MACRO: (4.9/10) (Unit 9/10) The measurement of macroeconomic performance / How the macro-economy works: the circular of income, AD/AS analysis, and related concepts

Question 1

What is macroeconomics?

Answer 1

The zooming out and looking at the bigger picture, economy at an aggregate level.

Question 2

What does aggregate mean?

Answer 2

The adding of all the elements.

Question 3

What are the 4 macroeconomic policy objectives?

Answer 3

1) To achieve economic growth
2) To work towards full employment (minimise unemployment)
3) To limit inflation (price stability)
4) To ensure a ‘satisfactory’ balance of payments

Question 4

What does ‘the balance of payments’ mean?

Answer 4

The government does not want more importing than exporting (within a limit). It measures currency flow into and out of an economy, in a particular time period.

Question 5

What is a policy objective?

Answer 5

A goal/desired outcome that a government wants to achieve.

Question 6

What is another type of macroeconomic policy that the economy may have (other than the other 4)?

Answer 6

• Balancing the budget
• Achieving an equal distribution of income.

Question 7

What is short-run growth?

Answer 7

This occurs when the economy moves from a situation where there are factors of production not being utilised (unemployment of resources, including labour) towards fully employment of resources (LINKS TO PPF CURVE).

Question 8

What is long-run growth?

Answer 8

This occurs when the economy’s productive capability increases, pushes PPF curve outwards.

Question 9

What is an example of a conflict between macroeconomic objectives in the short-run, when attempting to achieve them?

Answer 9

For example, when pursuing the objective of economic growth- this may result in a conflict with being environmentally stable:
- extraction and consumption of natural resources (e.g. oil)
- pollution and waste on factories
- habitat destruction (expanding factories into urban areas)

Question 10

What is short-run negative growth?

Answer 10

This is moving from a point on or near the PPF curve to one further away (increase unemployment of resources).

Question 11

What is long-run negative growth?

Answer 11

The PPF curve inwards.

Question 12

What data methods are used to measure the performance of an economy (macroeconomic)?

Answer 12

• real GDP
• real GDP per capita (per person)
• CPI
• RPI
• measures of employment
• productivity levels
• balance of payments

Question 13

What is GDP?

Answer 13

Gross Domestic Profit

Question 14

What are the 3 ways GDP can be measured?

Answer 14

1) Output measure (total value of goods/services produced by all sectors)
2) Expenditure measure (exports left by the economy)
3) Income measure (revenue= wages + profit)

Question 15

What is real GDP?

Answer 15

An inflation-adjusted measure that reflect the value of all goods and services produced by an economy in a given year.

Question 16

What is the difference between real GDP and nominal GDP?

Answer 16

Real GDP includes inflation, Nominal GDP doesn’t.

Question 17

How do you calculate GDP per capita?

Answer 17

GDP / Population

Question 18

How do you calculate Nominal GDP?

Answer 18

Real GDP X Average current price level

Question 19

What is Nominal GDP?

Answer 19

The raw numbers in current £, unadjusted for inflation.

Question 20

What is full employment (Beverdige definition)?

Answer 20

This is where 3% or less of the labour force are unemployed.

Question 21

What is full employment (Free-market definition)?

Answer 21

The level of employment occurring when all labour resources are being used efficiently, no significant unemployment.

Question 22

What does CPI stand for?

Answer 22

Consumer Price Index

Question 23

What does RPI stand for?

Answer 23

Retail Price Index

Question 24

What is CPI?

Answer 24

This measures the price changes of a broader range of goods and services, typically consumed by households (basket of goods).

Question 25

What is RPI?

Answer 25

This measures the price changes of retail prices of goods and services.

Question 26

What are lead indicators?

Answer 26

Indicators that aims to provide information about the future.

Question 27

What are lag indicators?

Answer 27

These are indicators that describe the past (and current) state of things (such as GDP, unemployment data etc.)

Question 28

What is income?

Answer 28

The flow of new output or production over a set period (per year) (flow concept).

Question 29

What is wealth?

Answer 29

This gives a snapshot at a particular instant in time of the accumulation of goods (stock concept).

Question 30

When is national income at an equilibrium?

Answer 30

Savings + Taxation + Imports = Investment + Government spending + Exports

Question 31

What is the circular flow income concept?

Answer 31

National output (households) = National income (firms) = National expenditure (government)

Question 32

What is gross investment?

Answer 32

Replacement + Net investment

Question 33

What is replacement investment?

Answer 33

The level of investment needed to maintain the same national capital good stock.

Question 34

What is net investment?

Answer 34

The investment to increase the national capital good stock, shift PPF outwards (economic growth).

Question 35

What are the injections in the circular flow?

Answer 35

Government spending, Investment and Exports

Question 36

What are the withdrawals in the circular flow?

Answer 36

Taxes, Savings, Imports.

Question 37

What does national income measure?

Answer 37

National income measures the total value of all goods and services produced in a country during a specific period of time. It's also known as national output or GDP

Question 38

What are injections?

Answer 38

Money entering the economy.

Question 39

What are withdrawals?

Answer 39

Money leaving the economy.

Question 40

What does AD stand for?

Answer 40

Aggregate Demand.

Question 41

What does AS stand for?

Answer 41

Aggregate Supply.

Question 42

What is the macroeconomic equilibrium?

Answer 42

The point at which AD equals AS.

Question 43

What is AD?

Answer 43

The total planned spending in an economy over a given period, at a given price level. C + I + G + (X-M)

Question 44

What is AS?

Answer 44

The total quantity of output that all firms in an economy are willing to produce, at a given price level.

Question 45

What is an economic shock?

Answer 45

An unexpected event that causes a shift in AS or AD.

Question 46

What is consumption (component of AD)?

Answer 46

The total planned spending by households on consumer goods and services.

Question 47

How much of AD is consumption, as a component?

Answer 47

Roughly 70%.

Question 48

What are factors that affect AD (consumption)?

Answer 48

- Interest Rates - Consumer confidence (on the economic future) - Level of Income - Level of Future Income - Wealth (feel wealthier, consume more) - Availability of Credit - Distribution of Income (policies that redistribute money from rich to poor, increase consumption) - Unemployment

Question 49

What happens when price level changes on an AD/AS graph?

Answer 49

Movement on the lines of AD and AS.

Question 50

What is the multiplier effect?

Answer 50

The multiplier measures the relationship between a change in national output, when a change (component) of AD changes.

Question 51

How do we calculate the multiplier (multiplier effect)?

Answer 51

Change in national income / Initial change in government spending

Question 52

What does MPC stand for?

Answer 52

Marginal propensity to consume.

Question 53

What is the MPC?

Answer 53

The proportion of an increase in disposable income that people plan to spend on domestically produced consumer goods.

Question 54

How do we calculate the multiplier, using the MPC?

Answer 54

1/(1-MPC)

Question 55

What is the accelerator theory?

Answer 55

The accelerator effect refers to the relationship between investment and the rate of GDP growth. - investment much more volatile part of AD than consumption - small change in demand leads to proportionally much bigger change in investment

Question 56

How can we measure savings?

Answer 56

The proportion of income saved by households is called household savings ratio: Realised savings / Household disposable income

Question 57

What is AS?

Answer 57

The total quantity of output that all the firms in an economy are willing to produce at a given price level.

Question 58

What does LRAS stand for?

Answer 58

Long run aggregate supply

Question 59

What is SRAS?

Answer 59

Short run aggregate supply

Question 60

How can we shift the SRAS (AS) curve?

Answer 60

- fall in labour costs - fall in raw materials costs - increase in labour productivity (e.g. due to training or technical progress)

Question 61

How can we shift the LRAS to the right?

Answer 61

We can only shift the LRAS if economic growth (more economic capacity) takes place as we have already used maximum production capacity (e.g. more workers).

Question 62

Why is the LRAS a straight line?

Answer 62

As all resources have been used to the maximum.

Question 63

Why is the Keynesian LRAS L-shaped?

Answer 63

As the economy has spare capacity at low output levels, but eventually reaches a point where it can’t produce more without increasing prices.

Question 64

What are the factors affect the LRAS curve?

Answer 64

- improvements in technical progress - increased factor mobility - improvements in productivity