Macro- Output + Aggregate Demand

Question 1

Define Macroeconomics

Answer 1

Study of the Economy as a System.

Deals with Broad Aggregates

Question 2

What are the 2 main Key issues in Macroeconomics?

Answer 2

Economic Growth

Macroeconomic Policy

Question 3

What is Economic Growth

Answer 3

Increase in Real GNP + GNP/capita

It is an Indication of Expansion of the Economy’s Total Output

Question 4

What is Macroeconomic Policy

Answer 4

Variety of Policy Measures used by the Gov. to affect Overall Performance of the Economy

Question 5

Define Inflation

Answer 5

Rate of Change of the General Price Level

Question 6

Define Unemployment

Answer 6

Measure of the Number of People looking for work but are without Jobs

Question 7

Define Output

Answer 7

Real Gross National Product (GNP) measures Total Income of an Economy

Question 8

What are the 5 main Measures of Output?

Answer 8

GDP
GNP
Value Added
Final Goods
Intermediate Goods

Question 9

Define GDP

Answer 9

Output made within the Borders of an Economy

Question 10

Define GNP

Answer 10

Total Income an Economy

Question 11

What is Value Added?

Answer 11

Increase in the Value of Goods as a result of the Production Process

Question 12

Define Final Goods

Answer 12

Goods purchased by the ultimate user- households or firms

Question 13

What are Intermediate goods?

Answer 13

Partly finished Goods that form Inputs to a subsequent Production Process that then uses them up

Question 14

What are the 3 Measures of National Output?

Answer 14

Expenditure
Income
Output

Question 15

What does the Expenditure Method calculate?

Answer 15

Y = C + I + G + X - Z

Total Expenditure in the Economy

Question 16

What does the Income Method calculate?

Answer 16

Sum of all Incomes Paid for Factor Services

e.g. Wages, Profits etc.

Question 17

What does the Output Method calculate?

Answer 17

Sum of Total Output (Value Added) produced in the Economy

Question 18

How do we distinguish between Real and Nominal GNP?

Answer 18

GNP Deflator

Question 19

What is the GNP Deflator?

Answer 19

Index showing what happens to the Price of all Goods

CPI is not good enough

Question 20

How do we account for Population Changes when measuring Output?

Answer 20

GDP/capita
GNP/capita
More Informative

Question 21

What is an Issue with the GNP measure?

Answer 21

It does NOT account for everything that makes up Economic Welfare

Question 22

Define Potential Output

Answer 22

Output the Economy would produce if all Factors of Production were fully employed

Question 23

Define Actual Output

Answer 23

What is actually produced within a given period.

This may diverge from Potential Output

Question 24

Define Output Gap

Answer 24

Difference between Potential and Actual Output

Question 25

What are the 3 Key Assumptions we make when analysing Keynesian Cross?

Answer 25

- Prices + Wages are Fixed- all variables in Real terms - ---The Actual quantity of Total-Output is Demand-determined - No Government - No Foreign Trade

Question 26

Define Consumption

Answer 26

Households Demand for G+S

Question 27

Define Investment

Answer 27

Firms desired/planned additions to physical Capital + Inventories

Question 28

What is AD under Keynesian Economics

Answer 28

AD = C + I | Due to No Government or Trade

Question 29

For simplification, where do we assume Households allocate their Income?

Answer 29

Consumption + Saving

Question 30

What is Personal Disposable Income of a Household made up of?

Answer 30

- Income households have for Saving + Spending | - Income from Supply of Factor Services (Plus Transfer Payments - Direct Taxes)

Question 31

What is the relationship between Consumption + Income

Answer 31

Strong Positive Correlation Even when Income approaches 0- people still Consume -BUT- People often do NOT Consume all of their Income so Consumption is a fraction of Income

Question 32

What is the Consumption Function?

Answer 32

``` C = A + cY Consumption = Autonomous Consumption + MPC x Income ```

Question 33

If MPS = 1 - MPC = 1 - c, then what is the Saving Function?

Answer 33

S = -A + (1 - c)Y

Question 34

What does Investment Demand depend on?

Answer 34

Depends on what Firms think will happen to their Future Demand

Question 35

Define AD

Answer 35

Sum of Households planned Spending + Firms planned Investments

Question 36

What are the 2 ways to find Equilibrium Output?

Answer 36

Planned Demand = Actual Output/Income | Planned Investment = Planned Saving

Question 37

Find the Multiplier from the AD Equation, Y = C + I

Answer 37

Y = AD = C + I => Y = A + cY + I => Y = [A + I] +cY Y* = [A + I] / (1 - c) == Multiplier

Question 38

Find the Savings Function if S = Y - C

Answer 38

S = Y - C => S = Y - (A + cY) S = -A + (1 -c)Y

Question 39

What is the function for the Multiplier?

Answer 39

1 / (1 - c)

Question 40

What is the Paradox of Thrift?

Answer 40

As Households Increase Autonomous Consumption--> Saving should Decrease However- If Output < Potential Output -- Equilibrium level of Planned Saving = Planned Investment Decreases Desire to Save--> Increased Output w/ no change to Planned Savings