Macro Economics

Question 1

Aggregate Demand (AD)

Answer 1

Total level of demand for desired goods and services (at any time by all groups within a national economy) that makes up the gross domestic product (GDP).

Aggregate demand is the sum of consumption expenditure, investment expenditure, government expenditure, and net exports.

Aggregate demand is the total amount of expenditures for consumer goods and investment for a period of time. It includes purchases by consumers, businesses, government, and foreign entities.

Question 2

Aggregate Demand (AD)

Answer 2

In macroeconomics, Aggregate Demand (AD) or Domestic Final Demand (DFD) is the total demand for final goods and services in an economy at a given time.

It is often called effective demand, though at other times this term is distinguished. This is the demand for the gross domestic product of a country.

Aggregate Demand can increase or decrease depending on several things. In effect, these things will cause shifts up or down in the AD curve. These include: Exchange Rates: When a country’s exchange rate increases, then net exports will decrease and aggregate expenditure will go down at all prices.

Question 3

Aggregate Demand (AD)

Answer 3

There are four components of Aggregate Demand (AD);

• Consumption (C)
• Investment (I)
• Government Spending (G)
• Net Exports (X-M)

Aggregate Demandshows the relationship between Real GNP and the Price Level

Question 4

Central Bank

Answer 4

The central bank’s most important function is to regulate the money supply in accordance with policies established to promote the nation’s economic well-being.

Monetary policy seeks to provide a supply of money, employment, and a relatively stable price level.

Question 5

Control of Money Supply

Answer 5

• Open market operations through bond sales and purchases are flexible (government securities can be purchased or sold in large or small amounts), cause prompt changes in bank reserves, and are more subtle than reserve ratio changes.
• The amount of commercial bank reserves obtained by borrowing from the central bank is small and because whether a change in the discount rate has much impact depends on whether the change occurs at a time when the commercial banks are inclined to alter their central bank borrowings.

Question 6

CPI vs PPI

Answer 6

The CPI is measured as the price that urban consumers paid for a fixed basket of goods and services in relation to the price of the same goods and services purchased in some base period.

The producer price index (PPI) is the measure used by companies.

The price index measures the combined price of a selected group of goods and services for a specified period in comparison with the combined price of the same or similar goods for a base period. The U.S. government’s producer price index (PPI) is an example. It measures the price of a basket of 3,200 commodities at the point of their first sale by producers.

Question 7

Deflation

Answer 7

Deflation is a general decline in prices of goods and services.

Question 8

Demand Pull Inflation

Answer 8

The most effective government fiscal policy would involve reducing demand that could be done by increase in taxation and reduced government spending.

Question 9

Discount Rate

Answer 9

The discount rate is the rate of interest banks pay when they borrow from a Federal Reserve Bank in order to maintain reserve requirements.

An increase in the discount rate (i.e., a bank’s cost of borrowing) tends to increase the rate banks charge for loans, which tends to have a ripple effect on interest rates charged by others.

Question 10

Expansionary Monetary Policy

Answer 10

Expansionary monetary policy is when a central bank uses its tools to stimulate the economy. That increases the money supply, lowers interest rates, and increases aggregate demand.

Question 11

Frictional Unemployment

Answer 11

Frictional unemployment measures the temporary unemployment that always exists as workers change jobs or new workers enter the workforce.

Question 12

Major Components of Real Gross Domestic Product

Answer 12

• Total worker hours
• Labor Productivity

Question 13

Marginal Propensity To Consum

Answer 13

The marginal propensity to consume (MPC) is the proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services, as opposed to saving it.

Marginal propensity to consume is a component of Keynesian macroeconomic theory and is calculated as the change in consumption divided by the change in income. MPC is depicted by a consumption line, which is a sloped line created by plotting change in consumption on the vertical “y” axis and change in income on the horizontal “x” axis.

Question 14

Multiplier Effect

Answer 14

The multiplier provides an indication of the impact of an increase in consumption or investment in GDP. An increase in spending ripples through the economy because individuals and business save only a portion of the increase in income.

Question 15

Recession

Answer 15

Recession is a contraction in the economy.

Question 16

Reserve Ratio

Answer 16

The reserve ratio is the percentage of total checking deposits that a financial institution must hold on reserve in the central bank.

The reserve ratio is the portion of reservable liabilities that commercial banks must hold onto, rather than lend out or invest. This is a requirement determined by the country’s central bank, which in the United States is the Federal Reserve. It is also known as the cash reserve ratio.

Question 17

Structural Unemployment

Answer 17

Structural unemployment measures the workforce that is unemployed due to a mismatch in job skills.

Significant amounts of structural unemployment can drag down the economy.

Question 18

Types of Unemeployment

Answer 18

• Changes over time in the structure of consumer demand, which in turn alters the structure or composition of the demand for labor, is what is referred to as structural unemployment.
• Frictional unemployment is due to imperfections in the labor market and relates to workers searching for jobs or waiting to take jobs in the near future.
• Cyclical unemployment is caused by the recession phase of the business cycle, that is, by a deficiency of aggregate spending.
• The full employment unemployment rate is the sum of frictional and structural unemployment.
• Full employment does not mean zero unemployment.

Question 19

Expansion

Answer 19

• Expansion is growth in the economy.
• Purchasing federal securities and lowering the discount rate would increase the supply of money and lower its cost. This would encourage investment.
• An increase in governmental spending causes an increase in domestic interest rates and international capital inflows. These capital inflows cause the domestic currency to appreciate, which has a negative effect on net exports.

Question 20

Inflation

Answer 20

Inflation is a general increase in prices of goods and services.

Question 21

Deflation

Answer 21

• In a period of deflation the government wants to encourage borrowing and investment to promote economic growth.
• The acknowledged prevenative measure is increasing the money supply

Question 22

Inflation

Answer 22

Decreasing interest rates and decreasing the money supply are preventive measures for a period of inflation.