Macroeconomic Performance

Question 1

Main macroeconomic objectives

Answer 1

• Sustainable economic growth
• Low and stable inflation (2%, +-1%)
• Low levels of unemployment
• Sustainable balance of payments

Question 2

Alternative macroeconomic objectives

Answer 2

• Improved productivity
• Reducing poverty
• Reducing inequalities in the distribution of wealth and income
• Sustainable government finances

Question 3

Macroeconomic trade-offs

Answer 3

• Faster growth can fuel demand-pull inflation and widen a current-account deficit
• Low unemployment can increase real wages and cause cost-push inflation
• Policies to reduce inflation can slow growth and cause unemployment

Question 4

Gross domestic product (GDP)

Answer 4

The value of real output of the economy over a period of time

Question 5

Nominal GDP

Answer 5

The monetary value of all goods and services produced in the economy

Question 6

Real GDP

Answer 6

The nominal value of GDP adjusted for inflation

Question 7

Real GDP per capita

Answer 7

National income per person

Question 8

Consumer Price Index

Answer 8

Tracks changes in the price of a basket of goods and services purchased by an average household

Question 9

Retail Price Index

Answer 9

The basket of goods/services includes other items like council tax and mortgage payments.

Question 10

Circular flow of income

Answer 10

• Households supply firms with the factors of production, receiving wages and dividends
• Firms supply goods and services to households, receiving payments

Question 11

Withdrawals

Answer 11

Money leaving the circular flow of income:
- Savings
- Taxes
- Imports

Question 12

Injections

Answer 12

Money entering the circular flow of income:
- Investment
- Government spending
- Exports

Question 13

Equilibrium

Answer 13

When the rate of withdrawals = the rate of injections

Question 14

Net injections

Answer 14

There will be an expansion in national output

Question 15

Net withdrawals

Answer 15

There will be a contraction in national output

Question 16

Aggregate demand

Answer 16

The total demand in the economy

Question 17

Causes of the AD curve

Answer 17

• Real income effect
• Balance of trade effect
• Interest rate effect

Question 18

Real income effect

Answer 18

• As price level falls the real value of income increases
• Consumers can buy more so consumption increases

Question 19

Shifts in the AD curve

Answer 19

• Changes in real income and employment
• Changes in consumer and business confidence
• The wealth effect
• Changes in monetary/fiscal policy
• Changes to the exchange rate (depreciations cause net exports to rise)

Question 20

Wealth effect

Answer 20

• When asset prices increase people feel wealthier
• Increased confidence leads to increased borrowing to fun additional spending

Question 21

Components of AD

Answer 21

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

Question 22

Consumption

Answer 22

Consumer spending on real output

Question 23

Investment

Answer 23

Spending on capital goods

Question 24

Government spending

Answer 24

Spending by the government on its current day-to-day provision of public services

Question 25

The multiplier

Answer 25

When an initial increase to AD causes a further, larger increase as 1 agents spending is another's income

Question 26

SRAS

Answer 26

The total quantity of goods and services that firms in an economy are willing and able to produce at a given price level, assuming that costs of production (especially wages) are fixed

Question 27

Movements along the SRAS curve

Answer 27

Caused by shifts in AD

Question 28

Shifts in SRAS

Answer 28

Caused by changes in the conditions of supply: - Labour costs - Raw material costs - Government regulation/intervention

Question 29

LRAS

Answer 29

The total quantity of goods and services an economy can produce when it is fully using all its factors of production and when all prices are fully flexible.

Question 30

Shifts in LRAS curve