Macroeconomics knowledge

Question 1

ways to measure national output

Answer 1

expenditure approach, income approach, output approach

Question 2

expenditure approach

Answer 2

consumption spending, investment spending, government spending, net exports

Question 3

GDP vs. GNI

Answer 3

everything produced within the country vs. total income received by residents of the country regardless of where the money comes from

Question 4

determinants of AD

Answer 4

changes in consumer confidence, interest rates, wealth, income/business taxes, changes in household/corporate indebtedness, expectations of future prices, improvements in technology, legal changes, changes in political/economic priorities, changes in national income abroad, changes in exchange rates, changes in trade policies

Question 5

determinants of SRAS

Answer 5

changes in wages, non-labour resource prices, indirect taxes, subsidies, and supply shocks

Question 6

Keynesian economic model

Answer 6

economy cannot move to the long run when experiencing a deflationary gap due to inflexible wages and other resource prices

Question 7

determinants of AS/LRAS

Answer 7

increased quantities of factors of production, improvements in quality of factors of production, improvements in technology, increased efficiency, institutional changes, reduction in the natural rate of unemployment

Question 8

structural unemployment causes

Answer 8

demand for particular labour skill, geographical location of jobs, market rigidities (minimum wage legislation, labour unions, employment protection, unemployment benefits)

Question 9

costs of unemployment

Answer 9

loss of real output, income for unemployed, and tax revenue for the government, costs to government of unemployment benefits, larger budget deficit/smaller surplus, more unequal distribution of income, decreased employability of unemployed people

Question 10

costs of inflation

Answer 10

redistribution effects, uncertainty, effects on saving, decreased international competitiveness, hindering economic growth, unequally distributed social costs

Question 11

redistribution effects of inflation

Answer 11

lenders, savers, and receivers of fixed-income lose, borrowers, payers of fixed income gain)

Question 12

costs of deflation

Answer 12

increase in the real value of debt, uncertainty, deferred consumption, risk of bankruptcies, ineffectiveness of policies dealing with deflation

Question 13

goals of monetary policy

Answer 13

low and stable inflation, low unemployment, reduce business cycle fluctuations, promote a stable economic environment for long term growth, external balance

Question 14

tools of monetary policy

Answer 14

open market operations, minimum reserve requirements, central banks minimum lending rate, quantitative easing

Question 15

constraints of monetary policy

Answer 15

possible infectiveness in recession (interest rates cannot fall when approaching zero, low consumer and producer confidence, banks may be fearful to lend), may be inflationary, cannot deal with cost-push inflation

Question 16

strengths of monetary policy

Answer 16

relatively short time lags, flexible policy (interest rates can be reversed and changed often according to needs), interest rates changes can be incremental, central bank independence, limited political constraints, no budget deficits or debt, no crowding out

Question 17

goals of fiscal policy

Answer 17

low and stable inflation, low unemployment, reduce business cycle fluctuations, promote a stable economic environment for long term growth, external balance, equitable distribution of income

Question 18

constraints of fiscal policy

Answer 18

problem of time lags, political constraints, creates government debt, tax cuts may be ineffective in recession in increasing AD, inability to fine-tune the economy, crowding out, can be inflationary, cannot deal with cost-push inflation

Question 19

strengths of fiscal policy

Answer 19

pulling the economy out of deep recession, ability to target sectors of the economy, direct impact of government spending on AD, ability to affect potential output, dealing with rapid and escalating inflation, automatic stabilisers (progressive income taxes, unemployment benefits)

Question 20

goals of supply-side policies

Answer 20

promote long term growth by increasing the productive capacity of the economy, improve competition and efficiency, reduce costs of labour and unemployment through greater labour market flexibility, increase incentives of firms to invest in innovation by lowering costs of production, reduce inflation to improve international competitiveness

Question 21

encouraging competition

Answer 21

privatisation, deregulation, contracting out to the private sector, anti-monopoly regulation, trade liberalisation

Question 22

incentive related policies

Answer 22

lowering personal income/business taxes, lowering taxes on capital gains and interest income

Question 23

labour market reforms

Answer 23

abolishing minimum wage legislation, reducing unemployment benefits, reducing job security, weakening the power of labour unions

Question 24

interventionist policies

Answer 24

investment in human capital (training and education, improved health care and access to it), investment in new technology, investment in infrastructure, industrial policies (support for small firms, enterprises, and newly emerging industries)

Question 25

constraints of market-based supply-side policies

Answer 25

problem of time lags, possible unfavourable impact on unemployment, negative impact on the government budget, possible negative impact on the environment and on equity

Question 26

constraints of interventionist supply-side policies

Answer 26

time lags, negative impact on government budget

Question 27

strengths of market-based supply-side policies

Answer 27

improved resource allocation, may not burden government budget, ability to create employment, ability to reduce inflationary pressures

Question 28

strenghts of interventionist supply-side policies

Answer 28

direct support of sectors important for growth, ability to create employment, ability to reduce inflationary pressures, possible positive impact on equity

Question 29

Keynesian multiplier

Answer 29

change in the real GDP/initial change in expenditure, or 1/(1-MPC)