Macroeconomics

Question 1

what is the circular flow of income model (draw it)

Answer 1

describes the flow of resources, g/s and income between the parts of the economy

Question 2

( firms and household ) what is the factor market and what is the product market

Answer 2

factor market - resources (labour, capital, natural) from households in return for pay (wages)
product market - g/s for spending by HH

Question 3

(government) what is current expenditure and what is capital expenditure

Answer 3

current exp - spending on current g/s (fuel, wages)

capital exp - spending on social infrastructure (schools, roads, railways, hospitals)

Question 4

what are the 2 formula for equilibirum of the entire circular flow

Answer 4

S + T + M = I + G + X

sum of ouput = sum of income = sum of expenditure

Question 5

what is GDP

Answer 5

the value of all g/s produced in country per year

Question 6

what are the 3 ways of measuring aggregate expenditure

Answer 6

1. income and earning approach
2. expenditure
3. production approach (value of all g/s is calculated)

Question 7

explain the expenditure approach of measuring aggregate expenditure THE SAME AS GDP (formula)

Answer 7

total planned spending

AE = C + I + G1 + G2 + (X=M)

Question 8

state the contents and sizes of consumption in AE and is it the most stable part of AE

Answer 8

30% non durables (food clothes)last up to 3 years
10% durables (cars, furniture, white goods) last 3+ year
60% services (plumber, doctor, mechanic)non commodity

Question 9

what is investment (AE) and is it volatile part of AE

Answer 9

business expenditure on new capital equipment which will produce final goods in the future
the most volatile component of AE has fluctuated between 16% and 23% of GDP in last 50 years

Question 10

describe the 3 types of gross private investment (the most volatile component of AE

Answer 10

1. fixed invesment - privately funded expenditure on equipment and structures used in production
2. residential fixed investment - priv exp on new houses
3. Changes in business inventories - stocks of goods that have been produced but not yet sold

Question 11

what percent of GDP does government spending take up and what do G1 and G2 stand for

Answer 11

23%
G1 - current exp
G2 - capital exp

Question 12

what percent of GDP doe net exports take up

Answer 12

-3% to 5% of GDP

Question 13

(determinants of agg exp) what are the 5 factors affecting consumption spending

Answer 13

1. levels of disposable income
2. cost of credit ( price of loan) price falls = exp rises
3. Stock of HH wealth (rise assets = rise confidence in spending)
4. consumer expectations (effects durable goods spending)
5. Govt Policies (tax affects HH disposable income)

Question 14

(determinants of agg exp) what are the 4 factors affecting investment exp

Answer 14

1. rates of interest (price of loan) inverse rltshp between interest rates and invest exp
2. business expectations
3. profatiability (to buy new production equipment)
4. gov policies (fiscal and monetary)

Question 15

what are the 4 macroeconomic objectives

Answer 15

1. inflation
2. unemployment
3. equity
4. economic growth

Question 16

define investment

Answer 16

expendityre on producer/capital goods used to produce final goods and services in the future

Question 17

(determinants of agg exp) what are the 2 types of gov expenditure and deterimine its effect on AE

Answer 17

stable exp - health/education/defense (stable bc no price factors)
unstable exp - welfare payments (volatile)

Question 18

(determinants of agg exp) what 2 things influence exports

Answer 18

• economic conditions of Aus and rest of world

- domestic agg production rises and falls due to seasons

Question 19

(determinants of agg exp) what is one thing that influence imports

Answer 19

domestics levels of economic activity (high econ activity means consumers and producers import things they cant get here)

Question 20

(determinants of agg exp) how do exchange rates effect net exports

Answer 20

price of imports are cheap for australia - exports to other countries are more expensive if the exhcnage rate is strong for AUD (high AUD = low net exports)

Question 21

(determinants of agg exp) how do terms of trade - ratio of exports:imports - effect net exports

Answer 21

if TOT are high = net exports is high

is TOT is low = next exports is low