Topic 1 - Microeconomics

Question 1

What is Microeconomics?

Answer 1

It is the study of how an individual household and firm make decisions and how they interact with one another in markets

Question 2

What is Macroeconomics?

Answer 2

The study of the economy as a whole

Question 3

What is the GDP, and what are the 4 main components?

Answer 3

GDP is the gross domestic product which is the market value of all final goods and services produced within a country in a given time period.

Consumption
Investment
Government purchases
Net exports

Question 4

GDP equation

Answer 4

Y= C + I + G + NX

NX = exports - imports = net exports

Question 5

What is another measure of income?

Answer 5

Gross National Product (GNP) or Gross National Income (GNI)

Question 6

What is Real GDP and what happens if you change this.

Answer 6

Uses constant (base year) prices to place a value production of goods and services.

Changes in real GDP reflect only changes in the quantity of goods and services

Question 7

What is Nominal GDP, and what happens if you change nominal GDP.

Answer 7

Uses current prices to value the economy’s production of goods and services

Changes reflect both quantities of goods and services and their prices

Question 8

What is the GDP deflator, and what is the equation

Answer 8

Measure of the price level calculated as the ratio of nominal GDP to real GDP

(Nominal GDP/real GDP)*1000

Question 9

What is the Human Development Index? (UN)

Answer 9

A statistic that involves life expectancy, education, and per capita income indicators to rank countries into four tiers of human development

Question 10

What is inflation? Why does this occur?

Answer 10

The loss of value of money

Supply of money increases faster than the supply of goods

Question 11

Two ways on how the Supply of money can increase

Answer 11

1. Private bank money increases rapidly as banks increase the supply of credit
2. Government money increases as the government increases the supply of fiat money, normally to buy goods and services without raising tax.

Question 12

What is the expected inflation rate equation

Answer 12

Inflation rate (pi) = (Pt+1 - Pt)/pt

Where (pi) = expected inflation rate
Where Pt+1 = price level next period
Where pt = current price level

Question 13

What is low inflation? And what does central banks do to try influence?

Answer 13

Reflects the expansion of private banks money.

Setting interest rates, raising them when inflation gets to high

Question 14

Why does central banks increase interest rates

Answer 14

To slow down the private creation of credit

Question 15

When does high inflation occur

Answer 15

Expansion of the government money supply

Question 16

What is Hyper inflation

Answer 16

Rapid rising of inflation and always occurs because of the expansion of government money

Question 17

What is the Consumer price index? CPI

Answer 17

Another measure of inflation, which includes some foreign goods (imports)

Question 18

CPI vs the GDPDF

Answer 18

CPI includes some foreign goods (imports) whereas GDPDF does not

CPI basket is fixed and rarely changes whereas GDPDF measures the prices of all goods/services currently produced.

Question 19

What is the Fisher Effect + equation

Answer 19

Describes the relationship between nominal interest rate and the real interest rate.

I= r + (pi) or r= i - (Pi). Where i= nominal interest rate. Where r = real interest rate.
Where (pi) = inflation rate