Macroeconomics

Question 1

Circular flow of income in a closed economy w/o government

Answer 1

Households offer factor inputs -> households earn income -> households save/spend income on goods & services from firms that hire labour, capital and benefit from investment
Injection of investment and leakage of savings

Question 2

Circular flow of income in a closed economy w/ government

Answer 2

Households offer factor inputs ->
households earn income ->
household gets taxed ->
households spend income on goods & services from firms that hire labour, capital and benefit from investment + subsidies
Injection of investment (I) + subsidies (G) and leakage of savings (S) + tax (T)

Question 3

Circular flow of income in open economy

Answer 3

Households offer factor inputs ->
households earn income ->
household gets taxed ->
households spend income on goods & services from imports + firms that hire labour, capital and benefit from investment + subsidies + exports
Injection of investment (I) + subsidies (G) + exports (X) and leakage of savings (S) + tax (T) + imports (M)

Question 4

Value added by firms

Answer 4

1. Payment of wages and rental cost of capital
2. Interest paid to households for savings that were lended to the firms for investment
3. Supernormal profits for households that own the firms (after selling final goods)

Question 5

Equilibrium

Answer 5

Aggregate Income = Aggregate Expenditure

Question 6

Value added formula

Answer 6

Sales - Purchase from Other Firms
GNP = sum of individuals value added

Question 7

GDP

Answer 7

Y (aggregate output) = Aggregate Demand
C (consumption) + I (invesment) + G (gov spending) + (X - M) aka NX

Question 8

National Income Identity

Answer 8

Y (aggregate income) = C (consumption) + S (savings) + T (tax)

Question 9

Injection and Savings equilibrium in closed economy w/o government

Answer 9

Y (aggregate output) = Aggregate Demand
C + S = C + I
S (private savings) = I (investment)

Question 10

Injection and Savings equilibrium in closed economy w/ government

Answer 10

Y (aggregate output) = Aggregate Demand
C + S + T = C + I + G
S + (T - G) = I
National Savings = Invesment

Question 11

Injection and Savings equilibrium in open economy

Answer 11

Y (aggregate output) = Aggregate Demand
C + S + T = C + I + G + NX
(S - I) + (T - G) = NX
Private savings + Public Savings = Net Exports

Question 12

Nominal GDP and Real GDP

Answer 12

Nominal: measured at current prices
Real: measure at constant prices
Real GDP = Nominal GDP / (Deflator/100)

Question 13

Multiplier

Answer 13

Magnitude of equilibrium output change due to change in aggregate demand from consumer behaviour, taxation and imports

1/[1-c(1-t)+z]

Question 14

Fiscal Policy (Government)

Question 14

Monetary Policy (Central Bank)

Question 15

Consumption function

Answer 15

Interecept: amount people will consume when current income: 0, consumption to meet survival needs and savings would be negative

Slope: marginal propensity to consume (for every $, how much is used to consume)

Question 16

Aggregate demand schedule

Question 17

Leakages against injections

Question 18

Meaning of 45-degree line

Answer 18

Values on the x-axis are equal to the values on the y-axis indicating equilibrium and inflationary/deflationary gaps

Question 19

Marginal propensity to consume (c)

Question 20

Marginal propensity to import (z)

Question 21

Paradox of thrift

Question 22

Structural budget and inflation-adjusted budget

Question 23

When to use IS-MP model?

Answer 23

In a closed economy

Question 24

When to use AD-AS model?

Answer 24

In an open economy