Macroeconomics

Question 1

What is a tariff?

Answer 1

Tariffs are taxes placed on goods imported and exported between countries.

Question 2

What is macroeconomics?

Answer 2

Macroeconomics is the study of the economy as whole. It is also the study of the value of goods and services produced in the UK; the general price level, sometimes known as inflation; employment and unemployment and the balance of payments.

Question 3

What is an economic system?

Answer 3

An economic system develops to resolve the basic economic problem, i.e how to allocate scarce resources when people have infinite wants.

Question 4

What are scarce resources?

Answer 4

Resources that are limited and will eventually run out.

Question 5

What three economic systems have evolved to deal with the economic problem?
Give an example of each.

Answer 5

1) Mixed economy (e.g. UK)
2) Free market economy (e.g. USA)
3) Planned or command economy (e.g. Cuba or north Korea)

Question 6

What are the five basic economic measures for a country?

Answer 6

1) Economic growth
2) Unemployment
3) Inflation
4) Balance of payments
5) Miscellaneous

Question 7

Why is macroeconomics useful?

Answer 7

Macroeconomics is useful because it allows economists to make a comparison between the economy today and in the past, in addition economists are able to compare the economies of different countries.

Question 8

Give three criteria for economic performance.

Answer 8

1) Level of production
2) Whether resources are being fully utilised
3) Economic growth

Question 9

Why is the rate of price rise important?

Answer 9

The rate of price rise is important because high rates of price rise disrupt the workings of the economy.

Question 10

What is economic growth?

Answer 10

Economic growth is the rate of change of output.

Question 11

What measure is used by the UN to calculate the output of different countries?

Answer 11

Gross domestic product (GDP) is the measure of output used.

Question 12

Why is economic growth seen as desirable?

Answer 12

Economic growth is seen as desirable because individuals prefer to consume more rather than fewer goods and services.

Question 13

When is an economy deemed to be performing poorly?

Answer 13

An economy is judged to be performing poorly when it fails to grow at all, or output shrinks shrinks as in a recession or depression.

Question 14

What is an economic boom?

Answer 14

A boom is where the economy is doing well, with economic growth above its long run average.

Question 15

Why is unemployment a major problem in society?

Answer 15

Unemployment is a major problem in society because it represents a waste of scarce resources, this is because output could be higher if the unemployed were in work.

Question 16

How is unemployment used to indicate economic performance?

Answer 16

High unemployment is an indicator of poor national economic performance and low unemployment is an indicator of good national economic performance.

Question 17

Why do fast growing economies tend to have low unemployment?

Answer 17

Fast growing economies tend to have low unemployment because more workers are needed to produce more goods and services.

Question 18

Why are technological advances important for economies?

What happens if there is little or no economic growth?

Answer 18

Technological advances allow economies to produce more with fewer workers.
If there is little or no economic growth, workers are made redundant through technological progress but fail to find jobs in other industries.

Question 19

What is an alternative way of judging economic performance with regard to employment and why?

Answer 19

An alternative way of judging economic performance is to consider the rate of job creation, this is because fast economic growth tends to lead to job creation.

Question 20

What may firms have to do if growth is negative?

What are the impacts of this?

Answer 20

Firms may have to lay off workers if growth is negative and the economy goes into recession, this will cause a rise in unemployment.

Question 21

What is inflation?

Answer 21

Inflation is the increase in average prices in an economy.

Question 22

Give two adverse affects of inflation.

Answer 22

1) The value of whhat savings can buy falls if prices rise.

2) It disrupts knowledge of prices, consumers don’t know what is a reasonable price for what they are buying.

Question 23

What happens if a household spends more thab it earns and takes on debt?

Answer 23

If a household spends more than it earns and takes on debt,eventually it must repay that debt.
If it fails to repay the debt, it is possible for assets to be seized by bailiffs and the household to be barred from borrowing in the future.

Question 24

What is a country’s value of imports?

Answer 24

A nations spending in foreign goods and services is known as the value of its imports.

Question 25

How do countries earn money to pay for imports?

Answer 25

Countries earn money to pay for imports by selling goods and service, known as exports to other countries.

Question 26

Give two ways in which countries are able to finance if the value of imports is greater than exports.

Answer 26

1) Borrowing

2) Running down savings held abroad.

Question 27

What is a current account surplus?

Answer 27

A current account surplus is where exports of goods and services are greater than imports.

Question 28

What is a current account deficit?

Give one impact of this.

Answer 28

A current account defecit is where imports exceed exports. Defecit may lead to foreign banks and other lenders refusing to lend anymore money.

Question 29

How may countries have to respond to be credit crunch? Give two impacts of this.

Answer 29

Countries have to respond to restore confidence, which will likely involve cutting domestic spending. This may lead to reduced exmconomic growth and rising unemployment.

Question 30

What is national income?

Answer 30

National income is the value of the output, expenditure or income of an economy over a period of time.

Question 31

What is income?

Answer 31

Income is rent, interest, wages and profits earned from wealth owned by economic actors.

Question 32

What is wealth?

Answer 32

Wealth is a stock of assets which can be used to generate a flow of production or income. For example, physical wealth such as factories and machines is used to make goods and services.

Question 33

What is aggreagate demand?

Answer 33

Aggregate demand represents the total value of expenditure in the whole economy.

Question 34

Give three ways in which you can calculate national income.

Answer 34

1) Aggreagate demand
2) Output
3) Income

Question 35

What does real national output represent?

Answer 35

Real national output represents the value of outputs in the economy after taking account if inflation.

Question 36

Give the equation for aggregate demand.

Answer 36

AD = C+I+G+(X-M )

Question 37

What is consumption? C

Answer 37

Consumption is spending by households on goods and services.

Question 38

What is investment? I

Answer 38

Investment is spending by firm,s on investment goods (or capital goods, these are machinery and equipment).

Question 39

What is government spending? G

Answer 39

Government spending includes current spending on wages and salaries and spending by governments on investment goods such as roads and schools.

Question 40

What is meant by exports minus imports? (x-m)

Answer 40

Imports do not form part of national output and do not contribute to national income so they are taken away from the value of exports.

Question 41

Give four factors that influence consumption and explain how they do so.

Answer 41

1) Rate of interest - when interest rates are low, the cost of loan repayments will be low, so consumers are more likely to borrow money to spend on goods and services.
2) Consumer confidence - if the economy is doing well and unemployment is falling, consumers are more likely to but goods and services.
3) Wealth effect - When the economy is doing well, both house prices and share prices usually increase, as a result consumers may have more cash to spend on consumer goods.
4) Income tax - A reduction in income tax will lead to higher disposable income for consumers, which should lead to a rise in demand for consumer goods.

Question 42

Give three factors that may influence investment.

Answer 42

1) Rate of interest - a reduction in interest rates is likely to lead to an increase in investment in capital goods, This is because reduced loan repayment will lead to greater profitability for the firm.
2) Business confidence - this is derived from the current and future state of the economy, it is important because firms want to be sure that they can justify spending this money and obtaining a good return on their investment.
3) Increase in company profitability - if company profits are increasing, they will be able to spend some this extra money on investment goods. A reduction in corporation tax will also lead to an increase in company profits.

Question 43

Give two ways in which government spending affects aggregate demand.

Answer 43

1) An increase in government spending on public sector investment projects such as roads, schools or hospitals will increase aggregate demand.
2) A reduction in government spending with no change in taxation would lead to a reduction in aggregate demand.

Question 44

How can exports affect aggregate demand?

Answer 44

If the price of UK produced goods is higher than foreign produced goods, consumers will switch to buying the foreign goods. This means that imports will increase and exports will decrease. As a result aggregate demand will decrease.
The reverse is true.

Question 45

What is meant by the term average propensity to consume, and how is it calculated?

Answer 45

Average propensity to consume - the proportion of total income spent, it is calculated by Consumption/Income (C/Y).

Question 46

What is meant by the term average propensity to save, and how it is calculated?

Answer 46

Average propensity to save - the proportion of total income which is saved, it is calculated by Savings/Income (S/Y).

Question 47

What is meant by the term disposable income?

Answer 47

Disposable income - household income over time, including state benefits, less direct taxes.

Question 48

What is meant by the term durable goods?

Answer 48

Durable goods - goods which are consumed over a long period of time, such as a television set or car.

Question 49

What is meant by the term marginal propensity to consume?

How is it calculated?

Answer 49

Marginal propensity to consume - the proportion of a change in income which is saved.
It is calculated by /\C//\Y.

Question 50

What is meant by the term marginal propensity to save?

How is it calculated?

Answer 50

Marginal propensity to save. - the proportion of a change in income which is saved.
It is calculated by /\S//\Y.

Question 51

What is meant by the term non-durable goods?

Answer 51

Goods which are consumed almost immediately like an ice cream or washing powder.

Question 52

What is meant by the term savings function?

Answer 52

Savings function - the relationship between the saving of households and the factors which determine it.

Question 53

What is meant by the term savings (personal)?

Answer 53

The proportion of household’s disposable income which is not spent over a period of time.

Question 54

What is meant by the term wealth effect with regard to consumption?

Answer 54

The change in consumption following a change in wealth.

Question 55

Give six determinates of consumption.

Answer 55

1) Interest rates
2) Consumer confidence
3) Wealth effects
4) Availability of credit
5) Inflation
6) Consumption of households

Question 56

How does availability of credit affect consumption?

Give two factors which determine the availability of credit.

Answer 56

Making credit more widely available will increase consumption.

1) The rate of interest
2) Government restrictions

Question 57

Give two ways in which inflation affects consumption.

Answer 57

1) If households expect prices to be higher in the future, they will bring forward their purchases, so expectations of inflation increase consumption and reduce saving.
2) Rising inflation tends to erode the real value of money wealth, households react to this by attempting to restore the value of their wealth by saving more; this reduces consumption.

Question 58

How does the composition of households affect consumption?

Answer 58

Young people and old people tend to spend a higher proportion of their income than those in middle age. So if there is a change in the composition of households in the economy, there could well be a change in consumption and saving. The more young and old the households, the greater will tend to be the consumption.