Macroeconomic Past Paper Questions: Definitions

Question 1

The Marginal Propensity to Consume

Answer 1

The proportion of a rise in national income that goes on to consumption :

MPC=dC/dY

Question 2

Cumulative Causation

Answer 2

When an initial change causes an eventual change that is larger (i.e. it has a snowball effect)

Question 3

The Multiplier Effect

Answer 3

An initial increase in aggregate demand
of £xm leads to an eventual rise in national income that
is greater than £xm.

Question 4

Output Gap

Answer 4

The output gap is the difference between actual output and sustainable output. Sustainable output is the level
of output corresponding to stable inflation.

Question 5

Policy Invariance Proposition

Answer 5

Is the conclusion that anticipated changes in economic policy, such as changes in government spending, have no effect on output and employment. Instead they remain at their equilibrium levels. Otherwise known as policy ineffectiveness proposition.

In the presence of rational expectations and continuous market clearing, anticipated changes in economic policy have no effect on output and employment which remain at their equilibrium levels. This prediction is known as the policy ineffectiveness proposition.

Question 6

Adaptive Expectations

Answer 6

The theory that people base their expectations of inflation on past inflation rates.