Macroeconomics- The national and international economy

Question 1

What is short-term economic growth

Answer 1

Short term economic growth is growth of real output resulting from using idle resources, including labour, thereby taking up slack in the economy

Question 2

What is long-term economic growth

Answer 2

Long-term economic growth is an increase in the economy’s potential level of real output, and an outward movement of the economy’s production possibility frontier

Question 3

What is gross domestic product

Answer 3

GDP is the sum of all goods and services, or level of output, produced in the economy over a period of time (such as a year)

Question 4

What is real GDP

Answer 4

Real GDP is the measure of all the goods and services produced in an economy, adjusted for price changes or inflation.
The adjustment transforms changes in nominal GDP, which is measured in money terms, into a measure that reflects changes in the total output of the economy

Question 5

what is nominal GDP

Answer 5

Nominal GDP is measured at the current market price without removing the effects of inflation

Question 6

What is the objectives of government economic policy

Answer 6

A target or goal that policy-makers aim to ‘hit’

Question 7

What is quantitative easing

Answer 7

This involves the Central Bank increasing the money supply and using these electronically created funds to buy government bonds or other securities

Question 8

What are the aims of quantitative easing

Answer 8

-Increase economic activity-encourage bank lending, investment and therefore help improve the rate of economic growth.

-Higher inflation rate. Quantitative easing may also be used to avoid the prospect of deflation

-Lower interest rates on assets

Question 9

How does quantitative easing work

Answer 9

The central bank creates money electronically-this is similar to printing money, except they are increasing bank reserves which don’t need to be printed in the form of cash

-The Central Bank uses these extra reserves to buy various securities. These include government bond and corporate bonds

Question 10

What will buying these securities achieve

Answer 10

Increased liquidity-Banks sell assets (bonds) for cash. Therefore banks see an increase in their liquidity (cash reserves). In theory, the bank will then be more willing to lend to customers. This lending will be important for increasing investment and consumer spending

-Lower interest rates- Buying assets reduce their interest rate. Lower interest rates on these securities may also encourage banks to lend rather than keep securities which are paying low interest. Higher lending should help improve economic growth.

Question 11

when should quantitative easing be pursued

Answer 11

-Quantitative easing is often suggested as a solution to a liquidity trap. A liquidity trap occurs when cutting interest rates fail to boost economic activity. This is because despite low-interest rates, banks are reluctant to lend and/or consumers are reluctant to borrow.

-Quantitative easing is also seen as a solution to deflation. During a period of deflation there is a reduction in consumer spending, often causing a recession. Quantitative easing can help increase inflation closer to the government’s inflation target of 2%.

Question 12

What is the equation for the multiplier effect

Answer 12

1/leakage = 1/import+MPT+MPS

Question 13

What does expansionary fiscal policy aim to do

Answer 13

Expansionary monetary policy aims to increase aggregate demand and economic growth in the economy

Question 14

What does AD equal

Answer 14

C+I+G+(X-M)

Question 15

What are the range of objectives governments aim to hit

Answer 15

-To achieve economic growth and improve living standards and levels of economic welfare

-Create and maintain full employment or low unemployment

-limit or control inflation, or to achieve some measure of price stability

-attain a satisfactory balance of payments , usually defined as the avoidance of an external deficit which might create an exchange rate crisis

Question 16

What is a recession

Answer 16

A recession in the uk and many other countries, a recession is defined as 6 months or more of negative economic growth or declining real national output

Question 17

when did the Great Depression arrive

Answer 17

in the 1929-30

Question 18

which country during the Great Depression was hit the hardest

Answer 18

The us because unemployment rate rose higher and remained higher much longer than any western country

Question 19

how much did the USA’s real GDP during the 1930s fall by

Answer 19

The real GDP fell by 9.4% in 1930

Question 20

What did the US unemployment rate climb by

Answer 20

The US unemployment rate climbed from 3.2% to 8.7% in 1930s

Question 21

How much did real GDP fall by in 1931

Answer 21

Real GDO fell by 8.5%

Question 22

In 1931 what did unemployment rise to

Answer 22

15.9%

Question 23

since 1929 how much had real GDP fallen by in 1932 and what did this do

Answer 23

Real GDP had fallen by 31% and had left 13million Americans without a job

Question 24

When did the USA begin it’s first stage of recovery

Answer 24

in 1934

Question 25

how did the recovery by the us effect real GDP and unemployment

Answer 25

real GDP rose by 7.7% and unemployment fell to 21.7%

Question 26

What is monetary policy

Answer 26

Monetary policy involves using interest rates and other monetary tools to influence the levels of consumer spending and aggregate demand (AD)

Question 27

what does monetary policies aim to do

Answer 27

-Low inflation. UK target is CPI 2% +/-1. Low inflation is considered an important factor in enabling higher investment in the long-term.

-Stable economic growth. Monetary policy is also concerned with maintaining a sustainable rate of economic growth and keeping unemployment low.

Question 28

What is tight monetary policy

Answer 28

If the Bank feels the economy is growing too quickly and inflation is expected to exceed the government’s target, then they are likely to increase interest rates to reduce the rate of economic growth and reduce inflationary pressures.

Question 29

What is loose monetary policy

Answer 29

If the Bank of England anticipates inflation falling below the government’s target of 2% and economic growth is sluggish, or the economy is facing a recession. They are likely to cut interest rates.

Question 30

Draw the graph for loose monetary policy

Answer 30

Question 31

Draw the graph for tight monetary policy

Answer 31