Unit 2

Question 0

Define the inflation rate

Answer 0

The percentage increase in the general price level over a period of time

Question 1

Define Inflation

Answer 1

A general and sustained rise in prices over a period of time

Question 2

Define demand pull inflation

Answer 2

Increases in the price level caused by increases in Aggregate Demand

Question 3

Define costpush inflation

Answer 3

Increases in the price level caused by increase in the costs of production

Question 4

Describe 6 costs of inflation

Answer 4

Menu Cost. Inflationary Noise
Shoe leather cost. Fiscal Drag
Administrative costs. Reduction in international competitiveness

Question 5

How is inflation measured?

Answer 5

Through the CPI. Which measures changes in the price of a representative basket of consumer goods & services.
It is collected by the family expenditure survey of 6000 households on the price of 650 goods & services

Question 6

Define aggregate demand

Answer 6

The total demand for a country’s goods & services at a given price level & in a given time period.

Question 7

Give the formula used for aggregate demand

Answer 7

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

Question 8

What causes inflation?

Answer 8

Inflation can arise from demand & supply

Question 9

Define aggregate supply

Answer 9

Aggregate supply is the total amount that producers in an economy are willing and able to supply at a given price level in a given period of time

Question 10

Describe 3 areas on the AS curve

Answer 10

Unused Capacity - at low levels of output the long run AS curve is horizontal
Intermediate Range- at higher levels of output the long run aggregate supply curve starts to slope upwards
Full capacity- at full employment the long run aggregate supply will be vertical

Question 13

Describe CIG(X-M)

Answer 13

Consumer expenditure = spending by households on goods & services
Investment= spending by firms on capital goods
Government spending= spending by the central bank & local gov on goods and services
Exports = goods & services sold abroad
Imports = goods & services bought from abroad

Question 14

Define macroeconomic equilibrium

Answer 14

A situation where aggregate demand = aggregate supply

Question 15

Define Gross Domestic Product

Answer 15

GDP is the value of all goods & services produced by factors of production based in a country during a particular year

Question 16

Define real GDP

Answer 16

Real GDP is the value of all the goods and services produced by factors of production based in a country during a particular year adjusted for inflation

Question 17

Define GDP per capita

Answer 17

GDP per capita is the value of all the goods & services produced by factors of production based in a country during a particular year divided by the population

Question 18

Describe 4 problems of measuring GDP and economic growth

Answer 18

Double counting
inflation
Informal economy

Question 19

Define circular flow of income

Answer 19

The circular flow of income shows the movement of spending throughout the economy

Question 20

Define leakages

Answer 20

Withdrawals of possible spending from the circular flow of income

Question 21

Identify 3 leakages

Answer 21

Savings
Imports
Taxes

Question 22

Define injection

Answer 22

Additions of extra spending into the circular flow of income

Question 23

Identify 3 injections

Answer 23

Investment
Exports
Government Spending

Question 24

Define the multiplier effect

Answer 24

The process by which any change in a component of aggregate demand resulting in a greater final change in real GDP

Question 26

What effect does an increase in withdrawals have on GDP

Answer 26

An increase in withdrawals from the economy would lead to a proportionally bigger decrease in National Income (GDP)

Question 27

How can inflation be harmful to an economy?

Answer 27

Due to reduction in international competitiveness, inflation can be harmful on a country’s international trade position. If the country’s inflation rate is above that of its main competitors its goods & services will become less competitive. This is likely to result in fall of exports & increase in imports.

Question 28

Give three ways GDP can be measured

Answer 28

Output measure- value of goods & services produced by all sectors of the economy
Expenditure measure- value of goods & services purchased.
Income measure- value of income generated mostly in terms of profit & wages

Question 29

Name three factors that determine why the AD curve slopes downwards

Answer 29

Wealth effect

Interest rate effect

Purchase of foreign goods & services

Question 30

What is the wealth effect?

Answer 30

If the overall price level were to rise it would mean that wealth would be capable of buying only a smaller quantity of goods & consumers would feel worse off. When this occurs people have a tendency to buy less so AD falls.
Rise in price level reduces real value of wealth & decreases ability to consume.

Question 31

What affect does interest rate have on AD?

Answer 31

A rise in interest rate leads to a fall in consumption, particularly of durable goods . The higher the rate of interest the less profitable new investment projects become, so high RoI=lower investment.

Question 32

Define allocative efficiency

Answer 32

Where consumer satisfaction is maximised

Question 33

What effect would an increase in injections have on GDP?

Answer 33

The multiplier states that any increase in injections into the economy would lead to a proportionally bigger increase in GDP

Question 34

Define economic growth

Answer 34

An annual percentage change in real GDP

Question 35

What is short run economic growth

Answer 35

Short run economic growth is said to occur when an economy increases its output. It can be shown as a shift in AD to the right

Question 36

What is long run economic growth

Answer 36

Long run economic growth takes place when the productive capacity of the economy increases. This can be due to an increase in the quantity or quality of the factors of production.

Question 37

Give some causes of economic growth

Answer 37

A fall in exchange rate may increase net exports and result in export led growth causing short run economic growth.
A cut in income tax or rise in consumer confidence can lead to consumption led growth. It may also occur as increase in investment or gov spending causing AD & AS to shift