Macroeconomics

Question 1

Macroeconomics

Answer 1

The area of economics that studies the economy as a whole, focusing on the ‘aggregates’ of the economy and on countries’ fundamental economic goals in relation to several main variables: economic growth, employment, price stability, external stability and income distribution

Question 2

National economy

Answer 2

Examines all economic activity taking place in a country

Question 3

Circular flow of income model

Answer 3

Shows that in any given time period, the value of output produced in an economy is equal to the total income generated in producing that output, which is equal to the expenditures made to purchase that output. Also shows injections and leakages

Question 4

Business cycle

Answer 4

Short-term fluctuations in real GDP over time, consisting of alternating periods of expansion and contraction (peaks and troughs)

Question 5

Leakages

Answer 5

The flows of money that leave the economy - savings, taxation, imports

Question 6

Injections

Answer 6

The flows of money that come into the circular flow of income from outside - investment, gov’t spending and exports

Question 7

GDP

Answer 7

Gross domestic product - total value of all final goods and services produced within an economy in a given period of time (usually a yr), regardless of who owns FOPs
Sum of C+I+G+net exp

Question 8

GNP

Answer 8

Gross national product - total monetary value of all final goods and services produced by factors owned/supplied by the country’s citizens in a given period of time

Question 9

GNI

Answer 9

Gross national income - total value of incomes earned by a nation’s FOP, regardless of where the assets are located (+ net property income from abroad)
GDP + net income from abroad

Question 10

Income method

Answer 10

Measuring the national income by adding up all the income earned by groups when factors of production are sold in resources markets
Wages + rent + interest + profits

Question 11

Output method

Answer 11

Measuring the national income through the output of firms in a given period

Question 12

Expenditure method

Answer 12

Measuring national income by adding up total sales for goods and services sold in an economy

Question 13

Real GDP

Answer 13

The market value of all the final goods and services produced within the borders of a country within a given period of time, taking into account inflation (often includes adjusted for inflation)

Question 14

Nominal GDP

Answer 14

GDP calculated in a given year without considering inflation

Expenditure: GDP = C + I + G + (X - M)
(consumer expenditure, investment spending, gov’t expenditure, exports expenditure, imports spending

Question 15

Deflator

Answer 15

Used to calculate real GDP and GNI from their nominal values, using a price index
Real GDP = (nominal/deflator) x 100

Question 16

Green GDP

Answer 16

This refers to the GDP that has been corrected for loss of biodiversity as a result of economic activity, and the monetary costs of pollution and climate change.

Question 17

PPP

Answer 17

Purchasing power parity - compares economic productivity and standards of living between countries on the basis of relative costs of goods and services

Question 18

GDP per capita

Answer 18

Total value of all final goods and services produced in an economy in a given period of time (a yr), per head of the population

Question 19

Aggregate demand

Answer 19

Total quantity demanded for a nation’s output of goods and services at different price levels by all buyers in an economy (consumers, firms, govt, foreigners), ceteris paribus
AD = C + I + G + (X-M)

Question 20

Aggregate supply

Answer 20

Total quantity supplied of goods and services by all the industries of a country/economy over a particular time period at different price levels, ceteris paribus

Question 21

Average price level

Answer 21

An index of the average prices of goods and services over time

Question 22

National output

Answer 22

Total output of all the industries of a country

Question 23

Recession (↓ demand)

Answer 23

A fall in total output resulting from a decrease in AD or AS

Question 24

Inflation (↑ demand)

Answer 24

An increase in average price level resulting from an increase in AD

Question 25

Supply shock (↓ supply)

Answer 25

An increase in the price level and decrease in output from a fall in AS

Question 26

Economic growth (↑ supply)

Answer 26

An increase in national output resulting from an increase in AS

Question 27

Consumer spending/ consumption

Answer 27

Spending of disposable income by households on goods and services

Question 28

Investments

Answer 28

By firms: addition to the capital stock of the economy, eg tech, factories; expenditure spending by firms on capital

Question 29

Government spending

Answer 29

Spending by govt, eg labour costs and infrastructure

Question 30

Net exports

Answer 30

Spending overseas on exports - spending domestic on imports

Question 31

Direct tax

Answer 31

Taxes that are paid directly to the government, eg on income, revenue (housegold and firms)

Question 32

Wealth

Answer 32

Assets accumulated that can retain value and change in value (eg property, financial investment)

Question 33

consumer/business confidence

Answer 33

When individuals/firms fear a recession → individuals incentivised to save more (fall in consumption), businesses invest less (fall in investment) Link to expectations of future prices

Question 34

Economic growth

Answer 34

Increase in the value of real output/real GDP or potential output over time

Question 35

Actual output

Answer 35

Quantity of g/s produced by an economy over time

Question 36

Potential output

Answer 36

Productive capacity of an economy over time

Question 37

Real output

Answer 37

The value of output produced in an economy measured in base year prices

Question 38

Full employment

Answer 38

When all FOPs are fully utilised in their best use; The natural rate of unemployment, or unemployment that prevails when the economy is producing the potential output in its LR equilibrium, determined by position of LRAS curve

Question 39

Deflationary gap

Answer 39

A situation where real GDP < potential GDP, unemployment > natural rate

Question 40

Inflationary gap

Answer 40

Economy is at a level of output that is greater than the full employment or potential level of output Real GDP > potential GDP, unemployment < natural rate

Question 41

Macroeconomic equilibrium

Answer 41

When quantity AD = quantity AS, quantity real GDP demanded = that supplied

Question 42

Recession

Answer 42

When an economy experiences 2 consecutive quarters of falling real national output

Question 43

Unemployment

Answer 43

People of working age who are part of the workforce, but are currently not employed - actively seeking a job, but unable to get work Unemployment rate = % people of total labour force unemployed

Question 44

Unemployment of resources

Answer 44

When there are unused resources and not all FOPs are fully used

Question 45

Underemployment

Answer 45

Those with part-time jobs who want to work full-time, or those who are over-qualified for their current jobs

Question 46

Natural rate of unemployment

Answer 46

Percentage of people who are unemployed due to structural, seasonal and frictional reasons (NOT CYCLICAL)

Question 47

Full employment

Answer 47

where all who are willing and able to work are employed

Question 48

Structural unemployment

Answer 48

A mismatch between the supply and demand for labour caused by labour market rigidity and changes to industries (eg manufacturing → service sector, but workers with manufacturing skills)

Question 49

Seasonal unemployment

Answer 49

Unemployment resulting from specific skills only being utilised at specific times of the year (eg ski instructor)

Question 50

Frictional unemployment

Answer 50

Those who are between jobs or between schooling and a job

Question 51

Real wage unemployment

Answer 51

Gap between number of jobs available and number of people willing and able to work at the prevailing wage rate (ie supply of labour > demand for labour at specific minimum wage)

Question 52

Cyclical unemployment

Answer 52

Demand-deficient unemployment, occurs when a lack or reduction in AD forces firms to make workers redundant, during downturns of business cycle

Question 53

Inflation

Answer 53

A sustained increase in the general price level in a nation over a period of time Inflation rate = ((y2-y1)/yr 1)*100

Question 54

Consumer-price index (CPI)

Answer 54

Measure of cost of living for average household - compares value of a basket of goods/services in one yr with the value of the same basket in a base yr. Used to find inflation

Question 55

Demand-pull inflation

Answer 55

When the demand for goods and services outstrips supply (one of the components of AD)

Question 56

Cost-push inflation

Answer 56

Occurs when the costs of production rise for a country, or when SRAS falls; usually the result of a negative supply shock

Question 57

Deflation

Answer 57

A decrease in the average price level of goods and services over time

Question 58

Disinflation

Answer 58

When the rate of inflation reduces (eg 4% → 2%)

Question 59

Absolute poverty

Answer 59

When people live below a certain level of income that is necessary to meet basic needs Standard of goods and services is absolute and unchanging over time, determined by poverty line (min income needed to sustain basic needs)

Question 60

Relative poverty

Answer 60

The inability to afford an adequate standard of goods and services, where the adequate standard is relative and changes over time (depending on what is ‘typical’ in a society, often taken to be 50% of society’s median income). With higher median income, this standard also increases

Question 61

MPI multidimensional poverty index

Answer 61

A composite indicator that measures poverty in three dimensions: health, education and living standards

Question 62

Gini coefficient

Answer 62

Measure of income inequality between 0 and 1 (closer to 1 is more unequal) Ratio of area between Lorenz curve and line of inequality : total area below line of inequality

Question 63

Lorenz curve

Answer 63

Visual representation of income shares received by percentages of the population; further away = more unequal distribution of income

Question 64

Equity

Answer 64

Condition of being fair or just, usually applied to the context of the income distribution within a country

Question 65

Progressive tax system

Answer 65

Percentage of income paid as tax increases as income increases

Question 66

Monetary policy

Answer 66

A demand-side policy: when the central bank uses the money supply and interest rates to manage the economy and influence AD

Question 67

Interest rate

Answer 67

The cost of borrowing money, the price of credit, the reward for saving Real interest rate = nominal interest rate - inflation rate (simple) Real interest + 1 = (1 + nominal) / (1 + inflation)

Question 68

Fiscal policy

Answer 68

A type of demand-side policy, whereby there may be changes in govt spending and taxation to achieve macroeconomic objectives

Question 69

Budget surplus | Budget deficit

Answer 69

When the planned govt spending is less/greater than govt revenues over a specific period of time

Question 70

Public debt

Answer 70

Total amount borrowed over the years that hasn’t been repaid (due to budget deficit?)

Question 71

Automatic stabilisers

Answer 71

Factors that automatically work towards stabilising the economy by reducing short-term fluctuations of the business cycle, without action by govt Eg progressive income tax and unemployment benefits

Question 72

Transfer payments

Answer 72

A type of govt expenditure that is not in exchange for goods and services, often used to redistribute income and support the poor

Question 73

Current expenditure

Answer 73

Day-to-day spending to keep the govt functioning, eg salaries for govt workers

Question 74

Capital expenditure

Answer 74

All building of infrastructure financed by the govt, eg roads

Question 75

Automatic stabilisers

Answer 75

Factors that automatically work towards stabilising the economy by reducing short-term fluctuations of the business cycle (eg progressive taxes, unemployment benefits)

Question 76

Informal sector

Answer 76

Economic activity that is unrecorded (illegal, not taxed) in national income accounts, by the govt

Question 77

Supply-side policies (SSP)

Answer 77

Policies that focus on increasing the quantity and quality of FOPs, and institutional changes to increase the productive capacity and LRAS to achieve LR EG

Question 78

Interventionist SSPs

Answer 78

Gov’t interventions in the market to improve the supply-side of the economy to … (above) Eg investment in human capital, R&D, provision/maintenance of infrastructure

Question 79

Market-based supply-side policies

Answer 79

Policies that support the allocation of resources through forces of demand and supply, rather than through govt intervention in markets to develop well-functioning competitive markets etc Eg labour market reforms (no min wage etc), incentive policies (low corp tax), increase competition

Question 80

Productivity

Answer 80

Quantity of output produced for each hour of work of the working population

Question 81

Infrastructure

Answer 81

Large scale public systems (services or facilities) of a country that is necessary for growth and development; add to an economy’s capital stock, usually govt-supplied

Question 82

Privatisation

Answer 82

When govt sells state-owned enterprises to the private sector

Question 83

Central bank

Answer 83

An independent national authority responsible for the monetary system. The central bank determines monetary policy by controlling the money supply and interest rate.