Unit 2 Managing the Economy

Question 0

Micro economies

Answer 0

The study of the behaviour of parts of the economy.

Question 1

Macro economics

Answer 1

The study of the behaviour of an economy.

Question 2

Unemployment

Answer 2

The number of people of working age who are seeking work yet do not have a paid job.

Question 3

Population of working age

Answer 3

In UK: males aged 16-65, females 16-60 (I.e school leaving age to retirement age)

Question 4

Workforce

Answer 4

All those of working age either in paid jobs or seeking them.

Question 5

Economic activity rate

Answer 5

Proportion of those of working age who are in paid jobs or seeking them.

Question 6

Economically inactive

Answer 6

Those of working age who have chosen not to do paid work or look for paid work.

Question 7

Gross domestic product (GDP)

Answer 7

The value of output produced by domestic based resources per year.

Question 8

Economic growth

Answer 8

Economic growth is the long term expansion of the productive potential of the economy, measured in the short run by the annual percentage change in real GDP.

Question 9

Real growth

Answer 9

Growth of GDP after inflation has been accounted for (I.e at constant prices)

Question 10

Nominal growth

Answer 10

Growth of GDP before inflation has been accounted for (I.e at current prices)

Question 11

Retail price index (RPI)

Answer 11

An index number measuring a weighted average for the price of consumer goods and services at a point in time.

Question 12

Consumer price index (CPI)

Answer 12

An index number measuring a weighted average for the price of consumer goods and services at a point in time.

Question 13

Inflation (P)

Answer 13

The sustained increase in the average price level.

Question 14

Underlying inflation

Answer 14

RPI excluding mortgage repayment costs

Question 15

Balance of payments (BoP)

Answer 15

A record of the transactions between residents of one country and those living abroad over a year.

Question 16

Balance of payments current account

Answer 16

The net inflow of money to a country arising from international trade in goods and services, investment income and transfers.

Question 17

Investment income

Answer 17

Earnings from ownership of assets.

Question 18

Standard of living

Answer 18

A measure of the material well-being of a person.

Question 19

Quality of life

Answer 19

A measure of the overall well-being of a person.

Question 20

Shadow economy

Answer 20

Payments for production which go unreported to the tax authorities.

Question 21

Purchasing power parity (PPP)

Answer 21

The nominal exchange rate which ensures home produced goods cost the same bought abroad.

Question 22

Human Development Index (HDI)

Answer 22

A measure of the relative socio-economic progress within a nation as a weighted (per capita) average of real income, education (literacy, years of schooling) and life expectancy.

Question 23

Sustainable development

Answer 23

Development which meets the needs of present generations without reducing the ability of future generations to meet their needs.

(Can also apply to sustainable growth, by simply replacing the word ‘development’ with the word ‘growth’).

Question 24

Circular flow of income

Answer 24

Model which explains what determines the equilibrium level of national income.

Question 25

Income (Y)

Answer 25

Money earned over a period of time.

Question 26

Wealth (W)

Answer 26

The value of an individual’s assets at a point in time.

Question 27

Injection (J)

Answer 27

Spending on domestic output which comes from outside the simple circular flow of income I. E. Investment, government and exports.

Question 28

Withdrawal (W)

Answer 28

Income which is not spent on domestic output (consumption) I. E. Savings, taxation and imports.

Question 29

Marginal propensity to consume (m.p.c)

Answer 29

The proportion of an increase in income which is spent on domestically produced consumer goods and services.

Question 30

Marginal propensity to save (m.p.s)

Answer 30

The proportion of an increase in income which is saved.

Question 31

Marginal propensity to withdraw (m.p.w)

Answer 31

The proportion of an increase in income which is not spent on domestically produced consumer goods and services.

Question 32

Aggregate demand (AD)

Answer 32

The sum of all planned spending on domestic output at a given general price level per period.

Question 33

Aggregate supply (AS)

Answer 33

The sum of all planned domestic production at a given general price level per period.

Question 34

Consumption (C)

Answer 34

Spending by domestic households on consumer goods and services.

Question 35

Investment (I)

Answer 35

Spending by domestic firms on capital goods.

Question 36

Multiplier effect

Answer 36

The knock-on effects of an initial change in injections or withdrawals on national income which cause national income to change by more than the initial change.

Question 37

Wealth effect

Answer 37

A rise in personal wealth will encourage consumers to spend more and save less.

Question 38

Recession

Answer 38

Declining real GDP for two successive quarters (six months).

Question 39

Output gap

Answer 39

Actual GDP minus sustainable GDP.

Question 40

Demand Management

Answer 40

Where government attempts to control aggregate demand by adjusting tax rates, interest rates and government spending in order to avoid ‘booms’ (high inflation) and ‘busts’ (high unemployment).

Question 41

Demand deficient (cyclical) unemployment

Answer 41

Unemployment caused by the fall in demand for labour which accompanies a fall in aggregate demand (and where real real wages don’t fall: wages are ‘sticky downwards’).

Question 42

Frictional unemployment

Answer 42

Workers moving between jobs who are unable to fill job vacancies between contracts due to imperfect information in the labour market.

Question 43

Supply side policies

Answer 43

Government attempts to increase aggregate supply.

Question 44

Productivity

Answer 44

Output per factor input.

Question 45

Competitiveness

Answer 45

The ability of domestic firms to sell their output in the global market (domestic + foreign).

Question 46

Flexible labour market

Answer 46

A competitive (macro) labour market in which employers and workers are free to negotiate market wages and conditions of work, in which workers are adaptable to the labour needs of firms and firms are adaptable to workers’ needs.

Question 47

Fiscal policy

Answer 47

Manipulation of government spending and taxation to achieve macro economic goals.

Question 48

Disposable income (Yd)

Answer 48

Household income after subtracting direct taxes (income tax and national insurance contributions) and adding government benefit payments.

Question 49

Budget deficit

Answer 49

Where government spending exceeds its revenue (largely from taxation) over a period of time.

Question 50

Monetary policy

Answer 50

Manipulation of interest rates to achieve macro economic goals.

Question 51

Interest rates (r)

Answer 51

The price of liquidity (money in a spendable form E. G. Bank deposits or cash).

Question 52

Inflation target

Answer 52

Policy that monetary conditions will be adjusted if forecasted inflation moves away from a declared target.

Question 53

Exchange rate (ER)

Answer 53

The price of one currency in terms of another (e.g £1 = $2).

Question 54

Phillips curve

Answer 54

Inverse relationship between rate of inflation and unemployment in the macro economy.