MACRO - Unit 7

Question 1

What are the 3 different methods of calculating the level of national income?

Answer 1

expenditure (aggregate demand)
income
output

Question 2

What is national income?

Answer 2

measures all the total value of goods and services produced in an economy

Question 3

What does the expenditure method include?

Answer 3

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

Question 4

What does the income method do?

Answer 4

adding together factor incomes
GDP is the sum of the incomes earned through the production of goods and services ;
Income + profit + rent income = GDP

Question 5

What does the output method involve?

Answer 5

totalling the value of all output produced in an economy for a period of time

Question 6

What is the calculation for real national income?

Answer 6

RNI = nominal national income / average price level

Question 7

What is the difference between nominal national wage and real national income?

Answer 7

nominal national wage doesn’t take into account inflation real national income takes into account inflation

Question 8

What does GNI mean?

Answer 8

includes incomes from oversea assets

Question 9

Why is RNI useful to the economy?

Answer 9

• it measures how successful an economy is
• it shows how well off population is - incomes per person
• it allows a government to see estimate how much can be collected in taxation

Question 10

What is the circular flow of income?

Answer 10

an economic model showing the flow of goods and services, the factors of production and their payments between households and firms within an economy

Question 11

What is meant by a closed economy?

Answer 11

this means there is no foreign trade and no government influence, there is only 2 groups household and firms

Question 12

What are the assumptions of the simple model?

Answer 12

households spend all their income on goods and services
firms spend all their income on factors of production
there is no government
there is no foreign trade

Question 13

What are the injections of circular flow of income?

Answer 13

investment
government spending
exports

Question 14

What are the withdrawals of circular flow of income?

Answer 14

savings
taxes
imports

Question 15

When will the national nominal wage rise?

Answer 15

I + G + X > S + M + T

Question 16

When will the national nominal wage falls?

Answer 16

I + G + X < S + M + T

Question 17

What are the components/ determinants of AD?

Answer 17

consumption ,investment, government spending, exports and imports

Question 18

What does aggregate mean?

Answer 18

the total demand for all goods and service in an economy at any given price level over a period of time

Question 19

Why does a AD curve slope down?

Answer 19

because at lower price levels the value of assets increase

Question 20

What is the price level?

Answer 20

is the average of price for all goods and services in an economy

Question 21

What is real national output ?

Answer 21

is the output of the economy taking into account inflation

Question 22

What determines the level of consumption in a household?

Answer 22

income - higher levels of disposable income will lead to higher consumption as can afford more
interest rates - lower interest rates mean higher consumption, saving less attractive
levels of personal debt - lower levels of personal debt means will consume more
levels of personal wealth - high levels more consumption
confidence - if people have more confidence they are more likely to consume
marginal propensity to consume/ invest - how likely someone is to spend or save £1

Question 23

What does investment mean?

Answer 23

NOT SAVING

is the firms aim to improve capital in terms of quantity, quality and efficiency

Question 24

What are the determinants of saving?

Answer 24

interest rates - higher the rates more people are likely to save
confidence - if there is less confident people are likely to save their income
inflation - if prices are rising quickly less incentive to save

Question 25

What are the determinants of investment?

Answer 25

interest rates - lower rates makes investment projects less costly confidence - more confident more likely to invest in capital projects government incentives - grants economic growth - the quicker the growth the quicker the capital goods will have to replaced profit levels - higher profits means more re-investment price of capital equipment technology tax - pay tax which lowers profit more likely to invest

Question 26

What is the accelerator effect?

Answer 26

shows the relationship between GDP and the rate of investment

Question 27

What is the accelerator theory of investment?

Answer 27

states that increases and decreases in the rate of growth of national income will lead to even larger increases in the level of investment.

Question 28

What does the government spend money on within the economy?

Answer 28

public services local government services welfare expenditure interest on debt

Question 29

What causes a movement along the AD curve?

Answer 29

price level change

Question 30

What causes shifts in the AD curve?

Answer 30

change in the components of AD (C, I, G, X or M)

Question 31

What does a rise in price level cause?

Answer 31

contraction

Question 32

What does a fall in price level cause?

Answer 32

expansion

Question 33

The higher the level of aggregate demand in an economy causes what?

Answer 33

higher level of economic activity

Question 34

When does a multiplier effect occur?

Answer 34

when there is an initial injection into the economy

Question 35

What is the formula for calculating a multiplier effect?

Answer 35

multiplier effect (K) = change in Real National Income (Y) / change in injections (J)

Question 36

What are the factors which affect the size of a multiplier effect?

Answer 36

``` marginal propensity to consume interest rates - high interest rates mean less likely to spend tax rates imports spare capacity ```

Question 37

What is meant by short-run?

Answer 37

all factors of production are assumed to be fixed

Question 38

A rise in price in the short-run aggregate supply causes what?

Answer 38

an expansion

Question 39

A fall in price in the short-run aggregate supply causes what?

Answer 39

a contraction

Question 40

What causes a shift in the short-run aggregate supply?

Answer 40

wages - if increase, the firm might substitute labour for capital, or employ less the price of raw materials - higher raw materials increase costs of production productivity - the productivity of land, labour and capital can change in the short-run. taxes and subsidies - increase in tax with increase costs and SRAS will decrease, more subsidies lower costs and increase SRAS exchange rate and imports - if importing raw materials and exchange rate becomes stronger it will be cheaper

Question 41

What are money wage rate?

Answer 41

do not take into account inflation

Question 42

What are real wages?

Answer 42

are money wages adapted for inflation

Question 43

An increase in costs of production will shift SRAS left or right?

Answer 43

left

Question 44

A decrease in costs of production will shift SRAS left or right?

Answer 44

right

Question 45

What are the differences between short-run and long-run?

Answer 45

in short-run all factors of production are fixed, except labour which can be hired. in the long-run all factors of production are variable and can be increased over time

Question 46

What does the long-run represent?

Answer 46

the maximum possible outcome an economy can be produced as determined by its available land, labour, capital and entrepreneurial resources

Question 47

Why is the LRAS curve assumed to be vertical?

Answer 47

means in the long run the amount of output firms are willing to produce is unaffected by changes in the price level

Question 48

On the classical view LRAS what does the Y represent?

Answer 48

maximum capacity of the economy to produce goods and services

Question 49

What causes the LRAS to shift?

Answer 49

- when there is change in quantity and or quality of factors of production - government intervention - economic incentives

Question 50

What is factor mobility?

Answer 50

refers to the ease in which factors of production can be put to different uses

Question 51

What are economic incentives?

Answer 51

such as higher prices are the reasons why economic agents strive to improve the production process. This leads to greater productive capacity.

Question 52

Which direction would the LRAS shift if there is a decrease in quantity and or quality of factors of production?

Answer 52

left

Question 53

Which direction would the LRAS shift if there is a increase in quantity and or quality of factors of production?

Answer 53

right

Question 54

What does A, B and C mean on the Keynesian AS diagram?

Answer 54

``` A = unused capacity. Firms can increase output without increasing costs B = limited spare capacity. As the economy is near full employment, firms find it more difficult to attract scarce resources, so price begins to rise C = full capacity. There is full employment and all resources are used. ```

Question 55

What causes a shift in the Keynesian AS diagram?

Answer 55

same as classical - a change in quality and or quantity in the factors of production