchange rates are often caused by low interest rates so that investors seek to invest it somewhere else)
• Less pressure to improve efficiency and competitiveness (as exports are high already)