Unit 2 Definitions

Question 1

• Accelerator

Answer 1

a change in the level of investment in new capital goods induced by a change in national income or output. The size of the accelerator depends on the economy’s capital-output ratio.

Question 2

• Aggregate demand

Answer 2

the total planned spending on real output produced within the economy.

Question 3

• Aggregate supply

Answer 3

the level of real national output that producers are prepared to supply at different average price levels.

Question 4

• Balance of trade in goods

Answer 4

the part of the current account measuring payments for exports and imports of goods. It is sometimes called the “balance of visible trade.”

Question 5

• Balance of trade in services

Answer 5

the part of the current account measuring payments for exports and imports of services. It is sometimes called the “balance of invisible trade,” though the two terms are not strictly identical.

Question 6

• Balanced budget

Answer 6

this is achieved when government spending equals government revenue (G = T.)

Question 7

• Bank Rate

Answer 7

the rate of interest the Bank of England charges when lending money to commercial banks to increase their liquidity.

Question 8

• Budget deficit

Answer 8

occurs when government spending exceeds government revenue (G > T.)

Question 9

• Budget surplus

Answer 9

occurs when government spending is less than government revenue (G < T.)

Question 10

• Capital-output ratio

Answer 10

the ratio between the output that firms are currently producing and their existing stock of fixed capital assets.

Question 11

• Central bank

Answer 11

the central bank implements monetary policy on behalf of the government.

Question 12

• Ceteris paribus

Answer 12

holding all other factors in the economy constant when examining one part of the economy. It is an important assumption in microeconomics, but not generally in macroeconomics.

Question 13

• Claimant count

Answer 13

the method of measuring unemployment according to those people who are claiming unemployment-related benefits.

Question 14

• Closed economy

Answer 14

an economy with no international trade.

Question 15

• Commercial bank

Answer 15

a commercial bank, such as Barclays, aims to make a profit from commercial banking business.

Question 16

• Consumption

Answer 16

total planned spending by households on real output produced within the economy.

Question 17

• Contractionary fiscal policy

Answer 17

uses fiscal policy to decrease aggregate demand and to shift the AD curve to the left.

Question 18

• Cost-push theory of inflation

Answer 18

a rising price level is caused by an increase in the costs of production, shown by a shift of the SRAS curve to the left.

Question 19

• Crowding out

Answer 19

a situation in which an increase in government or public sector spending displaces private sector spending, with little or no increase in aggregate demand.

Question 20

• Current account (1)

Answer 20

the part of the balance of payments measuring payments for exports and imports, investment income and transfers.

Question 21

• Current account (2)

Answer 21

a bank account that allows its owner to withdraw cash immediately by using a cheque or a plastic debit card.

Question 22

• Current account deficit

Answer 22

occurs when currency outflows in the current account exceed currency inflows. It is often shortened to “exports exceeding imports (X < M).”

Question 23

• Current account surplus

Answer 23

occurs when currency inflows in the current account exceed currency outflows. It is often shortened to “exports exceeding imports (X > M).”

Question 24

• Cyclical unemployment

Answer 24

also known as Keynesian and demand-deficient unemployment. As this name suggests, it is unemployment caused by a lack of aggregate demand in the economy.

Question 25

• Deficit financing

Answer 25

deliberately running a budget deficit and borrowing to finance the deficit.

Question 26

• Deflation

Answer 26

a persistent or continuing fall in the average price level.

Question 27

• Demand-pull inflation

Answer 27

a rising price level caused by an increase in aggregate demand, shown by a shift of the AD curve to the right.

Question 28

• Demand-side fiscal policy

Answer 28

changes in the budget deficit are used to increase or decrease the level of aggregate demand (and to shift the AD curve to the right or the left.)

Question 29

• Depression

Answer 29

this term has no generally agreed definition. It is best to think of it as a long and deep recession. In the UK, a recession is defined as a period of negative economic growth lasting at least 6 months.

Question 30

• Deregulation

Answer 30

involves removing previously imposed regulations.

Question 31

• Discretionary fiscal policy

Answer 31

involves making discrete changes to G, T and the budget deficit to manage and “fine-tune” the level of aggregate demand.

Question 32

• Economic cycle

Answer 32

the fluctuation of real output above and below the trend output line.

Question 33

• Economic growth

Answer 33

an increase in the economy’s potential level of real output, and an outward movement of the economy’s production possibility frontier.

Question 34

• Equilibrium national income

Answer 34

the level of income at which withdrawals from the circular flow of income equal injections into the flow. In a two-sector model of the economy, national income is in equilibrium when S = I.

Question 35

• Expansionary fiscal policy

Answer 35

uses fiscal policy to increase aggregate demand and to shift the AD curve to the right.

Question 36

• Export

Answer 36

a domestically produced good or service sold to residents of other countries.

Question 37

• Free-market economists

Answer 37

these are also known as neoclassical economists.

Question 38

• Frictional unemployment

Answer 38

voluntary unemployment, occurring when a worker switches between jobs.

Question 39

• Full employment (Beveridge’s definition):

Answer 39

3% or less of the labour force unemployed.

Question 40

• Full employment (free-market definition)

Answer 40

the level of employment occurring at the market-clearing real wage rate, where the number of workers whom employers wish to hire equals the number of workers wanting to work.

Question 41

• Government spending multiplier

Answer 41

the relationship between a change in government spending and the resulting change in national income.

Question 42

• Import

Answer 42

a good or service produced in another country and sold to residents of this country.

Question 43

• Inflation

Answer 43

a persistent or continuing rise in the average price level.

Question 44

• Interest rate

Answer 44

the reward for lending savings to somebody else (e.g. a bank) and the cost of borrowing.

Question 45

• Investment

Answer 45

total planned spending by firms on real output produced within the economy.

Question 46

• Investment income

Answer 46

profit and interest income flowing into a country that is generated from assets that residents of the country own abroad.

Question 47

• Investment multiplier

Answer 47

the relationship between a change in investment and the resulting change in national income.

Question 48

• Keynesian economists

Answer 48

followers of the economist John Maynard Keynes.

Question 49

• Labour Force Survey

Answer 49

a quarterly sample survey of households in the UK. Its purpose is to provide information on the UK labour market. The survey seeks information on respondents’ personal circumstances and their labour market status during a period of 1-4 weeks.

Question 50

• Lender of last resort function

Answer 50

the Bank of England’s willingness to lend cash to commercial banks to increase their liquidity and to maintain confidence in the banking system.

Question 51

• Liquidity

Answer 51

measures the ease with which assets can be turned into cash quickly and at a pre-known rate or price. Cash is the most liquid of all assets.

Question 52

• Macroeconomic equilibrium

Answer 52

the level of real national output at which AD = AS or at which planned injections into the circular flow of income equal planned withdrawals from the flow.

Question 53

• Macroeconomics

Answer 53

involves the study of the whole economy at the aggregate level.

Question 54

• Marketisation

Answer 54

involves shifting provision of goods or services from the non-market sector to the market sector.

Question 55

• Monetarism

Answer 55

the belief that, as inflation is assumed to be caused by excessive growth of the money supply, monetary policy should be used to control its growth.

Question 56

• Monetary policy

Answer 56

involves the use of interest rates to achieve the government’s policy objectives.

Question 57

• Money supply / stock of money

Answer 57

takes the form of cash and bank deposits.

Question 58

• Mortgage

Answer 58

a long-term loan to a house owner that is secured by the property.

Question 59

• National debt

Answer 59

the stock of all past government borrowing that has not been paid back.

Question 60

• National income / national output

Answer 60

the flow of new output produced by the economy in a particular period (e.g. a year.)

Question 61

• National income multiplier

Answer 61

the relationship between a change in aggregate demand and the resulting change in national income.

Question 62

• Open economy

Answer 62

an economy with exports and imports.

Question 63

• Output gap

Answer 63

the difference between actual output and the trend output line.

Question 64

• Policy conflict

Answer 64

occurs when two policy objectives cannot be achieved at the same time: the better the performance in achieving one objective, the worse the performance in achieving the other.

Question 65

• Policy indicator

Answer 65

provides information about what is happening in the economy.

Question 66

• Policy instrument

Answer 66

a tool or set of tools used to try to achieve a policy objective.

Question 67

• Policy objective

Answer 67

a target or goal that policy-makers aim to “hit.”

Question 68

• Privatisation

Answer 68

involves shifting the ownership of state-owned assets to the private sector.

Question 69

• Progressive tax

Answer 69

a tax where the proportion of income paid in tax rises as income increases.

Question 70

• Recession

Answer 70

a fall in real output for 6 months or more

Question 71

• Reflation

Answer 71

an increase in the level of real output following an increase in aggregate demand.

Question 72

• Saving

Answer 72

income which is not spent.

Question 73

• Seasonal unemployment

Answer 73

unemployment caused by factors such as the weather and the end of the Christmas shopping period.

Question 74

• Structural unemployment

Answer 74

unemployment caused by structural change in the economy: for example, when industries decline without being replaced by new industries.

Question 75

• Supply-side economics

Answer 75

a branch of free-market economics arguing that government policy should be used to improve the competitiveness and efficiency of markets.

Question 76

• Supply-side fiscal policy

Answer 76

used to increase the economy’s ability to produce and supply goods, through creating incentives to work, save, invest and to be entrepreneurial

Question 77

• Supply-side policies

Answer 77

interpreted narrowly, supply-side policies focus on the role of tax cuts in increasing personal incentives. Interpreted broadly, they aim to improve the economy’s ability to produce and supply more output.

Question 78

• Tax multiplier

Answer 78

the relationship between a change in taxation and the resulting change in national income.

Question 79

• Technical progress

Answer 79

improvements in methods of production resulting from invention, innovation and research and development. It often leads to the production of new types of goods and better-quality goods.

Question 80

• Trade-off between policy objectives

Answer 80

governments often do this because it may be impossible to achieve two or more objectives simultaneously. They aim for a satisfactory combination.

Question 81

• Transfers (1)

Answer 81

the part of government spending in which tax revenues are paid to people such as pensioners, without any output being produced in return.

Question 82

• Transfers (2)

Answer 82

payments flowing between countries in forms such as foreign aid, grants and gifts.

Question 83

• Trickle-down effect

Answer 83

income paid by rich people to the poorer people they employ.

Question 84

• Wealth

Answer 84

the stock of assets, or things that have value, which people own.