Lecture 1

Question 1

Unemployment Rate

Answer 1

the percentage of the workforce without work

Question 2

economic growth

Answer 2

the % change in real GDP (output) in economy

Question 3

Inflation rate

Answer 3

measures the change in the cost of living/change in the price level or average price in economy
the continuous rise in the goods and services sold in the economy

Question 4

exogenous variables

Answer 4

predetermined (an assumption that is given)

Question 5

endogenous variables

Answer 5

determined by the model

Question 6

classical economics

Answer 6

flexible price economics: models predict that intervention from policymakers is futile

Question 7

heterodox economics

Answer 7

SUB SCHOOLS: models do not necessarily rely on agents reacting in markets

Question 8

Keynesian economics

Answer 8

sticky price economics: models used to show the effectiveness of fiscal and monetary policy (OUTPUT FLEXIBLE, PRICES ARE FIXED)

Question 9

Output

Answer 9

sum of all production in economy

Question 10

expenditure

Answer 10

sum of all money spent in the economy

Question 11

final goods approach to production method

Answer 11

sums up production of domestic final goods producers

Question 12

value added approach

Answer 12

sums up value that every firm adds to chain of production (prevents double counting)

Question 13

nominal gdp

Answer 13

sum of production using current prices and quantities

Question 14

real gdp

Answer 14

sum of production holding prices constant at a base year

Question 15

benefits of real gdp

Answer 15

washes out price information so that an increase in GDP is a result of an increase in quantities not prices

Question 16

recession

Answer 16

when economic growth is negative for at least 2 periods

Question 17

GDP deflator

Answer 17

uses a weighted average of prices using the relative difference between real and nominal GDP.
The weight of each price reflects the relative importance of each good produced.

Question 18

CPI

Answer 18

consumer price index: uses a weighted average of prices faced by consumers (excludes housing costs)

Question 19

RPI

Answer 19

retail price index: uses a weighted average of prices faced by the average family (includes housing costs)

Question 20

price level

Answer 20

a number estimated by ONS that reflects movements in the average price in the economy

Question 21

formula for GDP deflator

Answer 21

(nominal/real) x 100

Question 22

formula for CPI in month t

Answer 22

cost of CPI basket in month t / cost of basket in base period

Question 23

Do we use CPI or GDP for inflation in capital goods

Answer 23

Shows up in GDP deflator measure but not CPI/RPI

Question 24

Do we use CPI or GDP for inflation abroad

Answer 24

shows up in CPI/RPI (because basket of goods includes imported goods) but not in GDP deflator

Question 25

what is fixed in the GDP deflator

Answer 25

price

Question 26

what is fixed in the CPI/RPI

Answer 26

quantities

Question 27

what isn't included in CPI basket

Answer 27

factory equipment

Question 28

where are changes in tastes picked up

Answer 28

Automatically in GDP deflator but manually by CPI

Question 29

what does GDP deflator ignore

Answer 29

external shocks eg. increases in price of oil

Question 30

disadvantages of using macroeconomic models

Answer 30

information loss: when we average, the high and low values cancel out simplification: we use representative agents

Question 31

money

Answer 31

a deferred means of payment

Question 32

economic slack

Answer 32

difference between actual activity and 'normal' rate of economic growth

Question 33

business cycle

Answer 33

the oscillating pattern that we see in economic activity over a longer time period

Question 34

how does fiscal policy affect the CLOSED economy

Answer 34

an increase in G causes disturbances in the financial markets as funds are required which leads to pressure on interest rates. this decreases investment which also decreases Y. Why does r increase? G requires money to carry out spending so there is less money available for consumers to borrow so r increases as price of money increases. firms less likely to invest.

Question 35

What are the balance of payments money flows and real flows

Answer 35

money flows - financial | real flows - goods

Question 36

how does fiscal policy affect the OPEN economy

Answer 36

- increase in G - increase in money demand in financial markets - upward pressure on interest rate - higher r causes capital inflow and increased demand for currency (lower exports) - higher exchange rate reduces output (CROWDING OUT)

Question 37

Labour force

Answer 37

subset of working age population willing and able to work at current wage rate (employed+unemployed)

Question 38

unemployment rate

Answer 38

proportion of the workforce without work | unemployed/labour force x 100

Question 39

participation rate

Answer 39

labour force/working age population

Question 40

equilibrium unemployment

Answer 40

minimum level of unemployment that still exists even when a wage is at a level that would normally ensure all those wanting work could work

Question 41

frictional unemployment

Answer 41

unemployment caused by job search

Question 42

structural unemployment

Answer 42

caused by economic structure (eg infrastructure problems)

Question 43

seasonal unemployment

Answer 43

caused by time of year

Question 44

supply side policy

Answer 44

government attempts to increase efficiency in economy, if successful shift AS to the right

Question 45

demand side policy

Answer 45

attempts to increase AD in economy to affect output, inflation and employment (fiscal/monetary)