Macro Booklet 3

Question 1

What is anticipated inflation?

Answer 1

Inflation which economic agents are expecting and for which they have planned.

Anticipated inflation can influence economic decisions such as spending and investment.

Question 2

What is an automatic stabiliser?

Answer 2

When a change in one variable automatically leads to an opposing change in another variable.

Examples include unemployment benefits and progressive taxes.

Question 3

What is a balanced budget?

Answer 3

A situation where the government’s spending for a given period equals its receipts.

This indicates fiscal responsibility and sustainable government finances.

Question 4

What is the bank rate or base rate?

Answer 4

The interest rate set by the Bank of England which influences other interest rates across the U.K. economy.

Changes in the base rate can affect borrowing costs and consumer spending.

Question 5

What is benign deflation?

Answer 5

A fall in the general price level which is caused by falling costs and which acts as a boost to real incomes.

Unlike harmful deflation, benign deflation can have positive effects on economic growth.

Question 6

What is a budget deficit?

Answer 6

A situation where the government’s spending in a given period is greater than the government’s receipts.

This typically leads to government borrowing to cover the shortfall.

Question 7

What is a budget surplus?

Answer 7

A situation where the government receives more in tax revenue than it spends.

A budget surplus can be used to pay down debt or invest in public services.

Question 8

What is classical or real-wage unemployment?

Answer 8

Unemployment caused by real wages being too high (i.e. above the market-clearing wage rate).

This type of unemployment can occur when minimum wage laws or union negotiations set wages above equilibrium levels.

Question 9

What is contractionary policy?

Answer 9

Government policy designed to reduce aggregate demand usually to combat demand-pull inflation.

Contractionary policies can include increasing interest rates or reducing government spending.

Question 10

What is core inflation?

Answer 10

The rate of inflation excluding price changes from more volatile items such as fuel and food.

Core inflation provides a clearer view of long-term inflation trends.

Question 11

What is cost-push inflation?

Answer 11

Inflation caused by rising costs of production (shifting SRAS to the left).

This can occur due to increases in wages or raw material costs.

Question 12

What is counter-cyclical policy?

Answer 12

Macroeconomic policy designed to work against the business cycle.

This includes expansionary policy during a recession or contractionary policy during an economic boom.

Question 13

What is a current account deficit?

Answer 13

When the currency outflows from a country’s current account exceed the currency inflows.

A current account deficit may indicate that a country is importing more than it is exporting.

Question 14

What is a current account surplus?

Answer 14

When the currency inflows into a country’s current account exceed the currency outflows.

This may suggest that a country is exporting more than it is importing.

Question 15

What is cyclical, Keynesian or demand-deficient unemployment?

Answer 15

Unemployment caused by a lack of aggregate demand.

This type of unemployment is often addressed through fiscal stimulus measures.

Question 16

What is deflation?

Answer 16

A sustained decrease in the general level of prices.

Deflation can lead to decreased consumer spending as people anticipate lower prices in the future.

Question 17

What is demand-pull inflation?

Answer 17

Inflation caused by an increase in aggregate demand.

This type of inflation often occurs in a growing economy with rising consumer confidence.

Question 18

What is a direct tax?

Answer 18

A tax on income such as wages/salaries or profit.

Examples of direct taxes include income tax and corporate tax.

Question 19

What is discretionary fiscal policy?

Answer 19

Government policy that involves deliberate changes in taxation and spending to influence the economy.

Discretionary fiscal policy is used to manage economic fluctuations.

Question 20

What is disinflation?

Answer 20

A fall in the rate of inflation.

Disinflation occurs when the general level of prices continues to rise, but at a slower rate.

Question 21

What does economically active refer to?

Answer 21

Those in employment and those who are unemployed but seeking work.

The economically active population is a key indicator of labor market health.

Question 22

What does ‘economically inactive’ refer to?

Answer 22

People who are unwilling to work at the current wage rate or unable to.

This includes individuals not actively seeking employment.

Question 23

How is ‘exchange rate’ defined?

Answer 23

The value of one currency (or its market price) expressed in terms of another currency.

Exchange rates can fluctuate based on market conditions.

Question 24

What is ‘expansionary policy’?

Answer 24

Government policy (fiscal or monetary) designed to promote economic growth by increasing aggregate demand.

This can involve increasing government spending or lowering taxes.

Question 25

Define 'external shock'.

Answer 25

An unexpected event with origins outside of a country. ## Footnote Examples include natural disasters or global economic downturns.

Question 26

What does 'fiscal loosening' mean?

Answer 26

Expansionary fiscal policy. ## Footnote It typically involves increasing government spending and/or decreasing taxes.

Question 27

What is 'fiscal policy'?

Answer 27

Macroeconomic policy based on the control of taxation and government spending. ## Footnote It aims to influence economic conditions.

Question 28

What is meant by 'fiscal tightening'?

Answer 28

Contractionary fiscal policy. ## Footnote This usually involves decreasing government spending and/or increasing taxes.

Question 29

What are 'fixed interest rates'?

Answer 29

Interest rates which do not change for the duration of a loan (e.g. on most business loans). ## Footnote This provides predictability in repayment amounts.

Question 30

What do 'free-market supply-side policies' aim to achieve?

Answer 30

Policies designed to increase the economy's productive capacity by reducing government involvement. ## Footnote This can include deregulation and tax cuts.

Question 31

Define 'frictional unemployment'.

Answer 31

Workers who are currently between jobs due to the time taken to find a suitable vacancy. ## Footnote This is often a natural part of the job market.

Question 32

What does 'geographical immobility of labour' refer to?

Answer 32

When workers find it difficult to relocate e.g. due to family and social ties or the housing market. ## Footnote This can hinder job matching in different regions.

Question 33

What is 'hyperinflation'?

Answer 33

A very high rate of inflation, typically in excess of 100% per year. ## Footnote This leads to a rapid decrease in the real value of the local currency.

Question 34

What is an 'indirect tax'?

Answer 34

A tax on expenditure, levied on goods and services. ## Footnote Examples include sales tax and value-added tax (VAT).

Question 35

Define 'inflation'.

Answer 35

A sustained increase in the general level of prices. ## Footnote It erodes purchasing power over time.

Question 36

What is 'interest'?

Answer 36

The reward for saving and the cost of borrowing. ## Footnote It is often expressed as a percentage of the principal.

Question 37

How is 'interest rate' defined?

Answer 37

The return on savings or borrowing expressed as a percentage. ## Footnote This can vary based on economic conditions.

Question 38

What does 'inter-generational equity' mean?

Answer 38

Fairness between different generations. ## Footnote It often addresses issues like debt and resource allocation.

Question 39

Define 'internal shock'.

Answer 39

An unexpected event with origins within a country. ## Footnote This could be political instability or natural disasters.

Question 40

What are 'interventionist supply-side policies'?

Answer 40

Policies designed to increase the economy's productive capacity through greater government intervention. ## Footnote This can include investment in infrastructure and education.

Question 41

What is 'long-run economic growth'?

Answer 41

An increase in an economy's real gross domestic product caused by an increase in productive capacity. ## Footnote This is often driven by technological advancements.

Question 42

Define 'malign deflation'.

Answer 42

A fall in the general price level caused by falling aggregate demand. ## Footnote This can lead to increased unemployment and economic stagnation.

Question 43

What is 'monetary policy'?

Answer 43

Macroeconomic policy based on the control of interest rates, the money supply (e.g. quantitative easing) and exchange rates. ## Footnote It aims to manage inflation and stabilize the currency.

Question 44

What does 'national (or government) debt' refer to?

Answer 44

The stock of outstanding debt owed by a country's government. ## Footnote This can impact future fiscal policy and economic growth.

Question 45

What is 'occupational immobility of labour'?

Answer 45

The difficulty workers have in changing jobs due to a lack of transferable skills. ## Footnote This can limit employment opportunities and wage growth.

Question 46

What is the output gap?

Answer 46

The difference between the current level of output in an economy and its long-run productive capacity (negative if there is spare capacity, positive if the economy produces beyond capacity in the short-run).

Question 47

What is a pro-cyclical policy?

Answer 47

Macroeconomic policy designed to work in line with the business cycle (i.e. expansionary policy during a period of growth or contractionary policy during a period of recession).

Question 48

Define progressive tax.

Answer 48

A tax that will take a higher proportion of high earners' income (and a lower proportion of lower earners' incomes).

Question 49

What is a proportionate tax?

Answer 49

A tax that will take an equal proportion of everybody's income.

Question 50

What is real G.D.P. per capita?

Answer 50

Real national output/income per person (adjusted for inflation).

Question 51

Define regressive tax.

Answer 51

A tax that will take a higher proportion of low earners' income (and a lower proportion of higher earners' incomes).

Question 52

What is seasonal unemployment?

Answer 52

When workers are unemployed only at certain times of the year (because the demand for their labour is seasonal).

Question 53

What is short-run economic growth?

Answer 53

An increase in an economy's real gross domestic product caused by increased use of its productive capacity (i.e. increased AD).

Question 54

Define structural unemployment.

Answer 54

Unemployment caused by a change in the structure of the economy which means that there is no longer demand for a certain type of labour.

Question 55

What are supply-side policies?

Answer 55

Policies designed to increase long-run aggregate supply and increase the productive capacity of an economy.

Question 56

What is technological unemployment?

Answer 56

Often regarded as part of structural unemployment, caused by workers being replaced by machinery.

Question 57

Define trade deficit.

Answer 57

When the value of a country's imports exceeds the value of the country's exports.

Question 58

What is unanticipated inflation?

Answer 58

Inflation which economic agents are not expecting and for which they have not planned.

Question 59

Define underemployment.

Answer 59

When a worker has a job but is working fewer hours than they would like - e.g. someone who wants a full-time job but takes a part-time job.

Question 60

What is unemployment?

Answer 60

People who are actively seeking employment at the prevailing wage rate but unable to find it.

Question 61

What is the unemployment rate?

Answer 61

The number of unemployed people expressed as a percentage of the economically active population.

Question 62

What are variable interest rates?

Answer 62

Interest rates that change, usually in response to changes in Bank Rate, such as some mortgages and most savings accounts.

Question 63

What is a wage-price spiral?

Answer 63

A scenario when rising inflation leads workers to demand increased pay to maintain their standard of living, which in turn increases firms' costs leading to further price rises and more inflation.