4.2.1

Question 1

What are the macro indicators and objectives?

Answer 1

Trade - Balanced
Inflation - Low and stable (2%)
Growth - Strong, sustained and sustainable
Employment - Low unemployment, full employment
Redistribution of income - Fair
Stability

Question 2

What are the measures of economic growth?

Answer 2

GDP (rGDP)
   -Income=Output=Expenditure
   -Measure of economic growth
       -Double Counting
       -Informal Activity - E.g. black market activity is not registered
       -Errors of vast data collection
   -Measure of living standards
       -Negative externalities
       -Income inequality
       -Other quality of life aspects
GDP/Capita
   -Has the same issues as using GDP as a measure
   -Factor income abroad & significance of remittances
   -Influence of FDI & repatriation of profit.
GNI
   -GDP + Net Factor Income
Green GDP

Question 3

Why does AD slope downwards?

Answer 3

The AD curve slopes downwards due to 3 effects:

• Wealth effect - As price level falls, the purchasing power of income now increases, meaning that people are more likely to increase their spending (Increasing C).
• Trade effect - As price falls, exports become more competitive and imports become less competitive, and vice versa.
• Interest effect - As prices fall, interest rates will decrease stimulating higher C, I and reduces the exchange rate, increasing (X-M)

Question 4

What shifts SRAS?

Answer 4

SRAS is determined by business’ costs, with a change in costs of production shifting the SRAS curve. This could be a change in the price of:

• Wages
• Raw materials
• Oil
• Business taxes

Question 5

Why does LRAS shift?

Answer 5

LRAS will shift if the quantity/quality of the factors of production will change, this could be due to:

• Change in labour productivity
• Change in investment (increased business efficiency)
• Change in infrastructure (lower transport costs/high geographical mobility of labour)
• Change in the quantity of labour
• Change in competition
• New resource discoveries - lower business costs.

Question 6

What is the multiplier

Answer 6

The multiplier is a process whereby any change in AD will lead to a greater change in national output. This is due to any increase in AD creating an income for someone which can be spent further, creating an income for someone else, with the cycle repeating. This repeating expenditure will further increase AD. The multiplier can be calculated by using 1/(1-MPC).
MPC is how much a consumer will spend of each extra £ received.

Question 7

What is the accelerator?

Answer 7

The accelerator effect is when the rate of GDP growth is increasing, firms will be more willing to invest (I increases), further increasing AD and resulting in higher GDP growth.