Macro Revision Questions

Question 1

6 Modifications to the circular flow of the economy

Answer 1

1) Imports
2) Exports
3) Tax
4) Savings
5) Govt Expenditure
6) Investment

Question 2

What is associated with Classical economics?

Answer 2

1)Laissez Faire
2)No Govt Intervention
3) Balanced Budget
4) Invisible Hand
5) Firms strive to produce goods as cheap as possible
6) Say’s Law
7) Unemployment and Inflation are temporary

Question 3

What is associated with Keynesian economics

Answer 3

1) Great Depression Stagflation
2) Aggeregate Demand (role of govt to stimulate demand)
3) Govt Spending / Tax (Fiscal Policy)
4) MPC (change in expenditure/change in income)
5) MPS (1-MPC)
6) Budget defecit is ok
7) Multiplier Effect
8) Phillips Curve

Question 4

What effects Marginal propensity to consume?

Answer 4

1) Income
2) Accumulated Wealth
3) Recession / Economic Environment
4) Availability of Credit
5) INterest (high interest > MPS) (low interest > MPC)
6) Inflation (deflation decrease MPC)

Question 5

What effects marginal propensity to save?

Answer 5

1) Inflation (deflation increases MPS)
2) Interest Rates
3) Saving Incentive (e.g. ISA)
4) Innovation in financial services
5) Demographics

Question 6

What is associated with Monetarist Economics?

Answer 6

MV = PT
Government intervention at a minimum
Brought on by stagflation in 70s
Full employment not possible due to natural unemployment
Money supply is the most important factor in economic growth
Increasing money supply is a short term solution that will long term lead to inflation

Question 7

Effects of High Inflation

Answer 7

1) Overheating
2) Hyperinflation
3) Reduce competetive advantage of exchange rate
4) Reduction in purchasing power of currency
5) Lower real interest rates
6) Lowers cost of existing debt

Question 8

Effects of Low Inflation

Answer 8

1) Reduces Demand / Production
2) Defer Spending / Investment
3) Increases Saving
4) Causes Deflation
5) Value of Debt Increases

Question 9

5 Features of CPI

Answer 9

1) Geometric Mean
2) Calculated monthly using basket of 700 goods
3) Includes Broker fees, Unit Trust fees, University Fees
4) 2% target for BoE
5) Same methodology as HICP

Question 10

5 Features of RPI

Answer 10

1) Arithmetic Mean
2) Excludes top 4% earners and pensioners (who get 75% of income from Govt)
3) Includes , Mortage Interest (general shelter costs)
4) Tends to overstate inflation (1% vs CPI)
5) Used to set rail fares, student loans and Linkers
6) RPIX excludes mortgage interest

Question 11

Give points on QE

Answer 11

1) Unorthodox Monetart Policy
2) Used when interest rates are low (cannot be lowered further)
3) BoE increase banks reserves at the BoE, then use this to buy gilts from Financial institutions
4) Cash injection lowers the cost of borrowing and should stimulate spending

Question 12

Govt response to Covid?

Answer 12

1) eat out to help out
2) furlough
3) cut interest rates to 0.1%
4) Asset purchase programs
5) self employed support scheme

Question 13

Key points on the bank of England?

Answer 13

1) Established 1694
2) Issuer of notes and coins
3) Lender of last resort
4) Advise DMO on issuance of Gilts
5) MPC set interest rates
6) 2% inflation target
7) Supervise banks through PRA and FCA

Question 14

What led to monetarist economics?

Answer 14

Stagflation in the 70s

unemployment, recession and inflation (rising energy prices)

Question 15

What economics is monetarist similar to?

Answer 15

Classical
1) Laissez Faire
2) Balanced Budget

Disagree over money supply becoming most important factor

Question 16

Why did monetarists beleive money supply was important?

Answer 16

An increase in money supply led to:

1) Increase in demand
2) Increase in production as a result
3) Increased production led to more employment