Macroeconomics

Question 1

What is the definition of aggregate demand?

Answer 1

it is the total demand for a country’s output at various general price levels, ceteris paribus

Question 2

What are the factors of AD?

Answer 2

C + I + G + (X-M)

• consumption expenditure
• Investment expenditure
• Government expenditure
• Net export revenue (export revenue-import expenditure)

Question 3

What affects consumption expenditure?

Answer 3

• size of disposable income (affected by income tax, transfer payment)
• interest rate(cost of borrowing money)
• economic confidence/sentiments

Question 4

What affects investment expenditure?

Answer 4

• expectation of business
• price of labour vs price of capital (are substitutes)
• corporate tax (increase in tax leads to lower post-tax profit)

Question 5

What affects net export revenue?

Answer 5

-changes in relative income
(rise in income of trading partners, assuming price elasticity in demand for exports is more than one, YEDx>0,(normal goods), export revenue will rise, X-M rises assume import expenditure stays constant)
(rise in domestic income leads to increase in import expenditure, M increases and X-M decreases, assume export revenue remains constant)

-inflation rates in other countries relative to domestic inflation
(when inflation of foreign country falls while domestic’s inflation remains constant, export goods would be more expensive while imports are cheaper, assuming demand for exports is price elastic, rise in price will lead to a MTP fall in Qd of exports, fall in export revenue, + since imports and domestic goods are substitutes, rise in price of domestic goods leads to rise in demand of imported goods, increase in import expenditure)

• relative quality of goods produced (competitiveness)
• trade policies

Question 6

What is the definition of aggregate supply?

Answer 6

it is the total value of domestic goods and services produced within the economy at every general price level

Question 7

What are the three segments of AS curve?

Answer 7

• horizontal range
• intermediate range
• vertical range

Question 8

What affects AS?

Answer 8

-for SRAS: cost of production, a fall in price of FOP will lead to fall in COP and will lead to downward shift of SRAS curve, while SRAS increases
-for LRAS: quantity, quality of FOP and state of technology, increase in QQT leads to increase in output for same amount of input which increases productive capacity
-note: Gov can affect both SRAS and LRAS,
SRAS-decrease COP by lower indirect tax (GST)/subsidies leads to fall in COP which increases SRAS and curve shifts down
LRAS- fall in direct tax (corporate tax) leads to increase in post-tax profits, hence increases investments, increase in QQ of capital goods, prod cap increases, LRAS increases, shifts right

Question 9

What are factors that can affect both LRAS and SRAS?

Answer 9

-increase in productivity of labour
(leads to fall in COP as each input leads to more output, hence COP falls and SRAS increases while curve shifts down)
-improvement in technology
(efficiency increases, unit COP falls, SRAS increases, since same amount of resources leads to more goods and services produced, increases prod. cap., increase in LRAS)

Question 10

State the multiplier process

Answer 10

increase in any components of AD will lead to a larger increase in real national income via the multiplier process
(increase in AD leads to increase in RNY via K, assuming spare capacity)

Question 11

How do you describe K and formula for it?

Answer 11

-increased in AD, cycle of spending and increase in income leads to eventually increase in national income that is much larger
take note there is also reverse multiplier K

• K= 1/ MPW= 1/ MPS+MPT+MPM, hard to obtain accurate data for marginal propensity to save/of taxation/to import

Question 12

What is the definition of actual growth?

Answer 12

it is the increase in real output(GDP) over time

Question 13

What is the definition of potential growth?

Answer 13

is the growth of potential output

Question 14

What is the definition of sustained growth? (aka non inflationary growth)

Answer 14

It refers to a rate of growth that can be maintained over a period of time without giving rise to high rates of inflation (tandem increase of AS and AD)

Question 15

What is the definition of sustainable growth?

Answer 15

it refers to sustained growth that does not lead to significant economic issues especially for the future generation

Question 16

What is the definition of inclusive growth?

Answer 16

it refers to sustained growth that is broad based across economic sectors for majority of population

Question 17

What is the definition of recession?

Answer 17

2 consecutive periods of negative economic output

Question 18

How does discretionary fiscal policy help to achieve marco-goals?

Answer 18

I: can help to achieve sustained growth, price stability, inclusive and sustainable growth
E: expansionary fiscal policy involves:
-increase in government expenditure -> leads to increase in AD C.P. assuming spare capacity, leads to multiplied increase in RNY via multiplier K, additionally, gov expenditure for increase in capital stock can lead to increase in LRAS due to increase in prod cap, achieving sustained growth

-fall in direct taxes(income and corporate) -> increase disposable income and increase consumer expenditure, also increases after tax profits which increases investment expenditure, assuming spare cap, increase in AD lead to multiplied increase of RNY via K, AEG

• inclusive growth-> gov makes tax system more progressive, transfer payments
• sustainable-> tax on specific goods and negative externalities

I: illustrate on AD AS graph

E: Evaluate using SUNART
State of economy: if economy is almost at full
employment, expansionary FP leads to DD pull inflation, economy outlook is poor will not lead to increase in AD

Urgency of issues: recession vs inflation

Nature of economy: size of K, LLOE vs SOE

Accumulated debts: leads to crowding out effects, increase in spending of gov exp leads to fall in private C and I as they are disincentivised due to rise in prices of resources, net effect on AD is neutral

Root cause of issue (recession, unN) DD pull vs cost push inflation, recession due to AS or AD

Time lag/ Time period

Question 19

How does supply side policies achieve marco-goals?

Answer 19

Both market oriented and interventionist ss policy leads to increase in LR and SRAS while interventionist also leads to increase in AD due to gov spending

how does this help sustainable and inclusive growth?
SUNART?

Question 20

What are the types and causes for unemployment?

Answer 20

• cyclical unN (due to fall of AD and firms will decrease production which leads to unN as labour is a derived demand)
• structural unN (due to mismatch of skills where skills of workers do not match the demand of skills needed by firms)
• frictional unN (time required to match qualified workers to available jobs)

Question 21

How does fiscal policy reduce unN?

Answer 21

I: expansionary FP can lead to rise in employment
E: increase in gov expenditure can lead to rise in AD and firms will be stimulated to increase production since labour is a derived DD, consumption expenditure also increases as tax falls which increases production, decrease in corporate tax also encourages investment expenditure
I: graph
E: SUNART
S-works only if economic outlook is good, firms may not want to invest as after tax profits still lower

Urgency of issue-

Root cause- if unN was caused by structural unN then FP may not work

-may sure to state policy with the context of the qn

Question 22

How does supply side policy reduce unN?

Answer 22

I: SS side policy either by market oriented or interventionist policy can help to increase AS and decrease structural unN (frictional too although it cannot completely eliminate it)

E: it corrects mismatch of skills among workers to skills demanded by employers
gov may increase AS by interventionist ss policy by improving quality and quantity of labour n increase job mobility, also redesigning jobs
or gov may increase AS by market oriented policy by promoting entrepreneurship, competition, reducing red tape etc.

also corrects frictional unN by investing in information infrastructure

I: no graph is needed as it cannot be represented on the graph

E: SUNART
Accumulated debt: interventionist ss policy requires a lot of gov funding which imposes on gov funding, may lead to gov debt
Root cause: ss policy can help to reduce structural unN as it retrains and reskills workers and well as job redesigning to facilitate lowering mismatch of skills
Time lag: Impact lag may be present

Overall need ensure there is also rise in AD as ss policy mostly leads to rise in AS

Question 23

What are the types of inflation?

Answer 23

DD pull is caused by persistent increase in AD (drawn with 3 AD curves in graph)
Cost push is caused by sustained increase in cost of production and hence a persistent fall in AS (increase in GPL)

Increase in COP can be from many factors such as wage vs productivity rate, cost of factor input, imported inflation (assuming demand of imports is price inelastic)

Question 24

What are the causes of rise in cause of production?

Answer 24

• increase in cost of factor input
• assuming rise in wage not matched by rise in productivity (output is same with increased in input)
• rise in indirect tax e.g. GST (which affects AS not AD)

Question 25

How does contractionary FP reduce inflation?

Answer 25

llaala

Question 26

How does ss policy reduce inflation?

Answer 26

lala