Module 11 – Macroeconomics Overview

Question 1

Define Capital Stock?

Answer 1

Ntural and man made resources

Question 2

Define Labor force

Answer 2

…that part of the population willing to work

Question 3

Define National Output

Answer 3

National Output = Capital Stock + Labor

Question 4

What does Purchasing Power Parity (PPP) allow?

Answer 4

Purchasing Power Parity (PPP) allows the comparing of countries national output by comparing the cost of a basket of goods

Question 5

If part of the ___ and part of the___ is idle then the national output will ___

Answer 5

capital stock (e.g. factories); labor force; be less than its potential

Question 6

Describe Potential output growth?

Answer 6

Potential output is not static, it normally grows due to the:

• growth in the quality and quantity of labour
• growth in the quality and quantity of capital stock
• technological advances

Question 7

What is Gross National Product (GNP)?

Answer 7

The actual output of an economy is known as the Gross National Product (GNP)

GNP is the value of all final goods and services produced in the economy in a year:

GNP = apa + bpb + cpc + … p

where p = price of that goods or service and a,b,c… is the quantity

Question 8

Households give ___ to firms and in return receive an ___

Answer 8

resources (labour);income (Gross National Income=GNI)

Question 9

GNI=___= ___

Answer 9

GNE;GNP

Question 10

What is GNE?

Answer 10

Gross National Expenditure. Gross National Expenditure alue of total spending by households.

Question 11

What is GNI?

Answer 11

Value of the services of the factors of pproduction hired by the firms

Question 12

Define microeconomics?

Answer 12

Microeconomics attempts to explain relative prices

Question 13

Explain macroeconomics?

Answer 13

Macroeconomics explains behaviour of level of prices of all goods/services taken together

• Inflation/deflation

Also concerned with behaviour of total income and total output, unemployment

Question 14

GNP = ___

Answer 14

C (Consumer goods produced) + I (Investment/capital goods produced)

Question 15

Define Entrepreneurs/managers

Answer 15

combine capital and labour to produce goods and services

Question 16

Discuss Long-term solution to poverty?

Answer 16

Long-term solution to poverty is not transfer of food and clothing – rather assistance in establishing capital stock and labour force In the short run there is virtually nothing a nation can do to internally acquire resources but it can avoid wasting them

Question 17

GNI = ___

Answer 17

C (Consumer goods purchased) + S (Savings)

Question 18

If consumer goods produced exceed consumer goods planned for purchase then?

Answer 18

• Unsold goods will increase inventories
• Firms will begin to produce fewer goods
• Firms will require fewer resources
• Household income will fall
• Households will purchase fewer goods

Gap will widen until inventories fall below desired levels then process will be reversed

These processes called “Business cycle”

• Creates waste
• Government has tools to alleviate tendency

Question 19

Aggregate demand consists of expenditure from 4 groups:

Answer 19

• Consumers (households)
• Firms
• Government
• International (households, firms and governments)

Each of these groups’ expenditures can be affected by governmental policies; consequently the policies enacted by government can influence aggregate demand.

Question 20

Discuss Actual output

Answer 20

• Gross National Product (GNP) = Sum of prices of all goods produced
• Gross National Expenditure – value of total spending by households
• Gross National Income – value of services of factors of production hired by firms
• GNP=GNE=GNI

GNP = C (Consumer goods produced) + I (Investment/capital goods produced)

GNI = C (Consumer goods purchased) + S (Savings)

Question 21

State the macroeco-nomic relationships

Answer 21

Let the symbol Y stand for Gross National Product.

Thus GNP ≡ GNE ≡ GNI ≡ Y

(NOTE: ≡ indicates an identity, i.e. something that is necessarily true by definition.)

For a domestic economy, aggregate demand equals consumption expenditure (C) plus investment expenditure (I) plus government expenditure (G).

Thus domestical-ly GNP ≡ Y ≡ C + I + G

Notes:

Y (GNP) = C (consumption expenditure) + I (investment expenditure) + G (government expenditure in an international economy

However, in an international setting, part of a nation’s resources are allocated to the production of export goods (X) and simultaneously households, firms and govern-

ments may buy goods from foreign nations, in other words imports (Z).

Thus internationally Y ≡ C + I + G + X ― Z

This last equation is known as the national income identity, and policy makers must never lose sight of it.

Notes:

Y = C + I + G + X (export) – Z (import)

Question 22

Define Fiscal policy

Answer 22

– control of government expenditure and tax rates
- Income taxes, sales taxes, customs, excise taxes, corporation taxes

Question 23

Define Monetary policy

Answer 23

Supply of money which directly affects interest rates

Question 24

Explain Output gap / employment gap

Answer 24

• aggregate demand is less than potential output

– idle labour and unused capacity in capital stock

Question 25

Explain Inflationary gap

Answer 25

* Aggregate demand is higher than potential output * prices rise, marginal buyers drop out of market

Question 26

Potential output (Q) expands regardless of government action due to supply-side factors:

Answer 26

- Growth in quality and quantity of capital stock - Growth in quality and quantity of labour force - Technological change

Question 27

Government has three mechanisms to affect equivalent growth in aggregate demand (Y). Explain.

Answer 27

* Increase government expenditure * Reduce tax rates * Increase disposable incomes * Increase money supply * Decrease rate of interest (R)

Question 28

Macroeconomics goals generally accepted as desirable are:

Answer 28

o Low inflation o Low unemployment o Balanced budget o Positive balance of trade o Stable currency

Question 29

Inflationary bias of market economics

Answer 29

- At full employment inflation rate is positive - Zero inflation might require a very high unemployment rate

Question 30

Explain full-employment rate of unemployment

Answer 30

Known as the natural rate of unemployment and this rate varies according to the socio-economic characteristics of each nation’s labour force

Question 31

Explain full-employment rate of down-time

Answer 31

unused capacity

Question 32

Discuss Gross domestic product (GDP).

Answer 32

GDP defines the economy as existing within the country’s borders GDP measures the output of an economy based on location

Question 33

Explain Gross National Product versus Gross Domestic Product

Answer 33

* We have already defined GNP as the value of all final goods and services pro- duced in the economy in a given period, and GDP measures the same thing * The difference is that GDP defines the economy as existing within the country’s borders, while GNP defines the economy according to the ownership of factors of production * While GDP measures the output of an economy based on location, GNP measures the output of an economy based on ownership * GNP = GDP + Net Income from Abroad

Question 34

What doe sit mean if we assume potential output in the short run is fixed?

Answer 34

The ability of a government to affect aggregate demand means that government policies can affect the unemployment rate and the inflation rate. Probelm with policies: * Time lag * Moving target (output continuously increasing) * Households and firrms: * Households expenditure is variable and unpredictable * Firm expenditure even more volatile * Depend on managers long-term expectations * Exogenous shocks (e.g. oil price spikes, ooil cartel)

Question 35

Name the policies categories that gorment has control fall into

Answer 35

fiscal policy and monetary policy

Question 36

Explain inflationary gap.

Answer 36

But what happens if households, firms and governments combined (the aggre- gate demand) attempt to buy more than the economy can produce. The answer is that prices will rise and we will have what is known as an inflationary gap, the extent of the gap and therefore the inflationary forces being dependent upon by how much aggregate demand exceeds full-employment output. Prices will rise, marginal buyers will drop out of the various markets, and the economy will return to full-employment equilibrium but at a higher price level. Why, you might ask, cannot this excess aggregate demand be satisfied with imports? It can be, as long as your country is creditworthy abroad, i.e. as long as other nations are willing to loan you the use of some of their resources – the resources that produce the imported goods and services. The debt, of course, will have to be serviced regularly and be repaid in the future.