Macro Book 1

Question 1

What are the macroeconomic policy objectives of the government?

Answer 1

• Sustainable economic growth
• Low unemployment
• Low and stable inflation
• A satisfactory balance of payments position
• Even distribution of income
• Balanced budget
• Protection of the environment

These objectives guide government decisions on resource allocation and economic policy.

Question 2

What is the circular flow of income?

Answer 2

It shows the flow of goods and services, money, and factors of production between firms and households.

This model is foundational for understanding national income and GDP calculation.

Question 3

Define injections in the context of the circular flow of income.

Answer 3

Money flowing into the circular flow in the form of investment, government spending, and exports.

Injections stimulate economic activity and increase overall economic output.

Question 4

Define withdrawals/leakages in the context of the circular flow of income.

Answer 4

Money flowing out of the circular flow in the form of savings, taxation, and imports.

Withdrawals can reduce economic activity and overall output.

Question 5

List the components of aggregate demand.

Answer 5

• Consumer expenditure (C)
• Investment (I)
• Government spending (G)
• Net Exports (NX)

Net Exports are calculated as exports (X) minus imports (M).

Question 6

What is the formula for calculating aggregate demand?

Answer 6

AD = C + I + G + (X - M)

This formula aggregates total planned expenditure on domestic output.

Question 7

What is the significance of consumption in aggregate demand?

Answer 7

It often accounts for more than 65% of aggregate demand.

Understanding consumer behavior is crucial for predicting economic trends.

Question 8

What does the Marginal Propensity to Consume (MPC) measure?

Answer 8

The change in consumption from a change in income.

MPC is typically between 0 and 1, indicating that people save part of any income increase.

Question 9

Calculate Mehul’s MPC if he spends £15,000 from an income increase of £18,000.

Answer 9

MPC = 15,000 / 18,000 = 83%

This shows a high propensity to consume from additional income.

Question 10

Define the Marginal Propensity to Save (MPS).

Answer 10

The change in saving from a change in income.

MPS complements the concept of MPC in understanding economic behavior.

Question 11

What factors influence the level of saving in an economy?

Answer 11

• Real disposable income
• Interest rates
• Confidence and expectations
• Range of financial institutions
• Government policies
• Age structure of the population

Each factor can significantly impact saving behaviors and overall economic stability.

Question 12

What is investment in economic terms?

Answer 12

The addition to the capital stock of the economy.

Investment is a volatile component of aggregate demand, influenced by business confidence.

Question 13

What is the role of business confidence in investment?

Answer 13

Firms invest when they expect returns from capital goods to exceed costs.

Changes in expectations can lead to rapid fluctuations in investment levels.

Question 14

What does ‘animal spirits’ refer to in economics?

Answer 14

The confidence or emotions of businessmen regarding future business prospects.

The term was coined by economist John Maynard Keynes to describe the psychological factors influencing investment decisions.

Question 15

How do interest rates affect investment?

Answer 15

A fall in interest rates typically increases investment by lowering borrowing costs and increasing consumer spending.

Lower interest rates can also decrease the opportunity cost of investment.

Question 16

What is the relationship between interest rates and investment?

Answer 16

Lower interest rates increase investment by reducing borrowing costs and increasing consumer spending

Firms may switch to investing in shares as savings returns fall, increasing share prices and funds for investment.

Question 17

Define gross investment.

Answer 17

Gross investment is total investment before accounting for depreciation.

Question 18

What is net investment?

Answer 18

Net investment is gross investment minus depreciation.

Question 19

What causes depreciation of an asset?

Answer 19

Depreciation occurs due to wear and tear, breakdown, and repair expenditures.

Question 20

What is included in government spending?

Answer 20

Government spending includes expenditure on education, healthcare, and police services.

Question 21

Are transfer payments included in government spending? Why or why not?

Answer 21

No, transfer payments are not included to avoid double counting as they do not involve purchasing goods and services.

Question 22

How does high unemployment affect government spending?

Answer 22

High unemployment may lead the government to increase spending to boost aggregate demand.

Question 23

What is the impact of a trade surplus on aggregate demand?

Answer 23

A trade surplus has a positive impact on aggregate demand.

Question 24

What is the impact of a trade deficit on aggregate demand?

Answer 24

A trade deficit has a negative impact on aggregate demand.

Question 25

What happens to net exports when real disposable income abroad increases?

Answer 25

Net exports may improve as purchasing power increases demand for exports.

Question 26

What effect does a rise in domestic price level have on net exports?

Answer 26

A rise in domestic price level worsens competitiveness and increases demand for imports.

Question 27

What is the effect of an increase in the exchange rate on exports?

Answer 27

An increase in the exchange rate raises export prices, reducing demand for exports.

Question 28

What happens to net exports if trade barriers are removed?

Answer 28

Net exports may rise as prices become cheaper, leading to increased exports.

Question 29

What are the three effects that explain the downward slope of the aggregate demand curve?

Answer 29

* The wealth effect * The interest rate effect * The international trade effect

Question 30

What is the wealth effect?

Answer 30

The wealth effect refers to changes in households' and firms' real wealth when the price level changes.

Question 31

What is the interest rate effect?

Answer 31

The interest rate effect explains that low prices lead to low interest rates, encouraging investment and consumption.

Question 32

What is the international trade effect?

Answer 32

The international trade effect indicates that a rise in price level reduces competitiveness, lowering net exports.

Question 33

Which country experienced a contraction in its AD in 2018?

Answer 33

Argentina.

Question 34

Which country likely became more internationally competitive due to a price level change?

Answer 34

Japan became more internationally competitive as prices fell.

Question 35

What does an increase in consumption do to the aggregate demand curve?

Answer 35

An increase in consumption shifts the aggregate demand curve to the right.

Question 36

What effect do cuts in government spending have on real GDP?

Answer 36

Cuts in government spending can lead to negative multiplier effects and a larger final decrease in real GDP.

Question 37

What is the impact of rising food and petrol prices on aggregate demand?

Answer 37

Rising food and petrol prices suggest inflation is rising, reducing real incomes and consumption.

Question 38

What effect does a cut in interest rates have on consumption?

Answer 38

A cut in interest rates lowers borrowing costs, increasing disposable income and consumption.

Question 39

Fill in the blank: Government spending decisions are influenced by the level of _______.

Answer 39

economic activity.

Question 40

True or False: A trade surplus occurs when imports exceed exports.

Answer 40

False.

Question 41

What is the likely effect of a rise in the exchange rate on imports?

Answer 41

Imports increase as they become cheaper relative to exports.

Question 42

What happens to aggregate demand when investment decreases?

Answer 42

Aggregate demand decreases.

Question 43

What was the impact of the increase in real investment expenditure between 2000 and 2007 on aggregate demand?

Answer 43

Investment increases, causing AD to shift to the right.

Question 44

What happens to aggregate demand when disposable income increases?

Answer 44

Aggregate demand increases due to higher consumption.

Question 45

What is the effect of an increase in taxes on consumer behavior?

Answer 45

An increase in taxes generally reduces disposable income and consumption.

Question 46

How does a decrease in taxation affect aggregate demand?

Answer 46

A decrease in taxation shifts aggregate demand to the right.

Question 47

What is Aggregate Supply?

Answer 47

Aggregate Supply is the total output of goods and services that an economy can produce at different price levels in a given time period.

Question 48

What does the Long Run Aggregate Supply (LRAS) curve represent?

Answer 48

The LRAS curve shows the total output of an economy when all resources are fully employed.

Question 49

What is the significance of the slope of the AS curve?

Answer 49

The slope of the AS curve indicates that increasing output affects prices differently depending on the level of output and spare capacity.

Question 50

What happens when output is low and unemployment is high according to the AS curve?

Answer 50

Firms can increase output without any increase in prices due to significant spare capacity.

Question 51

What occurs when output increases and resources become scarcer?

Answer 51

Producers must employ less efficient workers or compete for efficient factors of production, leading to increased costs and prices.

Question 52

What does it mean when all factors of production are fully employed?

Answer 52

It means that no further increase in output is possible regardless of price level.

Question 53

What characterizes the vertical LRAS curve?

Answer 53

The vertical LRAS curve indicates that aggregate supply is perfectly inelastic and does not respond to changes in price level.

Question 54

What does a shift to the right of the AS curve indicate?

Answer 54

An increase in aggregate supply.

Question 55

What does a shift to the left of the AS curve indicate?

Answer 55

A decrease in aggregate supply.

Question 56

What is the main factor causing short-run shifts in Aggregate Supply?

Answer 56

Changes in costs of production.

Question 57

What happens if costs of production increase?

Answer 57

Short run aggregate supply will decrease, leading to increased prices.

Question 58

What can cause long run shifts in Aggregate Supply?

Answer 58

An increase in the quality or quantity of factors of production.

Question 59

What is an example of a factor that can increase the quality of labor?

Answer 59

Improvements in education and training.

Question 60

What is Macroeconomic equilibrium?

Answer 60

Macroeconomic equilibrium occurs when aggregate demand and aggregate supply are equal.

Question 61

What happens when aggregate demand exceeds aggregate supply?

Answer 61

There would be a shortage of goods and services, prompting firms to expand output and potentially increase prices.

Question 62

What is the effect of increasing aggregate demand on output and inflation?

Answer 62

Output increases and unemployment decreases, but the price level rises, leading to inflation.

Question 63

Fill in the blank: The Keynesian LRAS allows economists to illustrate different _______.

Answer 63

[economic scenarios]

Question 64

True or False: The classical version of the AS curve assumes there is always spare capacity in the economy.

Answer 64

False

Question 65

What is the relationship between the marginal propensity to consume (MPC) and aggregate demand?

Answer 65

A higher MPC increases the likelihood of significant injections into the circular flow of income, affecting investment.

Question 66

What occurs in an economy at full capacity when aggregate demand increases?

Answer 66

The growth in aggregate demand will be purely inflationary with no increase in output.

Question 67

What happens if firms add to their existing capacity?

Answer 67

Money is invested in the economy.

Question 68

What does a high MPC indicate about business investment?

Answer 68

Businesses are more likely to invest.

Question 69

What is the impact of an increase in AD when there is considerable spare capacity?

Answer 69

Increases output and reduces unemployment without inflation.

Question 70

What occurs when AD grows at full capacity?

Answer 70

Purely inflationary effects with no increase in output.

Question 71

When is an increase in aggregate demand most beneficial?

Answer 71

When MPC is high, there is a large multiplier effect, and significant spare capacity.

Question 72

One cause of an increase in AD?

Answer 72

Fall in interest rate.

Question 73

Another cause of an increase in AD?

Answer 73

Increased government spending.

Question 74

Two causes of a decrease in AD?

Answer 74

* Higher taxation * Young people leaving to work in the US.

Question 75

What affects the macroeconomic objectives when expanding productive capacity?

Answer 75

Size of the increase in AS and level of economic activity.

Question 76

What happens when AS increases at full capacity?

Answer 76

Raises output and lowers the price level.

Question 77

What is the effect of AS growth when there is significant spare capacity?

Answer 77

No impact on the economy.

Question 78

What danger arises if AD grows slower than AS?

Answer 78

Deflation and unemployment.

Question 79

What was the state of the Chinese economy in the early 2000s?

Answer 79

AS growing faster than AD, leading to excess supply.

Question 80

Why is there likely to be unemployment if AS grows faster than AD?

Answer 80

Excess aggregate supply leads to a negative output gap and reduced employment.

Question 81

What encourages firms to expand?

Answer 81

* Increased consumer confidence * Lower interest rates.

Question 82

What happens when AD rises more quickly than AS?

Answer 82

Inflation occurs, and the economy may overheat.

Question 83

What can affect both the AD and AS curves simultaneously?

Answer 83

Increased spending on capital goods and government spending on training.

Question 84

What is the effect of a fall in the size of the labour force?

Answer 84

Decrease in AS.

Question 85

What is the effect of an increase in interest rates on AD?

Answer 85

Decrease in AD.

Question 86

What is the impact of technological advancement on AS?

Answer 86

Increase in AS.

Question 87

What happens with a decrease in income tax?

Answer 87

Increase in AD and AS.

Question 88

What is the effect on inflation when productivity improves?

Answer 88

Lower inflation due to falling unit costs.

Question 89

What happens to economic growth when labour productivity improves?

Answer 89

Higher economic growth.

Question 90

What is the long-term effect on unemployment from improved labour productivity?

Answer 90

Lower unemployment.

Question 91

How does improved labour productivity affect the balance of trade?

Answer 91

Improved balance of trade due to lower prices for exports.

Question 92

What is the short-term effect on spare capacity from improved productivity?

Answer 92

Rise due to extra capacity.

Question 93

What is the impact on business investment from improved labour productivity?

Answer 93

Higher business investment.