Macroeconomics

Question 1

A lot of this is from a concise guide to macroeconomics by David Moss

Answer 1

A lot of this is from a concise guide to macroeconomics by David Moss

Question 2

What is a simple way of defining a country’s output?

Answer 2

The total amount of goods and services that a country produces.

Question 3

How can a country use more output than it produces?

Answer 3

By borrowing the rest from another country

Question 4

Most widely accepted measure of national output?

Answer 4

GDP

Question 5

What is the biggest challenge in measuring GDP?

Answer 5

Avoiding counting the same output more than once

Question 6

How do they avoid over counting in calculation of GDP?

Answer 6

Focusing on the value-add at each point of production, i.e. the value something is sold for in excess of what it costs

Value added equals the sales price of a good or service minus the cost of all non labour inputs

Alternatively, you can just focus exclusively on final sales, which is called the expenditure method and is by far the most popular

Question 7

What is the formula for output?

Answer 7

Output = C + I + G + X - M

Question 8

Does the C + I + G + X - M formula avoid double counting?

Answer 8

Yep - C includes the money that firms receive from customers purchasing goods and services, but I exclusively focuses on things that businesses buy that will yield future payoff (i.e. capex)

Question 9

Why would a country run a trade surplus today?

Answer 9

Expect to get back additional output from their trading partners in the future

Question 10

What does the balance of payments show?

Answer 10

International transactions of a country

Question 11

What are the 2 parts of the balance of payments?

Answer 11

Current account, financial account, capital account

Question 12

On the balance of payments, what is the current account?

Answer 12

Current transactions such as exports and imports of goods and services

Question 13

On the balance of payments, what is the financial account?

Answer 13

Includes sales of stocks and bonds to foreigners

Question 14

On the balance of payments, how are deficits on the current account financed?

Answer 14

Using surplus on the financial account, i.e. capital inflows

Question 15

What is the theory of comparative advantage?

Answer 15

Each person should specialise at what they do best, and then people should trade.

Output will be higher this way, and both people will be better off

Question 16

What are the three sources of output growth that economists point to?

Answer 16

• Increases in labour,
• Increases in capital,
• Increases in efficiency in which both labour and capital are used

Question 17

In economic growth theory, how does the input of labour rise?

Answer 17

People work longer hours or if the workforce is expanded through new entrants

Question 18

In economic growth theory, how does capital stock rise?

Answer 18

Businesses enhance their productive capacity by adding more plans and equipment (through investment)

Question 19

In economic growth theory, how does effiiciency between capital and labour rise?

Answer 19

Producers are able to get more output from the same amount of labour and capital - as a result of organisation innovation, for example

Question 20

What do supply-side economists focus on to grow output?

Answer 20

• Growing labour
• Growing capital
• Increasing efficiency

Question 21

Why do supply-sides economists like reducing tax rates?

Answer 21

Lower tax rates allows people to keep more of their earnings, so there are incentives to work harder (increasing labour) and to save and invest more of their income (increasing capital).

There is also incentives for innovation (increasing efficiency), given that you keep more of the rewards

Question 22

In increasing economic growth using supply side economics, what is the alternative viewpoint to reducing taxes?

Answer 22

Increasing taxes to do more government led investment in public infrastructure, education, and R&D

Question 23

Where did the concept of demand-side economics come from?

Answer 23

Borne out of the Great Depression, when productive potential remained, but the economy went into a depressed state because of a lack of demand

Question 24

Why is there worries about pensions when baby boomers retire?

Answer 24

Each active worker paying into the national pension system will have to support an ever-larger number of retirees

Question 25

Why should you use real GDP instead of nominal GDP?

Answer 25

Nominal GDP = P x Q

Therefore, nominal GDP goes up automatically because of inflation.

Instead, real GDP goes up because the quantity of goods produced increases, either because of increased labour, capital stock, or efficiency

Question 26

In a faltering economy, what does wage stickiness usually cause?

Answer 26

Leads to unemployment. In an ideal world, wages would fall, but they are sticky, so the alternative is people being laid off.

Question 27

In banking, what is the money multiplier?

Answer 27

1 / Proportion of leakage

Shows how much a deposit will ‘create’ in money circulating in the economy.

Leakage can be through banks retaining funds because of capital requirements, or money that is not redeposited for other reasons

Question 28

What happens if everyone wants to withdraw their money from a bank at the same time?

Answer 28

Not possible, because a bank lends money out and only keeps a small amount in reserves

Question 29

What are the three basic tools of monetary policy?

Answer 29

Discount rate - the rate that the central bank lends to commercial banks

Reserve requirement - the proportion of deposits banks are required to hold in reserve and thus not lend out

Purchases and sales of financial securities through open market operations

Question 30

What is an open market purchase?

Answer 30

A central bank buys government bond or other assets from private sector financial institutions to inject money into the economy

Question 31

What is quantitative easing?

Answer 31

Form of monetary policy where the central bank attempts to encourage economic growth by purchasing long-term securities to increase the money supply

Question 32

Difference between OMO and QE?

Answer 32

In OMO, central bank buys short-term treasury securities in order to push up the left end of the yield curve. The demand for securities injects money into the banking system, which is then loaned to businesses and individuals and puts downward pressure on interest rates.

In QE, central bank buys long-term debt securities (MBS, corp bonds, sovereign bonds etc)

Question 33

How is the goal of OMO different to QE?

Answer 33

Goal of OMO is to reduce interest rates through purchasing short-term securities, whereas QE is used to increase the money supply by purchasing long-term securities

Question 34

How does the Fed move the federal funds rate?

Answer 34

Open market operations - purchases/sells short-term treasury securities