Topic 1 - Introduction and the goods market

Question 1

what does the circular flow model show

Answer 1

how money flows through society

Question 2

What is GDP

Answer 2

Gross domestic output
The measure of aggregate output

Question 3

what are the three ways of measuring GDP

Answer 3

The product method - add up the value of all goods and services produced in the country, industry by industry

The income method - add up all the incomes paid to households (wages, salaries, profits, rent and interests)

The expenditure method - add up all the expenditure necessary to purchase the nations production

Question 4

Critiques of GDP

Answer 4

Does not consider health or quality of education

Question 5

Alternative measures of the economy (Not GDP)

Answer 5

HDI

OECD Better life index

Ecological footprint

Question 6

what is HDI
limitations of it

Answer 6

measures combined life expectancy at birth, access to education and GNI per capita

Even with these additional variables it doesn’t consider inequalities, poverty, human security, empowerment etc.

Question 7

what is ecological footprint

Answer 7

has been developed to measure how much nature we have and how much we use

Question 8

Why is Z different in a closed economy

Answer 8

X = IM = 0 so
Z = I + C + G

Question 9

Equation for Z

Answer 9

Z = C + I + G + X - IM

Question 10

what is a endogenous variable

Answer 10

a variable that depends on other variables in the model
(consumption or even AD as it relies on consumption)

Question 11

what is an exogenous variable

Answer 11

A variables not explained within the model but instead taken as given

Question 12

what is the consumption function

Answer 12

C = c0 + c1 (Y-T)
c0= Autonomous consumption (intercept)
(What people consume if disposable income is zero so just necessities)

c1= The marginal propensity to consume (the slope_

T = Tax
Y-T = disposable income

Question 13

What will the effect of an increase in consumption be (considering multiplier and Keynesian cross)

Answer 13

Increase in demand
equal increase in production
equal increase in income
second round increase in demand
equal increase in production
equal increase in income

Question 14

How does the equilibrium cross always return to equilibrium

Answer 14

via a negative feedback loop

Question 15

why can we not increase demand without any limit

Answer 15

at some point we will have full employment of workers and there will be no spare capacity to raise demand further