6.The measurement of macroeconomic performance.

Question 1

Define macroeconomics.

Answer 1

It is the study of the whole economy at the aggregate level.

Question 2

List 4 main objectives of a macroeconomic government.

Answer 2

• economic growth and stability- raising living standards and reducing economic volatility.
• maintain full employment.
• reduce inflation- price stability (2% inflation target).
• achieve balance of payments.

Question 3

Define short-run economic growth.

Answer 3

The growth of real output resulting from using idle resources. Occurs when a point inside the PPF curve moves to the PPF frontier. Also known as economic recovery.

Question 4

Define long-run economic growth.

Answer 4

The rise in the economy’s potential level of real output. Outward shift in the PPF curve.

Question 5

Define GDP, real GDP, and nominal GDP

Answer 5

GDP- sum of all goods/services produced in the economy over a given period of time. (or level of output).
Real- GDP adjusted for inflation or price changes.
Nominal- GDP at current market levels (includes inflation).

Question 6

Describe the movement on the PPF curve in the short-run if economic growth is negative.

Answer 6

Movement from a point on the PPF frontier to a point inside the PPF curve.

Question 7

What would a movement from PPF2 frontier to PPF1 frontier show?

Answer 7

It would show long-run negative growth.

Question 8

Define inflation.

Answer 8

A persistent or continuing rise in the average price level.

Question 9

Describe the difference between real GDP and nominal GDP?

Answer 9

Nominal GDP is real GDP multiplied by inflation (average price level).

Question 10

Define full employment (free market definition).

Answer 10

Full employment is where the number of workers willing to work, is equal to the number of workers firms wish to hire. (occurs in eeconomy’s aggregate labour market at market-clearing real wage rate).

Question 11

How is unemployment measured?

Answer 11

• claiment count- measures number of people who claim unemployment related benefits (e.g. Jobseeker’s allowance).
• labour force survey- survey of 60,000 people which provides information on the UK labour market.

Question 12

When does inflation occur?

Answer 12

When most prices are rising some some degree across the whole economy.

Question 13

Define deflation and disinflation.

Answer 13

Deflation- a persistent or continuing fall in the average price level.
Disinflation- when the rate of inflation is falling, but is still positive.

Question 14

How is absolute price stability achieved, and how often does it occur?

Answer 14

When there is a zero annual rate of inflation, with the average price level neither rising nor falling from year to year. It is extremely rare.

Question 15

What is a price index?

Answer 15

A price index shows the extent to which a price has changed over a period of time, e.g. a quarter.

Question 16

What indices are used to measure the rate of consumer price inflation?

Answer 16

• Consumer price index- official measure used to calculate consumer price inflation. Calculates the average price of a basket of 700 different consumer goods.
• Retail price index.

Question 17

Define the balance of payments.

Answer 17

It is a record of all the currency flows into and out of a country over a given time period (e.g. a year).

Question 18

Define the current account of the balance of payments.

Answer 18

It measures all the currency flows into and out of a country over a given time period, in payments for exports and imports, together with income and transfer flows.

Question 19

What is the balance of trade?

Answer 19

It is the difference between the money value of exports and the money value of imports.

Question 20

When will a balance of trade deficit/surplus occur?

Answer 20

• A trade deficit will occur when value of imports is greater than the value of exports.
• A trade surplus will occur when the value of imports is less than the value of exports.

Question 21

Define balanced budget (another macroeconomic objective).

Answer 21

Balanced budget is when government spending is equal to government revenue. (Government revenue is mostly tax revenue).

Question 22

What is a policy conflict?

Answer 22

Occurs when two policy objectives cannot both be achieved at the same time because achieving one, worsens the performance of the other.

Question 23

List 2 policy conflicts and trade-offs with full employment and economic growth policy.

Answer 23

• satisfactory balance of payments or exchange rate.

- control of inflation.

Question 24

What do Keynesian economists believe about how governments should manage the economy?

Answer 24

They believe that the government should manage the economy, particularly through the use of the fiscal policy.

Question 25

What do free-market economists believe about how governments should run the economy?

Answer 25

They believe that governments should not intervene in the economy and prefer the operations of free markets.

Question 26

Define the monetary policy.

Answer 26

It is the use of interest rates and other monetary instruments used by government and its other agents (e.g. The Bank of England) to achieve the governments policy objectives.

Question 27

Define the fiscal policy.

Answer 27

It is the use of government spending and taxation to try to achieve the governments policy objectives.

Question 28

What is a performance indicator? What two groups are they divided into?

Answer 28

Performance indicators provides information sbout the success or failure of a policy target.

• lead- provides info about the future state of economy.
• lag- provides info on past and current performance in the economy.

Question 29

Give an example of a lead and lag indicator.

Answer 29

Lead- the likely state of aggregate demand.

Lag- info on the level of GDP.

Question 30

How do you calculate the percentage change in a given factor? (index numbers)

Answer 30

Percentage change=change in index points/index number of base year.