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Question 1

Using the classical long-run aggregate supply curve, explain what will happen in the long run to real output if aggregate demand increases?

Answer 1

There would be no change in real output. This is because classical economists believe the economy will be at full employment in the long run.

Question 2

Explain the likely impact on aggregate demand of a fall in average house prices.

Answer 2

Aggregate demand will decrease. This is because there is a reduction in consumer confidence and consumption. There is negative equity (the value of the house may be less than the price consumers paid for it).

Question 3

Explain the effect of an increase in aggregate supply.

Answer 3

As aggregate supply increases. There will be an improvement in capital and an increase in productivity.

Question 4

Explain the reason of the shape of the Classical long-run AS curve.

(A straight upwards vertical line)

Answer 4

The economy is operating at a full capacity, so there are no unused factor of production,

Question 5

What is meant by spare capacity in the economy?

Answer 5

Equilibrium level output can occur below the full employment level of output.

There is a negative output gap in the economy

There is an under-utilisation of the factors of production

Question 6

Define aggregate demand

Answer 6

AD = C + I + G + (X-M)

Aggregate demand is the total amount of planned spending on goods and services at any price level in an economy.

Question 7

Define Budget Deficit

Answer 7

Budget deficit is when government spending exceeds tax revenue.

Question 8

Define direct tax.

Answer 8

Tax on income

Tax on business profits

Question 9

Define a balanced government budget.

Answer 9

When government spending equals tax revenue.

Neither a budget deficit nor a budget surplus

Question 10

What is the reason for a weaker pound for the UK?

Answer 10

There is a weaker pound due to a lack of confidence a as results of the UK’s decision to leave the EU.

Question 11

Define inflation

Answer 11

An increase in the general price level.

Question 12

Explain the causes of inflation.

Answer 12

Demand pull inflation may increase due to a fall due to an increase in injections.

Cost push inflation due to an increase in the costs of raw materials and energy.

Question 13

Define price level

Answer 13

Price level is the average of the current prices of goods and services in the economy.

Question 14

What is the difference between deflation and disinflation?

Answer 14

Deflation occurs when the inflation rate falls below zero. Disinflation is when the inflation rate falls but remains positive.

Question 15

Describe the supply and demand of food in the UK.

Answer 15

The UK is a net importer of food that has relatively inelastic.

Question 16

If imports become more expensive…

Answer 16

there is cost push inflation

Question 17

If exports become more expensive…

Answer 17

leading to more demand pull inflation.

Question 18

Explain the reasons for the increase in the number of people unemployed in the UK over the time period shown.

Answer 18

-There may be closure of high street shops. High street shops employ large number of people in the UK and with sales moving online jobs tend to be lost permanently.

-There may be uncertainty over the process of leaving the EU. Uncertainty discourage firms from investing into their business.

-There may be falling incomes. Lower incomes lead to lower consumption so there is less demand for labour.

Question 19

What are the economic effects of a decrease in the rate of unemployment?

Answer 19

There will be an increase in disposable income. This will increase MPC, therefore consumption increases. If there is more consumption less scarce resources fall into spare capacity.

There will be increased tax revenue. So, budget deficit would decrease.

Question 20

Define under-employment. Explain why under-employment occurs.

Answer 20

When a worker is working fewer hours than they would like to work. This can be because of:

-Recession, so there is a lack of demand in the market.

-Increased mechanisation

-An increase in zero-hours/part-time/flexible contracts offered by employees/

Question 21

Define claimant count.

Answer 21

Claimant count is number of people claiming unemployment benefit.

Question 22

Define the ILO measure of unemployment.

Answer 22

The ILO measure of unemployment defines someone as unemployed if they are without a job, want a job, and have actively sought work for the last four weeks.

Question 23

Why are Purchasing Power Parties used.

Answer 23

PPPs are used to improve accuracy when comparing data between countries. PPP compares costs of living between different countries. PPP is calculated by comparing the price of a basket of comparable goods and services in different countries.

Question 24

Define Real GDP

Answer 24

Real is the value of GDP adjusted for inflation. GDP is the total output of the economy.

Question 25

Define Gross National Income.

Answer 25

GNI is GDP + net income paid into the country by other countries for things such as dividends and interest.

GNI measures income received by a country both domestically and from assets abroad.

Question 26

Define index numbers.

Answer 26

Index number are an economic data figure that reflects price/quantity compared with the base year. It shows the percentage change in price from the base year.

Question 27

Define Recession.

Answer 27

Negative economic growth. It is fall in GDP for to successive for two consecutive quarters.

Question 28

Describe/explain the characteristics of a recession.

Answer 28

-There is falling inflation due to the reduction in consumer expenditure.

-There is rising unemployment due to less demand for workers caused by falling real output.

-Falling profits possibly lead to higher levels of business failure.

-Increase in budget deficit due to a rise in government spending on benefits and fall in tax revenues.

Question 29

Explain how the multiplier effect leads to an increase in aggregate demand.

Answer 29

-The Multiplier effect occurs when an initial injection into the circular flow causes a bigger final increase in real national income. The injection of demand might come for example from a rise in exports, investment or government spending.

-The multiplier effect arises because on agent’s spending is another agent’s income (used an example).

Question 30

Define an injection.

Answer 30

Injection is money flowing into the circular flow of income. Injection comprises of investment, government spending and exports.

Question 31

What can decrease the value of a multiplier.

Answer 31

An increase in the marginal propensity it import.