Measuring the Macroeconomy

Question 1

Define Economic Growth

Answer 1

Process of steady increase in quality and quantity of goods

Question 2

What are Business cycles and what are the two elements

Answer 2

Economy moves up and down its not steady
Booms: demand for a product increases
Busts: demand for a product decreases

Question 3

What causes unemployment to increase and decrease

Answer 3

Recessions cause an increase in unemployment
Unemployment can be decreased through increasing government spending and reducing taxes

Question 4

What causes inflation to rise and fall

Answer 4

Booms: inflation goes up
Busts: inflation goes down
It also works in the inverse as reducing inflation can bring about a recession

Question 5

What is a government budget deficit and surplus

Answer 5

Deficit: when government spending is higher than the money raised from taxes
Surplus: when government spending is lower than that raised from taxes
Taking on more debt can help get out of recession

Question 6

What does high interest rates lead to

Answer 6

tight monetary policy leading to reduced demand and less investment and spending as there is less liquid capital for consumers

Question 7

What is the advantage of low interest rates?

Answer 7

Stimulate demand as people have more disposable income

Question 8

What is Quantitative easing

Answer 8

When a nations central bank tries to increase liquidity in the financial system through purchasing things like govt bonds
This was used during the 2008 crisis

Question 9

How can a growth in productivity be measured and what does it lead to

Answer 9

More inputs or greater value for outputs from the same number of inputs
Growth in productivity leads to higher real wages

Question 10

What are targets and give examples

Answer 10

issues that matter for their own sake as they affect living conditions
E.G. high unemployment, inflation

Question 11

What are instruments and give examples

Answer 11

Variables that policy makers change in order to achieve the targets
E.G. bank rates, government spending, tax rates

Question 12

What is the macroeconomic policy problem

Answer 12

choosing appropriate values of the instruments to achieve the best outcome of the targets

Question 13

What is positive analysis

Answer 13

Predicting the consequences of a policy regardless of the connotations

Question 14

What is Normative analysis

Answer 14

Predicting the consequences of a policy and advising on it based off how good they are

Question 15

Describe the Classical approach and the “invisible hand”

Answer 15

The economy works well on its own if all individuals act in their best interest in the free market
Very limited government involvement is needed

Question 16

Describe the Keynesian approach and why it came about

Answer 16

During the great depression classical theory failed as high unemployment was consistent
Keynes said that it was because the economy was out of equilibrium for too long so more government involvement is necessary

Question 17

At which points were the Keynesian and Classical approaches more popular

Answer 17

Keynesians dominated from WW2-1970 and then stagnation led to a classical comeback until the 90s and now there is excellent research with both approaches