Paper 2 Macro

Question 1

Equation for Aggregate Demand?

Answer 1

C+ I+ G+ (X-M)

C = Consumer Expenditure
I = Investment 
G = Government Spending
X = Exports
M = Imports

Question 2

What is Aggregate Demand?

Answer 2

Total Level of planned real spending on goods and services produced in the economy

Question 3

How does a Change in Consumption affect aggregate demand?

Answer 3

Change in Personal Taxation –> Change in Disposable Income –> Change in Consumption

Change in Interest Rates –> Change in Levels of borrowing –> Change in Disposable income –> Change in Consumption

Decrease in Unemployment –> Increased Income –> Increased Consumption

Question 4

How does a Change in Investment affect AD?

Answer 4

Change in business taxation –> Changes in retained profits –> Changes in investment

Changes in interest rates –> Change in levels of borrowing –> Change in retained profits –> Change in Investment

Increased Confidence –> Increased Borrowing –> Increased Investment

Question 5

How does Government Spending affect AD?

Answer 5

Change in EG –> Change in Taxation Revenues –> Change in Spending on public and merit goods

Political Change –> Change in Government Spending due to differing political beliefs

Question 6

How do Exports and Imports affect AD?

Answer 6

Depends on
Relative Levels of inflation
Level of trade barriers
Exchange Rates
Economic Growth Overall

Question 7

Economic Growth?

Answer 7

The Percentage increase in real GDP over a period of time

Question 8

Economic Cycle?

Answer 8

Refers to periods of time where economic growth fluctuates.

Question 9

GDP?

Answer 9

Total value of output (G and S) produced in an economy over a period of time

Question 10

Real GDP?

Answer 10

The amount of goods and services produced by an economy each year having been adjusted for inflation

Question 11

Real GDP Per Capita?

Answer 11

Total Value of output produced in an economy over a period of time which is adjusted for inflation and expressed per head of population

Question 12

Nominal GDP?

Answer 12

The amount of goods and services produced by a country in a time period

Question 13

Total Growth in GDP?

Answer 13

Is Represented by the percentage change in the value of x over a period time

Question 14

Human Capital?

Answer 14

refers to the skill level and education of the workforce

Question 15

National income

Answer 15

The value of all income in the economy added together and includes income from wages, profits, royalties, dividends, interest and other income earned from abroas

Question 16

What does it mean by a recession?

Answer 16

Negative real GDP for Two Consecutive Quarters

Question 17

What does it mean when an economy is in a depression?

Answer 17

If Real GDP declines for eight consecutive quarters

Question 18

Benefits of EG?

Answer 18

Increase Employment

Increased SoL –> EG means people have an average of higher incomes

Reduced Poverty –> Increase in EG –> More Jobs –> More income

Improved Government Finances –>

Improved Production Possibilities –>

Question 19

How does EG lead to Increased Employment?

Answer 19

EG is the result of more output being produced –> Businesses are producing more –> Derived Demand for labour increases

Question 20

How does EG lead to improved Government Finances?

Answer 20

Increased Profit for Firms –> Increased Tax Revenue –> Increased Government Budget

Less Expenditure on Unemployment Benefits

As Standards of Living Improve –. Gov dont have to invest as much on hospitals as people can afford them –> Increased Budget for Government

Question 21

Problems caused by Economic Growth?

Answer 21

Unsustainable Growth

Environmental Damage

Regional Differences in inequality

Inflation

Question 22

Inflation?

Answer 22

The Persistent rise in the general prices of goods and services over a period of time

Question 23

Deflation?

Answer 23

Is a period of time where average prices are falling. This can be caused by a falling aggregate demand

Question 24

Aggregate Demand?

Answer 24

The total demand of an economy, including the total demand from consumers, businesses, government expenditure and foreign buyers

Question 25

CPI?

Answer 25

A system used to measure general price levels

Question 26

RPI (Retail Price Index)?

Answer 26

A system used to measure the general price level which includes house prices and rates (council tax)

Question 27

Demand Pull Inflation?

Answer 27

Inflation caused by too much demand in the economy, as a result of a lack of supply

Question 28

Cost-Push Inflation?

Answer 28

Inflation caused by rising business costs

Question 29

Interest Rates?

Answer 29

The Cost of borrowing and the reward for saving

Question 30

Purchasing Power of Money?

Answer 30

The amount of G and S that can be bought with a fixed amount of income

Question 31

Menu Costs?

Answer 31

The Costs to firms of having to update their catalogue /price lists due to repeated price changes

Question 32

Shoe Leather Costs?

Answer 32

The Costs to firms and consumers when searching for new suppliers when prices are increasing due to inflation

Question 33

Hyperinflation?

Answer 33

Very High levels of inflation when prices get out of control

Question 34

Impacts of Inflation on the Balance of Payments?

Answer 34

If domestic inflation is higher than other countries --> Domestic firms will find it harder to sell in overseas markets --> The Price of exported G and S will be rising and therefore the demand for exports is likely to fall --> The Balance of Payments will be Worse --> A fall in demand for exports will cause a rising in unemployment and a fall in GDP (Foreign Consumers wont buy domestic G and S) Domestic Consumers will buy foreign goods and services because --> Current Account Deficit)

Question 35

How does Inflation affect Unemployment?

Answer 35

If Domestic prices for G and S are Rising faster than international competitors Decrease in demand for domestic G and S because -As Prices increase people consume less because they have less income OR Some people save during Inflation Decrease in Demand will lead to Unemployment as firms will not need to produce as many G and S and therefore less workers are demanded

Question 36

Lay Off Workers?

Answer 36

Means to no longer employ someone because they are no longer needed and there is not enough work for them to do

Question 37

What is the ILO's Definition of an Unemployed Person?

Answer 37

Willing and able to work, activity seeking work but unable to find a job in the last 4 weeks and can start within the next two weeks OR out of work, have found a job and waiting to start within the next two weeks

Question 38

Cyclical Unemployment?

Answer 38

Unemployment caused by falling demand as a result of a downturn in the economy

Question 39

Structural Unemployment?

Answer 39

Unemployment caused by a fall in demand for products in an industry

Question 40

Frictional Unemployment?

Answer 40

When workers are unemployed for a short period of time as they move from one job to another

Question 41

Seasonal Unemployment?

Answer 41

Unemployment caused when seasonal workers, such as those in the holiday industry are laid off becaise the season has ended

Question 42

Voluntary Unemployment?

Answer 42

Unemployment resulting from people choosing not to work

Question 43

Income Inequality?

Answer 43

Differences in income that exist between different groups of earners in society, that is, the gap between the rich and the poor

Question 44

Absolute Poverty?

Answer 44

Where People do not have enough resources to meet all of their basic human needs

Question 45

Relative Poverty?

Answer 45

Poverty when relative to existing living standards of the average individual. It can also be when a person earns less than 50% or 60% of the median income of that economy