Topic 6: Macroeconic activity

Question 1

Define macroeconomics

Answer 1

Macroeconomics studies the economy as a whole and is concerned with the big picture of the economy. Macroeconomics focuses on why the economy grows and why economic activity fluctuates over time

Question 2

Define circular flow of income

Answer 2

The circular flow of income is a macroeconomic model that describes the flows of resources, goods and services, and income between the parts of the economy

Question 3

Define savings

Answer 3

Saving is the portion of household income not spent on goods and services for current consumption
(leakage)

Question 4

Define investment

Answer 4

Investment is defined as expenditure on goods and services which are not intended for current consumption
(injection)

Question 5

Define imports and exports

Answer 5

Imports are a leakage and exports are an injection

Question 6

Concept of total spending

Answer 6

One man’s spending is another man’s income
∑O = ∑Y= ∑E
0= output
Y = income
E = Expenditure

Question 7

When does equilibruim exist?

Answer 7

When S=I (savings = Investment)

Question 8

What happens when s>I

Answer 8

• When flow of savings exceeds flow of investment (S>I), the flow of income will contract as leakages exceed injections
• Total spending will be less than output, so the unsold stock of firms will increase
• Firms will react by cutting production and reducing the amount of resources they employ in production
• Households will then receive less income so consumption and savings will fall
• This pattern will continue until savings = investment at a lower level of income

Question 9

What happens when I>S

Answer 9

• If I>S, there will be an expansionary effect on the circular flow cause level of income to rise
• Total expenditure will exceed current output causing inventory levels to fall
• Firms will react by increasing production and employing more resources, so incomes paid to households will rise
• Level of economic activity will expand

Question 10

Equilibrium in governemnt sector

Answer 10

T = G
When there is an inequality between taxation (leakage) and government expenditure (injection) the level of output and income in the economy will change
If T>G, the amount of money withdrawn from circular flow exceeds the expenditure injection, so level of income will fall
If G>T, the level of income will rise

Question 11

Equilibrim in open economy

Answer 11

M = X
When there is inequality between imports and exports, the level of output and income will change
If M>X, the amount of money withdrawn from the circular flow exceeds the funds injected, so the level of income will fall
If X>M, the injections increase the size of the real and money flows circulating around the economy so the level of income will rise

Question 12

Equilibrim in full circular flow

Answer 12

S+T+M=I+G+X

If S+T+M>I+G+X, aggregate withdrawals are greater than injections and producer output and household income will fall
If S+T+M<I+G+X, aggregate injections are greater than withdrawals, so household income and producer output will rise

Question 13

Define GDP

Answer 13

It is defined as the total market value of all final goods and services produced in a country during a period of time (usually a year)

Question 14

Define Aggregate expenditure

Answer 14

Aggregate expenditure is the total planned spending on final goods and services
AE = C + I + G + (X – M)

Question 15

Consumption (c)

Answer 15

• 54%
• Expenditure on non-durable goods - food, clothing
• Expenditure on services - Doctors, machanics
  Expenditure on consumer duragles - White goods(washing machine)

Question 16

Investment (I)

Answer 16

• 18%
• Business expenditure on new capital equiplment, which will produce final godds, and services in the future

Question 17

Governemnt( G)

Answer 17

• 26%
• G1- Current expenditure which provides for day- to day functions of governemnt
• G2- Capital expenditure to provide for future needs such as schoold, roads

Question 18

Net Exports (X M)

Answer 18

2%
- Value of goods and services sold oversease - the value of goods and services brought from overseas

Question 19

Factors affecting Consumption

Question 20

Factors affecting investment

Question 21

Factors affecting Government

Question 22

Factors affecting net exports