THEME 2 STEEDS (part 1)

Question 1

what is GDP

Answer 1

gross domestic product (measure value of output)

Question 2

what are the main measures of the economy

Answer 2

1-unemployment
2-exchange rate
3-debt
4-inflation
5-interest rates
6-balance of payments

Question 3

circular flow on income

Answer 3

Question 4

3 measures of economic activity

Answer 4

1- income method (add all income of firms)
2- expenditure method (finding how much people have spent)
3- output method (goods and services that have been sold)

Question 5

7 government main economic objectives

Answer 5

1- control inflation
2- reduce unemployment
3- economic growth
4- balance of payments
5- debt
6- reduce inequality
7- sustainability

Question 6

what is aggregate demand

Answer 6

total spending on goods and services within an economy

Question 7

aggregate demand equation

Answer 7

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

Question 8

what percentage does each component of AD equation account for

Answer 8

1- consumers 65%
2- investment 15%
3- government spending 25%
4- difference between imports and exports -5%

Question 9

how does wealth influence consumption

Answer 9

increase in wealth value leads to increase of consumption - the wealth effect

Question 10

what is the accelerator theory

Answer 10

• as output increases, investment will increase but investment will increase at an accelerating rate faster than the output. investment is linked to the growth of the economy

Question 11

3 types of government spending

Answer 11

1- capital spending (new public infrastructure)
2- current expenditure (providing public services)
3- transfer payments (benefits system)

Question 12

what is the multiplier

Answer 12

initial increase in AD leads to a much bigger increase in total output

Question 13

falls in AD

Answer 13

-fall in net exports
-cut in government spending
-higher interest rates
-decline in household wealth and confidence

Question 14

increase in AD

Answer 14

-depreciation of exchange rate
-cuts in direct and indirect taxes
-increase in house prices
-expansion of supply of credit and lower interest rates

Question 15

what are shocks to aggregate demand

Answer 15

unexpected events that cause changes in the level of demand, output and employment

Question 16

terms of trade

Answer 16

the ratio of an index of a country’s export prices to an index of its import prices

Question 17

short run time period

Answer 17

4-6 months

Question 18

long run time period

Answer 18

after 4-6 months/one year

Question 19

fiscal policy

Answer 19

a governments policy regarding taxation and government spending

Question 20

progressive tax

Answer 20

marginal rate of tax rises as income rises. causes a rise in the average rate of tax

Question 21

proportional tax

Answer 21

marginal rate of tax is constant leading to a constant average rate of tax

Question 22

regressive tax

Answer 22

rate of tax paid falls as income rises

Question 23

problems with fiscal policy

Answer 23

-recognition lags
-imperfect information
-response lags
-magnitude

Question 24

discretionary fiscal changes

Answer 24

deliberate changes in tax and government spending

Question 25

automatic fiscal changes

Answer 25

changes in tax revenues and government spending arising automatically as economy goes through the trade cycle

Question 26

what is money

Answer 26

-medium of exchange
-unit of account
-standard of deferred payment
-store of value

Question 27

factors considered by bank of englanf when setting interest rates

Answer 27

1- GDP growth and spare capacity
2-bank lending and consumer credit figures
3-equity markets and house prices
4-consumer and business confidence
5-growth of wages
6-unemployment figures
7-trends in global foreign exchange markets
8-international data

Question 28

transmission mechanism of monetary policy

Answer 28

changing of interest rates gives the opportunity to influence AD

Question 29

quantitative easing

Answer 29

the introduction of new money into the money supply by a central bank.

Question 30

what is the liquidity trap

Answer 30

a situation when expansionary monetary policy does not increase the interest rate and income hence it doesn’t stimulate economic growth. usually during recession when confidence is low