Module 13 - Macroeconomics and Government Policy

Question 1

Government’s four key macroeconomic objectives

Answer 1

• economic growth
• low unemployment
• low inflation
• avoidance of balance of payments deficits and exchange rate problems

Question 2

GDP

Answer 2

gross domestic product - sum of market values of all the goods and services produced in an economy during a period

Question 3

four categories of factors of production

Answer 3

land (rent)
labour (wages)
capital (interest)
enterprise (profit)

Question 4

savings are a ____ in the circular flow of economy

Answer 4

withdrawal

Question 5

investments are a ____ in the circular flow of economy

Answer 5

an injection

Question 6

exports are ____ in the circular flow of economy

Answer 6

injections

Question 7

imports are ____ in the circular flow of economy

Answer 7

withdrawals

Question 8

government spending are a ____ in the circular flow of economy

Answer 8

injection

Question 9

taxation of households/firms are a ____ in the circular flow of economy

Answer 9

withdrawal

Question 10

trade surplus

Answer 10

exports > imports

Question 11

trade deficit

Answer 11

exports < imports

Question 12

budget deficit

Answer 12

gov spending > taxation

Question 13

budget surplus

Answer 13

gov spending < taxation

Question 14

How are budget deficits finances

Answer 14

usually through issue of government bonds and loan stock - public sector net cash requirement is the total amount the government requires to borrow

Question 15

aggregate demand formula

Answer 15

consumer spending + investment + government spending + exports - imports

Question 16

consumption function

Answer 16

C = a + b Y

where a is autonomous consumption (amount a person will consume if their income is zero)

b is the marginal propensity to consume (proportion of an increase in their income that a person will spend on consuming goods and services)

Question 17

relationship between MPS and MPC

Answer 17

MPS = 1 - MPC

Question 18

multiplier effect

Answer 18

Increase in national income = injection x 1/MPS

Question 19

unemployment

Answer 19

Those of working age who are without work but are available for work at the current wage rate

Question 20

Frictional unemployment

Answer 20

Unemployment that exists because of a person switching jobs

Question 21

Seasonal unemployment

Answer 21

unemployment at certain times of the year

Question 22

Structural unemployment

Answer 22

Supply of labour in one industry outstrips the demand and people’s skills are too inflexible to be transferred `

Question 23

Classical unemployment / real wage unemployment

Answer 23

occurs when wage rates are kept artificially higher than the equilibrium rate through things like minimum wage or through the power of trade unions

Question 24

demand deficient unemployment

Answer 24

cyclical unemployment - in times or low economic growth of recession aggregate demand falls - wages are inflexible so number of people firms are willing to employ falls

Question 25

government policies to combat unemployment

Answer 25

• interest rates
• geographical subsidies
• changing the minimum or living wage rates

Question 26

inflation

Answer 26

sustained increase in the price level in an economy

measured monthly using CPI and RPI

Question 27

demand-pull inflation

Answer 27

increase in prices from increase in demand

Question 28

cost-push inflation

Answer 28

rising prices met with demands for higher wages which increase production costs and prices rise further

Question 29

how is inflation in the UK managed

Answer 29

• UK gov sets target rate of inflation for BoE currently 2%
• BoE aims to keep annual CPI within 1% of this
• if lower or higher the governor of the Bank of England must write to the chancellor to explain why and what actions will be taken to bring inflation back in line with target

Question 30

Fiscal policy

Answer 30

relates to gov spending and taxation

• expansionary: increase gov spending/cutting taxation
• contractionary: cut gov spending/increase taxation

Question 31

advantages of fiscal policy

Answer 31

• redistribution of wealth

- can target specific behaviors e.g. alcohol

Question 32

disadvantages of fiscal policy

Answer 32

• time lag between spending being set and seeing effect
• households may not react as anticipated to tax rate changes
• if increase in aggregate demand may also increase inflation

Question 33

monetary policy

Answer 33

attempts to control economy using changes in money supply, availability of credit and interest rates - aims to influence level of demand

higher interest rates used to slow down demand and lower interest rates used to stimulate demand

Question 34

quantitative easing

Answer 34

involves directly injecting money in to the economy - creates digital money used to buy things like government bonds which lowers the interest rates on other loans and boots other financial asset prices