Unit 2

Question 1

What is the price level?

Answer 1

The average level of prices in the economy and is mainly calculated by cpi

Question 2

When do shifts in ad occur?

Answer 2

When there is a change in any other relevant variable other than the price level

Question 3

What three factors affect consumption spending shifting the ad curve?

Answer 3

Unemployment may fall making consumers less afraid they will lose their jobs and more willing to borrow money and spend, government may reduce interest rates, a substantial rise in the stock market prices wil increase consumer wealth.

Question 4

What is the multiplier effect?

Answer 4

An initial change in ad can have a greater final impact on equilibrium national income.

Question 5

What increases the multiplier effect?

Answer 5

Higher propensity to consume

Question 6

The highee the leakages…..the smaller/ bigger the multiplier effect?

Answer 6

Smaller

Question 7

What is marginal propensity to consume?

Answer 7

The ratio of consumption to income at the margin. The lower this is the lower the multiplier

Question 8

What I consumption?

Answer 8

Spending on consumer goods and service over a period of time

Question 9

What are non durable goods?

Answer 9

Goods and services which are ued up immediately or over a short period of time e.g. ice-cream

Question 10

What is the most important determinant of consumption?

Answer 10

Disposable income

Question 11

What does average propensity to consume measure?

Answer 11

The average amount spent on consumption out of total income

Question 12

What are two important ways in which wealth of house hold can increase over time?

Answer 12

Changes in house prices (if the real price of houses increases considerably overtime, then households feel able to increase their spending. They do this by borrowing more money secured against the value of their house). A change in the value of stocks and shares

Question 13

What two affects does inflation have on consumption?

Answer 13

1) if households expect prices to be high in future they will be tempted to bring forward their purchase. 2) Rising inflation tends to erode the real vale of moneys wealh. Households react to thisby attempting to restore the real value of their wealth by saving more

Question 14

What five things affect consumption?

Answer 14

Inflation, rate of interest, availability of credit, composition of households and wealth

Question 15

How do savings differ from saving?

Answer 15

Saving is a flow concept which takes place over a period of time. Savings added to a stock of savings at a fixed point in time

Question 16

Definition of economic growth

Answer 16

Long term expansion of a countries productive potential

Question 17

How is short term growth measured

Answer 17

By the annual percentage change in real national output

Question 18

How is long term growth shown

Answer 18

By the increase in trend or potential GDP and this is illustrated by an outward shift in a country’s long run aggregate supply curve

Question 19

What is GDP?

Answer 19

The value of output of goods and services produced by all sectors of the economy

Question 20

Limitation of GDP when measuring living standards

Answer 20

Regional variations in income and spending, inequalities of income and wealth, economic growth an externalities and leisure working hours.

Question 21

Definition of unemployment

Answer 21

Those who are actively seeking work but are unable to find it

Question 22

What are the measurements of unemployment?

Answer 22

Claimant count (job seekers allowance) and ILO labour force survey

Question 23

What are the 4 types of unemployment?

Answer 23

Frictional, seasonal, cyclical and structural

Question 24

What three components makeup HDI and how are they measured?

Answer 24

Wealth (GNP per capita adjusted for PPP), health (life expectancy at birth) and education (number of school years)

Question 25

Three negatives attached to HDIs

Answer 25

There are other measures of development, it doesn’t tell us the quality of life and education and PPP values change very quickly and are likely to be inaccurate/ misleading

Question 26

Four other measures of development

Answer 26

Crime rates, happiness, income inequality and political freedom

Question 27

How do CPI and RPI differ?

Answer 27

RPI includes the costs of housing (mortgage interest costs and council tax for example) while CPI does not.

Question 28

What is demand pull inflation?

Answer 28

Demand Pull inflation occurs when total demand for goods and services exceeds total supply

Question 29

What is cost push inflation?

Answer 29

Cost push inflation occurs when firms increase prices to maintain or protect profit margins after experiencing a rise in their costs of production.

Question 30

Dangers of high inflation?

Answer 30

Higher interest rates, falling real income and rising risk of relative poverty, risk of lost competitiveness in global market and slower economic growth and fewer jobs