Macroeconomics, Part 7- How the Macroeconomy Works

Question 1

Injections definition:

Answer 1

Money going into the economy.

Question 2

Withdrawals definition:

Answer 2

Money leaving the economy.

Question 3

What is the macroeconomic consumption function?

Answer 3

AD = C + I + G + (X-M)
Aggregate Demand = Consumer spending + Spending by businesses + government spending + (exports - imports (balance of payments))

Question 4

Consumer confidence definition:

Answer 4

Illustrates the optimism the general public has on the future.

Question 5

What will happen if consumer confidence is high?

Answer 5

People will spend more and the economy will grow.

Question 6

What will happen if consumer confidence is low?

Answer 6

People will save more and the economy will shrink.

Question 7

In the circular flow of income, how does money get into the economy?

Answer 7

• Government spending (G)
• Bank loans for investment (I)
• Exports (E)

Question 8

In the circular flow of income, how does money leave the economy?

Answer 8

• Taxation (T)
• Savings (S)
• Imports (M)

Question 9

Capacity definition:

Answer 9

The maximum level of goods or services produced.

Question 10

Spare capacity definition:

Answer 10

Resources left over when you’re not working at capacity.

Question 11

What are the factors affecting consumer spending?

Answer 11

• Interest rates at the bank
• Consumer confidence
• Tax rates
• Stage of the economic cycle
• Inflation expectations

Question 12

What factors affect exports?

Answer 12

• International competitiveness
• Stage of the economic cycle over seas
• Trade restrictions e.g. tariffs
• Exchange rates

Question 13

What factors affect government spending?

Answer 13

• Stage of the economic cycle
• level of tax revenue
• Size of the public sector

Question 14

What factors affect business spending?

Answer 14

• business confidence
• Interest rates
• Stage of the economic cycle
• Level of spare capacity

Question 15

What factors affect imports?

Answer 15

• International competitiveness
• Foreign government regulations
• Stage of the economic cycle
• Exchange rate
• Trade restrictions e.g. tariffs

Question 16

Aggregate supply definition:

Answer 16

Total value of all goods and services produced in an economy in a year

Question 17

What are the factors that cause a rightward shift of the SRAS curve?

Answer 17

• Fall of business’ costs of production
• A fall in the unit labour costs, (lower wage rates or increase in productivity)
• Reduction in indirect taxes such as VAT
• Increase in subsidies
• Technical progress

Question 18

What are external factors that affect aggregate supply?

Answer 18

• World oil and gas prices
• Energy prices / costs
• Other mineral / metal prices
• Foodstuff prices
• Import tariffs / quotas

Question 19

What causes shifts in SRAS?

Answer 19

• Input costs (wage costs, labour productivity, raw material and component prices, interest rates, business rents, fuel, energy costs)
• Business taxes, subsidies and imported costs (VAT, environmental charges, subsidies, costs of meeting regulations, costs of imported components (exchange rates))
• Supply shocks (natural disasters, political crisis)

Question 20

Hot money definition:

Answer 20

The general term for money that is invested. For example putting it on bonds, shares, loans or property

Question 21

What is the multiplier process?

Answer 21

If the government injects money of that into the economy, some of it will be spent. That money that is spent will be spent by the new owner and so on.

Question 22

Marginal propensity to consume definition:

Answer 22

The amount of additional earnings that are spent

Question 23

Marginal propensity to save definition:

Answer 23

The amount of additional earnings that are saved

Question 24

Multiplier effect definition:

Answer 24

A change in one of the components of AD can lead to a multiplied final change in the equilibrium level of GDP

Question 25

Multiplier effect formula:

Answer 25

1 / (sum off MPS + tax + imports)

Question 26

Positive multiplier definition:

Answer 26

Initial increase in an injection leads to a greater final increase in GDP

Question 27

Negative multiplier definition:

Answer 27

Initial increase in an injection leads to a greater final decrease in GDP (not sure, need to check)

Question 28

What are the three leakages of the multiplier process?

Answer 28

• Savings
• Tax
• Imports

Question 29

The higher the rate of leakage, the _____ the multiplier

Answer 29

Lower

Question 30

When does the multiplier process have the greatest effect?

Answer 30

When AS is highly elastic. When AS is inelastic, it is hard to produce more output so it is hard for the multiplier process to have much effect and it may just cause more inflation

Question 31

When is there a high multiplier effect?

Answer 31

• Lots of spare capacity
• MPS is low
• MPC is high

Question 32

When is there a low multiplier effect?

Answer 32

• Economy is close to its limits
• Propensity to import is high
• High inflation causing rising interest rates which then lowers other components of AD

Question 33

What does the LRAS curve look like and represent?

Answer 33

A vertical supply curve when there is full employment so there can’t be any more supply. It represents the full long run productive capacity of the economy i.e. when we’re producing just about as much as our factors of production will allow.

Question 34

What are the factors that affect LRAS?

Answer 34

• An increase in the quantity and quality of capital equipment, (machinery, tools e.t.c)
• A more highly skilled workforce
• Innovation and improvements in productive processes
• Geographical/ occupational immobility
• Improved attitudes of entrepreneurship
• Encourage more people to join the labour supply, (immigration, raise the retirement age, lower the school leaving age, lower benefits, lower income taxes)

Question 35

What is net investment?

Answer 35

Capital accumulation - depreciation

Question 36

When would the LRAS curve shift to the right?

Answer 36

If capital investment is greater than depreciation