Macroeconomic equilibrium and multiplier effect

Question 1

Define Keynesian equilibrium

Answer 1

Macroeconomic equilibrium occurs at the level of real GDP where aggregate demand curve intersects the aggregate supply curve. AD = AS

Question 2

Define the multiplier

Answer 2

The amount by which an initial change in AD must be multiplied to find an eventual change national income ( Y or GDP )

Question 3

Define multiplier process

Answer 3

The mechanism by which a change in AD eventually leads to an even greater change in national income (Y or GDP)

Question 4

Why doesn’t the national income go on rising forever,

Answer 4

Saving
Taxation
Imports

Question 5

What are the problems of using the multiplier

Answer 5

Difficult to measure the exact size of the multiplier
Not instant, there is time lag, between the initial increase in AD and the eventual increase in NY
Other factors could change

Question 6

Define economics cycle

Answer 6

Fluctuations in the level of economic activity/GDP over time. It follows a repeated pattern of booms and slumps

Question 7

Define recession

Answer 7

At least 2 consecutive quarters of declining GDP

Question 8

What are recessions/slumps characterised by:

Answer 8

Rising unemployment
Low and falling inflation
Falling or negative economic growth

Question 9

What are recoveries and booms characterised by?

Answer 9

Low and falling unemployment
High and rising demand pull inflation
High and rising economic growth
Consumer confidence is high

Question 10

Negative output gap (classical economics)

Answer 10

Classical unemployment

Question 11

Positive output gap (classical economy)

Answer 11

Excess demand in the economy