Unit 2 Economics

Question 1

GDP ( Gross Domestic Product )

Answer 1

Gross domestic product measures the total value of goods and services being produced within an economy over a period of time

Question 2

Economic growth

Answer 2

A measure of how much output has increased over a 12-month period. It is expressed as a percentage.

Question 3

GNI (Gross national income)

• Toyota sends its money back to Japan

Answer 3

Measures the total value of goods and services produced within an economy over a period of time plus net factor incomes from overseas.

Question 4

GNP (Gross national product)

• MNC’s such as McDonald’s

Answer 4

The total value of goods and services produced within an economy through labor and the citizens of a country both domestically and from overseas

Question 5

PPP (Purchasing power parties)

Answer 5

An exchange rate of one currency in terms of another which compares how much a typical basket of goods in one country costs in terms of another country

Question 6

Limitations of comparing with GDP/ GNI with other countries

Answer 6

Different metrics and measures can be used
No externalities measured
Quality of data

Question 7

Recession

Answer 7

Two consecutive quarters of negative economic growth

Question 8

Inflation, deflation and disinflation

Answer 8

Inflation - The avg increase in the price of goods and services being sold with an economy.

Deflation - The avg decrease in the price of goods and services being sold with an economy

Disinflation - A fall in the rate of inflation

Question 9

Limitations of CPI

Answer 9

Inflation rates differ for each household
The index cannot indicate changes in quality
CPI excludes housing

Question 10

PPI (Producer price index) Inflation

Answer 10

measures the change in the price of a typical basket of goods bought and sold by the manufactures in an economy.

Question 11

Demand-pull and cost-push inflation

Answer 11

Demand-pull: Inflation caused when there is excess demand for products

Cost-push: Inflation caused due to rising business cost

Question 12

Unemployment

Answer 12

People without a job but who are actively seeking employment

Question 13

Underemployment

Answer 13

People who would work more hours if available or are in jobs below their skill level

Question 14

4 types of unemployment ( fssc)

Answer 14

Frictional unemployment: short term unemployment caused when people are between jobs

Structural unemployment: unemployment caused when there is a declining industry, such as robots replacing humans, (factor substitution)

Seasonal unemployment: unemployment caused due to changes in seasonal demands for goods and services

Cyclical unemployment: unemployment caused when there is a decline in the economic cycle such as a downturn or recession

Question 15

Balance of Payments

Answer 15

A record of all financial transactions, over a period of time between economic agents of one country and many other countries

Question 16

Current account :

Current account surplus: Exports > imports
Current account deficit: Exports < imports

Answer 16

section of the balance of payments where it records the number of imports/exports of goods and services and primary/secondary incomes for an individual country

Question 17

Exchange rates

Answer 17

The price of one currency in terms of another

Question 18

SPICEE AND WPIEEC

Answer 18

Stronger pound - Imports cheaper - Exports expensive

Weaker pound - Imports expensive - Exports cheaper

Question 19

Aggerate demand

Answer 19

The total demand or expenditure in the economy at any given price

Ad formula : C + I + G + (X-M). Cars in Germany get exported and imported.

Question 20

Influences on Consumption that shifts the AD curve

Answer 20

Disposable income
Interest rates
Consumer confidence
Level of welfare payments
Availability of credit
Wealth effects

Question 21

Influences on Investment

Answer 21

Rate of economic growth
Interest rates - ( low i.rates - businesses spend more)
Business confidence
Availability of credit
Taxes

Question 22

Influences on Net trade balance (X-M)

Answer 22

Disposable income
Protectionism - (High lvl of protectionism ad shifts left)\
State of the global economy
Exchange rates
Non-price factors

Question 23

Aggerate supply

Answer 23

Is the total value of goods/services produced within an economy

Question 24

Factors that affect (SRAS) Short-run aggerate supply

Answer 24

Cost of raw materials and energy
Exchange rates
Tax rates

Question 25

Factors that affect Long-run aggerate supply

Answer 25

Advancements in Technology
Changes  in Productivity (shifts PPF)
Investment in Education
Changes in Goverment regulation 
Changes in Demography (high/low Migration)

Question 26

Circular flow of income

Answer 26

Diagram: Factor incomes - Factors of production- Goods/services - Expenditure of goods/services.

Injections - Investment, Goverment spending, Exports
Withdrawl - Savings, taxes, and imports

Injection > Withdrawal - Economic growth increases

Question 27

Multiplier effect

Answer 27

An increase in investment will lead to an even greater increase in income.

Formula - 1 / 1-MPC

Question 28

Output Gaps and difficulties

Answer 28

Negative output gap - where actual output is less than potential output

Positive output gap - where actual output is greater than potential output.

Difficulties: Inaccurate/poor quality data provided
Problems measuring productivity

Surveys of producers about spare capacity may be inaccurate

Question 29

Actual vs Potential Growth

Answer 29

Actual growth: is short-run economic growth that is measured by changes in real GDP over a period of time.

Potential Growth; is Long-run economic growth that is measured by changes in the productive potential of an economy over a period of time

Question 30

Benefits of growth (SITDU)

Answer 30

Increased standard of livings 
Increased investment
Increased tax revenue
Increased disposable income
Decreased unemployment

Question 31

Costs of growth

Answer 31

Increased opp. cost
Increased income inequality
Increased inflation
Increased environmental costs

Question 32

Macroeconomic objectives (TIGER)

Answer 32

Balanced Trade
Low Inflation 
High Economic growth
High employment
Greater income equality

Question 33

Short-run phillips curve - inflation rises

Answer 33

Unemployment decreases - Consumers have more disposable income - Demand for normal goods increases - Firms exploit the rising demand by increasing their prices - Inflation increases

Question 34

Cost-push inflation and unemployment (refer to the book)

Answer 34

Cost of production increases- SRAS decreases, as firms are less willing and able to supply goods and services and will reduce there workforce to save up costs - Therefore Unemployment increases- Firms will increase their prices to cover their rising costs - Inflation and unemployment increases

Question 35

Supply-side policies

Answer 35

Privatization - Free market
Deregulation - Free market
Reducing wages - Free market
Reducing the influence of trade unions - Free market

Investment in education/ training - Invertionist policies
Subsidies - Invertionist policies
Lower taxes - Invertionist policies

Question 36

Budget Surplus and Deficit

Answer 36

Budget Surplus: When taxation is greater than government spending

Budget Deficit: When government spending is greater than taxation

Question 37

2 types of fiscal policy (Expans and contract)

Fiscal policy is to do with changes in gov spending and taxations

Answer 37

Expansionary, (increasing the aggerate demand, where gov spending is more than taxation, Budget deficit )

Contractionary( reducing the aggerate demand, where taxation is more than gov spending, Budget surplus )

Question 38

expansionary effects on consumers and firms (ad increases, left )

Answer 38

Decrease in taxes –> consumers have more disposable income –> demand for normal goods increases –> ad rises

Decrease in cooperation taxes –> firms have more money to spend on their business –> better quality products –> ad rises

Increase in gov spending –> more spending on infrastructure (increase in productivity), subsidies –>
ad rises

Question 39

Contractionary fiscal policy effects on consumers and firms( ad decreases, right)

Answer 39

An increase in tax –> consumers have less disposable income to spend on goods/ services –> demand for normal goods decreases –> ad decreases

an increase in cooperation tax –> firms have less money to spend on their businesses, business cost increases–> ad decreases

a decrease in gov spending –> less spending on infrastructure (decrease in productivity), decreasing subsidies –> ad decreases

Question 40

why governments use Contractionary fiscal policy (ipm)

Budget surplus

Answer 40

to reduce inflation
to reduce pollution
to eliminate market failure

Question 41

why governments use Expansionary fiscal policy (eug)

budget deficit

Answer 41

to increase economic growth
to increase GDP
to reduce unemployment

Question 42

2 types of monetary policies

Answer 42

increasing the supply of money

changing interest rates to control inflation

Question 43

monetary policy (changing interest rates to control inflation) green left

Answer 43

Inflation increases above 2 %
Central banks will increase interest rates
Consumers will spend less and save more
Demand for goods and services decreases
Firms profit decrease
Firms will have lower prices in response to the demand
Inflation falls back to 2 %

Question 44

increasing the supply of money

Answer 44

Central banks will buy bonds from commercial banks

Commercial banks will receive money in exchange for the bonds

Commercial banks will have more money to spend on the consumers and firms

As a result consumers and firms have more money entering the economy

more money enters the economy improving, GDP, economic growth, reducing unemployment