Chapter 1

Question 1

What is real GDP?

Answer 1

a measure of aggregate out; income and spending (under certain assumptions)

Question 2

What is interest rate?

Answer 2

The cost of borrowing and return to savings

Question 3

What is exchange rate?

Answer 3

The cost of one currency in terms of another

Question 4

What do the following variables mean?

Q^d
Q^s
P
Y

Answer 4

Q^d - quantity demand
Q^s - quantity suppler
P - price
Y - aggregate income

Question 5

What is a general demand equation?

Answer 5

Q^d = D(P,Y)

Question 6

What is a general supply equation?

Answer 6

Q^s = S(P,Ps)

Question 7

What are endogenous variables?

Answer 7

Variables determined using the model?

ie. P, Q^d, Q^s

Question 8

What are exogenous variables?

Answer 8

Variables that are determined outside the model (model takes their values & behaviour as given)

(ie. Y, Ps)

Question 9

What is market clearing?

Answer 9

An assumption that is made where prices are flexible and adjust quickly to equate supply and demand

Question 10

What does sticky price mean?

Answer 10

Prices in the short run are slow to adjust to changes to supply or demand