Macro Economics

Question 1

What does MACRO ECONOMICS explain ?

Answer 1

Macro Economics explains why the economy grows and fluctuates over time based on decisions made as a whole, by consumers, businesses and governments.

Question 2

What are the four Macro Economic agents ?

Answer 2

Producers (Firms and people that produce goods or supply services), Consumers (people who purchase the goods or services), Governments (establishes rules for economies), Central banks (set macroeconomic objectives to ensure price stability and economic growth)

Question 3

What are the four main policy objectives ?

Answer 3

• To create and maintain full employment
• To achieve price stability by controlling/limiting inflation
• To achieve economic growth and improvements
• To maintain a satisfactory balance of payments

Question 4

What is economic growth ?

Answer 4

The capacity of the economy to produce more goods and services over a period of time

Question 5

How can economic growth be measured ?

Answer 5

Economic growth can be measured using gross domestic product (GDP)

Question 6

What is GDP ?

Answer 6

The value of all goods and services produced in an economy over a period of time.

Question 7

What is the difference between nominal GDP and real GDP ?

Answer 7

Nominal GDP is GDP that does not take inflation into account. Real GDP does take inflation into account.

Question 8

What is nominal income ?

Answer 8

How much you gain in that time period, without taking inflation of goods into account

Question 9

What is real income ?

Answer 9

Nominal income that takes inflation of goods into account

Question 10

What is GDP per capita ?

Answer 10

GDP is how we can have a rough idea of the spending power of individuals in a population.

Question 11

How do you calculate GDP per capita ?

Answer 11

GDP / Population

Question 12

What is short term economic growth ?

Answer 12

Growth of real output resulting from the use of idle resources such as Labour, thereby using up spare capacity in the economy.

Question 13

Name 6 important economic developments/issues

Answer 13

Response to economic shocks, poverty and inequalities, global corporations, climate change, rise of super economic powers, globalization and supply chains

Question 14

What is economic shock ?

Answer 14

These are events that are large and unexpected and that bring about changes in economic growth, inflation and unemployment.

Question 15

Define globalisation

Answer 15

The process by which economies become more integrated

Question 16

What are the factors of production ?

Answer 16

Enterprise
Land
Labour
Capital

Question 17

what is balance of trades

Answer 17

The balance of trade refers to the difference between a country’s exports and imports of goods. It is a key component of a country’s current account in the balance of payments.

Balance of Trade = Exports - Imports

Question 18

what is trade surplus

Answer 18

Trade Surplus: If exports are greater than imports, the country has a trade surplus.

Question 19

what is trade deficit

Answer 19

Trade Deficit: If imports exceed exports, the country has a trade deficit.

Question 20

what is balance of payments

Answer 20

The balance of payments (BoP) is a record of all economic transactions between residents of a country and the rest of the world over a specific period, typically a year or a quarter. It provides a comprehensive overview of a country’s financial dealings with other nations, including trade, investment, and financial transfers.

Question 21

What is a withdrawal from the economy ?

Answer 21

Money being taken out of the economy

Question 22

What is an injection into the economy ?

Answer 22

Money coming into the economy

Question 23

What is national income ?

Answer 23

The total money earned in an economy

Question 24

What are the conditions that affect the level of national income ?

Answer 24

If the sum of injections = the sum of withdrawals, then national income is in equilibrium

If the sum of injections > the sum of withdrawals – The level of national income is RISING

If the sum of withdrawals > the sum of injections – The level of national income is FALLING

Question 25

What is an investment ?

Answer 25

Spending by firms on buildings, machinery and improving the skills of the labor force

Question 26

What is consumption ?

Answer 26

Total planned spending by households on consumer goods and services

Question 27

What is savings ?

Answer 27

Money that is not spent on consuming goods and services

Question 28

What is the wealth affect ?

Answer 28

Value of asset will increase Consumer confidence increases Consumption of goods and services increases Aggregate demand increases REAL GDP INCREASES (Economic growth rises)

Question 29

Why do firms invest ?

Answer 29

To generate long-term profits (Positive rate of return)

Question 30

What are the two main factors that affect investment ?

Answer 30

- Interest rate (Increase) - Prices of capital and machinery (decrease)

Question 31

What are the determinants of demand ?

Answer 31

- Relative prices of capital and labor - The nature of technical progress - The availability of credit - Changes in business expectations

Question 32

How does the relative prices of capital and labor affect demand ?

Answer 32

If the price of capital decreased, firms would invest in more capital-intensive methods of production. This investment in capital means that investment will increase.

Question 33

How does a new wave of technology affect demand ?

Answer 33

If there is a wave of new technology, existing machinery may be made obsolete. This means that firms that do not invest in the new state-of-the-art technology will lose sales to those that have. This means that there will be an increase in investment by firms as they purchase the new capital equipment

Question 34

How does changes in business expectations affect demand ?

Answer 34

Positive expectations – businesses expect the future and profits to improve due to factors like increased aggregate demand. Negative expectations – businesses expect the future sales and profits to fall due to factors like falling aggregate demand

Question 35

How do you calculate AD ?

Answer 35

AD = C + I + G + (X – M) Where: C = Consumption I = Investment G = Government spending X = Exports M = Imports

Question 36

What is the law of supply ?

Answer 36

As the price of a product rises, so businesses expand supply. Higher prices provide a profit incentive for firms to expand production. The profit incentive is the key goal of a rational firm.

Question 37

What are 5 factors that can shift demand ?

Answer 37

Costs of production External shocks New technology and innovation Taxation and subsidies Number of and scale of producers in the market

Question 38

What is aggregate demand ?

Answer 38

The total demand in an economy

Question 39

How does level of income affect consumption and savings ?

Answer 39

As income rises, both saving and consumption increase because consumers have more money available to spend and save.

Question 40

How does a decrease in interest rates affect consumptions and savings ?

Answer 40

As interest rates decrease, savings with decrease and consumption will increase.

Question 41

How does an increase in wealth affect consumption ?

Answer 41

Wealth is the stock of owned assets (E.G the value of property or financial assets) As house prices rise, an individual's wealth rises, this promotes consumer confidence and a ‘feel good factor’ that leads to increased consumption

Question 42

How does the distribution of income affect savings and consumption ?

Answer 42

Rich people tend to save more of their income than poorer people, so redistributing income from the rich to the poor should increase consumption and reduce saving

Question 43

What is the Hot money process ?

Answer 43

Interest rates up Savings up Foreigners move money to the banks for more interest Demand for £ goes up, value of £ goes up Exports down International competitiveness down imports up Net exports down AD down GDP down

Question 44

What is LRAS (Long run aggregate supply)

Answer 44

Maximum output an economy can produce with the given factors of production