Week 5 - macroeconomic environment

Question 1

What is inflation

Answer 1

A continuous and persistent increase in aggregate prices

Question 2

What is used to measure inflation

Answer 2

Consumer price indices or retail price indices over a 12 month period

Question 3

Demand - pull inflation

Answer 3

Inflation that results from excess demand that cannot be matched by production

Question 4

Cost - push inflation

Answer 4

results from an increase in production costs

Question 5

Built - in inflation

Answer 5

Results from workers demand for wages that match the increase in the prices of goods and services

Question 6

Real wage unemployment

Answer 6

wages above market clearing level, results in surplus of labour

Question 7

Cyclical unemployment

Answer 7

disequilibrium unemployment caused by a fall in AD

Question 8

What does the Phillips curve suggest

Answer 8

That there is a relationship between inflation rate and unemployment (the lower the inflation, the higher the unemployment rate)

Question 9

Balance of payments

Answer 9

net balance of earning and payments arising from international trade over a given period of time

Question 10

The impact of balance of payments

Answer 10

The balance of payments must be taken into account in setting monetary and fiscal policy at a national level

Question 11

What can balance of payments data indicate

Answer 11

• pressure on the exchange rate
• be related to imposing or removing controls over external payments/transfers

Question 12

What 3 things are the composition of the balance on payments

Answer 12

1. current account
2. capital account
3. financial account

Question 13

Current accounts

Answer 13

• captures imports and exports of goods and services
• captures wages, interest and profits flowing into and out of a country

Question 14

Capital accounts

Answer 14

Records one change changes in the stock of assets

Question 15

Financial accounts

Answer 15

• the purchase as rests of assets
• investment
  flows to and from reserves

Question 16

What are exchange rates

Answer 16

The rate at which a countries currency can be exchanged for another countries currency

Question 17

Factors determining exchange rates

Answer 17

• price inflation
• balance of payments
• market psychology
• interest rates

Question 18

Higher interest rates (demand attractiveness)

Answer 18

• attracts foreign investments because of higher returns on assets
• increase demand for the domestic currency

Question 19

Lower interest rates (demand and attractiveness)

Answer 19

• reduce foreign investment appeal
• reduces demand for the domestic currency

Question 20

What is carry trade

Answer 20

A strategy where investors borrow in a currency with low interest rates and invest in a currency with higher interest rates to profit from the interest rate differential

Question 21

What is fiscal policy

Answer 21

Uses government spending and taxation to influence aggregate demand in the economy

Question 22

What is the difference between fiscal policy and monetary policy

Answer 22

Fiscal policy involves taxation and government spending, monetary policy focuses on controlling the money supply

Question 23

What does monetary policy aim to achieve

Answer 23

• maintain stable price
• control inflation
• control or moderate economic growth
• stabalise exchange rates
• reduce unemployment rates