Chapter 25/26/27

Question 1

What is macroeconomics?

Answer 1

Study of large economic systems such as those of a whole country or area of the world.Wh

Question 2

What are the macroeconomic objectives?

Answer 2

Redistribution of income, reducing unemployment, controlling inflation, economic growth, protecting the environment

Question 3

What is economic growth?

and what positive impacts can it have?

Answer 3

Increasing the level of output by a nation, as economies grow, national income rises. As the economy produces more, more labor is needed and unemployment falls.

Question 4

How do we measure economic growth?

Answer 4

Gross Domestic Prodcut (GDP) - market value of all the goods/services produced in a period of time.

Question 5

What are the 7 limitations of GDP?

Answer 5

Inflation, Population changes, statistical errors, value of home produced goods, hidden economy, other factors (distribution of income), external costs

Question 6

How do we make GDP fair in terms of inflation?

Answer 6

By using ‘real GDP’ (GDP- Inflation)

Question 7

How do we make GDP fair in terms of population changes?

Answer 7

GDP per capita

Question 8

Describe the economic cycle?

Answer 8

How much economic activity changes over a period of time, including boom, downturn, recession, and recovery

Question 9

What happens at the boom?

Answer 9

GDP highest, Inflation highest, Unemployment lowest

Question 10

What happens at downturn?

Answer 10

GDP decreasing, Inflation decreasing, unemployment increasing

Question 11

What happens at recession?

Answer 11

GDP lowest, Inflation lowest, Unemployment highest

Question 12

What happens during recovery?

Answer 12

GDP increasing, Inflation increasing, unemployment decreasing

Question 13

What are the 6 impacts of economic growth?

Answer 13

Employment rises, standards of livings rise, poverty falls, productive potential rises, inflation may increase too quickly and interest rates will have to rise (overheats), environmental damage

Question 14

Define inflation.

Answer 14

The rate at which the general price of goods increases, over a period of time.

Question 15

Define deflation.

Answer 15

The rate at which the general prices of goods are decreasing and aggregate demand is falling.

Question 16

What is aggregate demand?

Answer 16

Total demand in the economy including consumption, investment, gov expenditure and net exports.

Question 17

What are CPI and RPI?

Answer 17

Methods of measuring inflation
CPI- Consumer Price Index, measure in the change of prices in a period of time (not including housing)
RPI- Retail Price Index, measure in the change of prices in a period of time (including housing).

Question 18

What are the two types of inflation?

Answer 18

Demand pull and cost push

Question 19

Why does demand-pull inflation occur, give specific reasons.

Answer 19

Inflation caused by too much demand compared to supply, either because of lower taxes/lower interest rates, higher gov spending, increasing demand for exports.

Question 20

Why does cost-push inflation occur?

Answer 20

Inflation caused by rising business costs, either from increased taxes or increased wages. Businesses want to protect their profit margins.

Question 21

What kind of relationship do interest rates and inflation have?

Answer 21

Inversely proportional- If interest rates fall, inflation increases. There is more disposable income to spend so purchasing power increases.

Question 22

What does inflation impact?

Answer 22

Prices, wages, exports, unemployment, menu costs, shoe leather costs, uncertainty, business/consumer confidence.

Question 23

How does inflation impact prices and wages?

Answer 23

Prices: As prices rise, the purchasing power of money decreases.
Wages: May need to increase when prices rise, otherwise standards of living fall. (Trade unions).

Question 24

How are exports and unemployment affected by inflation?

Answer 24

Exports: Inflation increase in one country may cause their firms difficulty selling overseas
Unemployment: Will decrease because inflation means too much demand, more labor needed.

Question 25

What are shoe leather costs?

Answer 25

Costs to firms and consumers when looking for new suppliers.

Question 26

What are menu costs?

Answer 26

Costs to firms when prices keep changing e.g. printing new menus

Question 27

Why does uncertainty occur when there's inflation?

Answer 27

It makes it difficult to invest into long term projects because of

Question 28

What happens to consumer and business confidence as inflation occurs?

Answer 28

Consumers may be less willing to borrow large amounts of money because of uncertainty. Businesses may be less willing to invest/grow because the future is uncertain.

Question 29

What is hyperinflation?

Answer 29

Very high levels of inflation, when the economy grows too quickly and overheats.

Question 30

Define unemployment.

Answer 30

When those seeking to find work are unable to find it

Question 31

What is disinflation?

Answer 31

When prices are rising but at a slower rate than before.

Question 32

What is the formula for labor force participation rate?

Answer 32

Labor force/Total working age population

Question 33

What is the formula for unemployment rate?

Answer 33

No. in labor force not working/Total labor force

Question 34

Who is included in the labor force?

Answer 34

People who are either employed or actively looking for work. It includes employed and unwillingly unemployed people.

Question 35

Name the different types of unemployment.

Answer 35

Cyclical/demand deficient Seasonal Voluntary Structural Frictional

Question 36

What kind of changes in the structure of the economy cause structural unemployment?

Answer 36

Sectorial: Industry decline Technological: Machines taking over jobs Regional: Some regions face lower employment

Question 37

What is cyclical/demand deficit unemployment?

Answer 37

Caused by falling due recession/downturn.

Question 38

What is seasonal unemployment?

Answer 38

Workers that are only required for certain times in the year

Question 39

What is structural unemployment?

Answer 39

Changes in the structure of the economy

Question 40

What is voluntary unemployment?

Answer 40

People who choose not to work

Question 41

What is frictional unemployment?

Answer 41

When workers are unemployed for a short time as they move jobs.

Question 42

What 8 things does unemployment impact?

Answer 42

Poverty, society, gov spending, output, use of scarce resources, business + consumer confidence and tax rev.

Question 43

Why does unemployment affect output and use of scarce resources?

Answer 43

Output is lower since productive potential is not being met. A waste of limited resources.

Question 44

Why does unemployment affect poverty and society?

Answer 44

If people aren't working, they aren't earning money so they can't afford basic needs. They rely on govs. Govs feel this burden and spend more on welfare, which means less for developing society.

Question 45

Why does unemployment affect tax revenue and gov spending?

Answer 45

If people are unemployed, they will not pay taxes so govs feel this burden. Gov spending has to be focused on financial aid rather than education.

Question 46

How does unemployment affect business and consumer confidence?

Answer 46

Unemployment means people have less confidence to spend their money as they like because of the uncertain future. Consumers are less willing to buy so business profits fall, this prevents growth plans.