Macroeconomics

Question 1

What are the 3 components of income to a closed economy

Answer 1

Consumption, investment, gov expenditure

Question 2

What is a stock

Answer 2

A stock is a quantity measured at a point in time.

Question 3

What is a flow

Answer 3

A ‡ow is a quantity measured per unit of time.

Question 4

What’s market clearing

Answer 4

An assumption that prices are ‡exible, and adjust to
equate supply and demand.
Happens when prices are flexible rather than sticky

Question 5

What’s the aggregate demand eqn

Answer 5

AD= C+I+G

Question 6

What is a consumption a function of

Answer 6

Y-T

Question 7

What is Investment a fn of

Answer 7

Interest rate

Question 8

What is the Aggregate supply eqn

Answer 8

F(K,L)

Function of capital and Labour

Question 9

Definition of consumption

Answer 9

The value of all goods and services bought by households

Question 10

What is disposable income

Answer 10

total income minus total taxes

Question 11

What is marginal propensity to consume (MPC)

Answer 11

The marginal propensity to consume (MPC) measures the proportion of extra income that is spent on consumption.

It’s the slope of the consumption function C(Y-T)

Question 12

What’s average propensity to consume (APC) and how does it change with increasing income

Answer 12

A ratio of total consumption to total disposable income for different levels of disposable income It is calculated by dividing the amount of consumption by disposable income for any given level of income

It falls as income rises (more likely to save as income rises)

Question 13

Difference between Keynes and Fisher models for consumption

Answer 13

Keynes: Current consumption depends only on current income.
Fisher: consumption depends on lifetime income, and people
try to achieve smooth consumption. (depends only on the present value of
lifetime income.)

Question 14

What 8s the lifetime resources eqn

Answer 14

Wealth + years to retirement x annual income

W + RY

Question 15

What is the smooth consumption eqn

Answer 15

Lifetime resources / lifetime years

Question 16

What is the Life Cycle hypothesis

Answer 16

The LCH says that income varies systematically over the phases of the
consumer’s life cycle, and saving allows the consumer to achieve smooth
consumption.

Question 17

For the Permanent income hypothesis, what is the income equation

Answer 17

Y= Yp + Yt

Permanent plus transitory income

Question 18

What is the PIH consumption eqn

Answer 18

C= aYp

a > 0 is the fraction of permanent income that people consume per
year.

Question 19

What’s the difference between the PIH and LCH

Answer 19

LCH: current income changes systematically as people move through their life
cycle.
PIH: current income is subject to transitory ‡uctuations.

Question 20

What is the basis behind the random walk hypothesis

Answer 20

based on Fisher’s model & PIH, in which forward-looking consumers base
consumption on expected future income

If PIH is correct and consumers have rational expectations, then consumption
should follow a random walk (i.e., a martingale): changes in consumption
should be unpredictable.

Consumption appears random as consumers have factored in
changes in permanent income, so the changes dont actually affect C.

Question 21

What is the principle behind the consumption model of instant gratification

Answer 21

people are likely to not be perfect decision makers,
Save too little due to instant gratification of
consuming.

Question 22

Gross investment

Answer 22

Total capital spending

Question 23

Net investment

Answer 23

Gross investment minus an estimate for capital

consumption (replacement for depreciated goods)

Question 24

What are the 3 components to the cost of capital

Answer 24

Interest cost
Depreciation
Capital loss (negative as capital gain reduces cost of capital)

Question 25

Factors that affect levels of investment

Answer 25

Business confidence
Profitability
Public policies

Technological shocks
Inadequate financial systems

Question 26

Name 4 types of gov spending

Answer 26

Current spending
Capital spending
Interest payments
Transfer payments

Question 27

3 types of taxes

Answer 27

Direct taxes (on earnings) 
Indirect taxes (on expenditures) 
Wealth taxes (capital transfer)

Question 28

Why don’t monopolists operate in inelastic demand section

Answer 28

As here the marginal revenue is negative

Question 29

Equation for Lerner Markup Index and what is it a measure of

Answer 29

L = P - MC / P

Measure of Market power
Higher numbers is greater market power

Perfectly comparative firm L = 0
L = 1 monopoly power

Can also be written as - 1/demand elasticity. Less elastic demand implies more market power.

Question 30

How does Lerner index correspond with price distortions

Answer 30

Higher Lerner markup index shows higher price distortion (due to low demand elasticity)

Question 31

Define market power

Answer 31

The ability of a firm to profitably charge a price above the perfectly competitive levels

Question 32

In perfect competition what is the long run price

Answer 32

P= marginal cost = min AC

Question 33

In a monopoly what is relation between MR and MC

Answer 33

MR = MC when at optimal quantity (profit maximisation)

Question 34

Why do monopolist firms only operate in elastic region

Answer 34

The reason monopolies always operate where demand is elastic is because when demand is inelastic the firms will just continue to increase prices as their revenue will increase. So therefore it will only stop increasing prices where demand becomes elastic

Question 35

MR equation in terms of P and e

Answer 35

MR = P ( 1 + 1/e )

Question 36

What is MPK

Answer 36

Marginal product of capital, the additional output as a result of an additional unit of capital.

Question 37

Define the Gov spending multiplier and give it’s equation

Answer 37

The increase in spending resulting from a £1 increase in G

= MPC / 1 - MPC

Question 38

What does MPC x ΔY equal

Answer 38

ΔConsumption