Quick Exam

Question 1

Short run economic growth? + draw diagram

Answer 1

Caused by an increase in AD

*draw diagram *

Question 2

Long run economic growth + draw diagram

Answer 2

Caused by an increase in productivity

Question 3

Causes of short run Economic growth

Answer 3

1) lower interest rates
- cheaper to borrow for consumers, cheaper for businesses to invest
2) lower income tax/ corporation tax
- more disposable income, more retained profit
3) high government spending
4) weaker exchange rate

Question 4

What causes an LRAS shift to the right?

Answer 4

1) Quantity of FOP
2) Quality of FOP
3) Increase in productivity capacity

Question 5

Causes of Long run economic growth

Answer 5

1) Increase in labour productivity
2) increase in workforce ( immigration)
3) infrastructure improvements
- transport = cheaper to transport goods
- easier to access goods
4) increase competition

Question 6

The policy objective of sustainable development?

Answer 6

To reduce the negative impact on the environment and future generations

Question 7

Sustainability?

Answer 7

It refer to meeting the needs of the present without compromising the future.

Question 8

Limitation of unsustainable growth

Answer 8

1) Resource depletion and resource degradation
2) deforestation
3) over use + burning of fossil fuels

Question 9

Causes of Unemployment?

Answer 9

1) structural
2) frictional
3) cyclical

Question 10

Consequences of unemployment ( Economy)

Answer 10

1) lost output
- labour as a resource is lost
2) deterioration of govt finances
- high levels of govt spending on unemployment benefits
- lower tax revenues
3) Hysteresis
- skills outdated and lost

Question 11

Cost of unemployment (individual)

Answer 11

1) loss of main source of income
2) loss of status

Question 12

Benefits of unemployment

Answer 12

1) firms benefit from greater pool of workers
2) workers have time to search for best job
- not pressured into taking any job

Question 13

Balance of payments

Answer 13

A record of economic transactions that take place between a country and the rest of the world

Question 14

What does the current account measure?

Answer 14

Trade

Question 15

Components of the current account

Answer 15

1) Trade in goods
2) trade in services
3) income
- measure of flows of income e.g. remittances
4) transfers
- payment of EU fees
- contribution of AID to developing countries

Question 16

The policy objective of sustainable balance of payments

Answer 16

The uk aim for the current account is to be satisfactory, so there is not a large deficit. This is usually near to equilibrium

Question 17

Fiscal policy?

Answer 17

The use of government spending and taxation to influence the economy economy

Question 18

Expansionary fiscal policy?

Answer 18

Increase AD

Question 19

Contractionary fiscal policy?

Answer 19

Decrease AD

Question 20

Why might we use expansionary fiscal policy?

Answer 20

1) Boost growth
2) reduce unemployment
3) increase demand pull inflation

Question 21

Why might we use contractionary fiscal policy?

Answer 21

1) reduce inflation
2) reduce budget deficit and national debt
3) redistribution of income
- higher tax on rich
4) reduce current account deficit
- less disposable income = less imports

Question 22

Types of government spending

Answer 22

1) current spending
- day to day spending
- payment of public sector wages
2) capital spending
- infrastructure spending
3) welfare spending
- benefits and pensions
4) debt interest payment

Question 23

Effect of an increase in interest rates on individual

Answer 23

• increased cost of borrowing
• higher mortgage payments
• improved return for savers
• increased cost of bank loans

Question 24

Effect of increase in interest rates on economy

Answer 24

1) currency will appreciate
- exports less competition; imports cheaper
2) inflation
- will be lower
3) economic growth
- tend to be slower
4) unemployment could rise

Question 25

Supply side policies

Answer 25

Designed to increase productive capacity of the economy

Question 26

2 types of SSP

Answer 26

1) interventionist SSP 2) Market based SSP

Question 27

Aim of interventionist SSP

Answer 27

Try to provide bigger role of government to boost LRAS

Question 28

Aim of market based SSP

Answer 28

Reduce the role of the government

Question 29

Interventionist SSP policies

Answer 29

1) govt spending on education 2) govt spending on infrastructure 3) subsidies to promote investmernt - buying capital - New r + d

Question 30

3 groups of market based SSP

Answer 30

1) tax reform 2) labour market reform 3) competition policy

Question 31

Policies of tax reform

Answer 31

1) lower income tax - incentive those outside the labour force to join - incentivise those to work harder 2) lower corporation tax - firm retain more profit which they can invest

Question 32

Policies in labour market reform

Answer 32

1) reduce benefit and welfare payments - strong incentive to work 2) reduce minimum wage - reduce cost of production

Question 33

Policies in Competition policy

Answer 33

1) privatisation 2) deregulation 3) trade liberation

Question 34

Cons of SSP

Answer 34

1) no guarantee of success 2) cost - some of these policies are very costly 3) time lags - many years before completion( infrastructure)

Question 35

What defines the long run for a firm in production?

Answer 35

In the long run, all inputs are variable — the firm can adjust all factors of production (labor, capital, land, etc.).

Question 36

What is a repurchase agreement (repo) and how does it function in central bank operations?

Answer 36

A repurchase agreement is a short-term contract where a commercial bank sells securities (like government bonds) to the central bank with an agreement to repurchase them later at a slightly higher price. It functions as a collateralized loan, helping commercial banks manage liquidity.

Question 37

What is the central idea of Milton Friedman’s Monetarism?

Answer 37

Monetarism, developed by Milton Friedman, is the theory that emphasizes controlling the money supply as the key to managing inflation and economic stability. It holds that excessive growth in the money supply leads to inflation and that steady, predictable increases in money supply support stable economic growth.

Question 38

What are the key features of quantitative easing (QE)?

Answer 38

Quantitative easing is when a central bank purchases long-term securities to inject liquidity into the economy. This raises bond prices, lowers long-term interest rates, and increases the volume of base money, aiming to stimulate economic activity during periods of low growth and low interest rates.

Question 39

What is the natural rate of unemployment and what does it signify?

Answer 39

The natural rate of unemployment is the level of unemployment consistent with an economy operating at full capacity, where inflation is stable and not influenced by monetary disturbances. It includes only frictional and structural unemployment and excludes cyclical unemployment.

Question 40

What is the long-run effect of increased government spending on output and prices in the AD-AS model?

Answer 40

In the long run, increased government spending shifts the aggregate demand curve rightward, leading to a higher price level (inflation) but no change in real output. Output returns to its natural level, while the main effect is higher inflation.

Question 41

What is a liquidity trap and how does it affect monetary policy?

Answer 41

A liquidity trap occurs when interest rates are so low that increases in the money supply fail to reduce them further or stimulate spending. People hoard money instead of investing, making monetary policy ineffective in boosting economic activity.

Question 42

When is monetary policy most effective in stimulating output?

Answer 42

Monetary policy is most effective when money demand is less responsive to interest rate changes, because increases in the money supply then cause larger decreases in interest rates, stimulating investment and boosting output more significantly.

Question 43

What happens in the AD-AS model when both money supply and autonomous consumption increase?

Answer 43

Both factors shift aggregate demand rightward, resulting in an increase in the level of output and the price level in the short run.

Question 44

What does the real rate of interest represent in terms of capital investment?

Answer 44

The real rate of interest measures the opportunity cost of capital investment, reflecting the cost of borrowing funds adjusted for inflation and influencing firms' investment decisions.

Question 45

What happens to total output when capital per worker increases, holding other factors constant?

Answer 45

Total output increases because workers are more productive, but the rate of increase diminishes due to diminishing returns to capital.

Question 46

What is the primary source of long-run increases in output per person?

Answer 46

Long-run growth in output per person is mainly driven by increases in average labour productivity, resulting from technological progress, capital accumulation, and improved skills.

Question 47

What is compound interest?

Answer 47

Compound interest is the payment of interest on the original principal and on all previously accumulated interest, causing the investment to grow exponentially over time.

Question 48

When do living standards, measured by output per person, increase in a country?

Answer 48

Living standards improve when total output grows faster than the population, resulting in higher output per person.

Question 49

What does a price elasticity of demand of 2 imply?

Answer 49

It means that a 1% decrease in price leads to a 2% increase in quantity demanded, indicating that demand is elastic and consumers are very responsive to price changes.

Question 50

What does a yield curve represent in bond markets?

Answer 50

A yield curve shows the relationship between bond yields (interest rates) and their time to maturity, illustrating rates of return across different maturities for bonds of similar credit quality.

Question 51

How is the Aggregate Demand schedule derived from the IS-LM model?

Answer 51

By dropping the assumption that the general price level is constant, we can analyze how changes in prices affect real money balances, shifting the LM curve and allowing us to derive the Aggregate Demand curve from the IS-LM framework.

Question 52

In the original Phillips curve, what variable is shown on the vertical axis?

Answer 52

The proportionate rate of change in nominal wages is plotted on the vertical axis, showing the inverse relationship between wage inflation and unemployment.

Question 53

What does a central bank do when it engages in quantitative easing?

Answer 53

The central bank buys long-term government bonds to increase the money supply, lower long-term interest rates, and stimulate economic activity.

Question 54

According to liquidity preference theory, what does holding money for speculative purposes imply?

Answer 54

It implies that people expect interest rates to rise in the future, causing them to hold money instead of bonds to avoid losses from falling bond prices.

Question 55

What relationship does the investment demand curve show between real interest rates and investment spending?

Answer 55

The investment demand curve shows an inverse relationship: higher real interest rates reduce investment spending, while lower real interest rates encourage more investment, assuming other factors are constant.

Question 56

Absolute advantage

Answer 56

Absolute advantage is who can produce more of a good using the same resources.

Question 57

Comparative advantage

Answer 57

Comparative advantage depends on opportunity cost.