Theme 2 AO1

Question 1

What is Monetary policy?

Answer 1

Monetary policy is where a country’s central bank will change the interest rates, supply of money or exchange rates to influence an economy

Question 2

what is GDP

Answer 2

The total value of all goods and services produced within an economy in a given period of time

Question 3

What is GDP per capita

Answer 3

the average GDP of each person in a country

Question 4

What are supply-side policies?

Answer 4

Policies that aim to increase the supply of goods in an economy

Question 5

What is the government budget

Answer 5

The statement of what the government plans to do in regards to taxation and spending.

Question 6

What is balance of trade?

Answer 6

The difference between the value of a countries total exports and total imports over a given period of time

Question 7

What is the CPI?

Answer 7

It is a way of measuring inflation by using the prices of a basket of popular goods and services over a particular period of time

Question 8

What is demand-pull inflation?

Answer 8

Higher demand > increased prices

Question 9

What is cost-push inflation?

Answer 9

Higher costs for businesses > higher prices being charge to account for higher costs.

Question 10

What is a budget fiscal deficit?

Answer 10

Government spending is greater than government revenue.

Question 11

What is expansionary fiscal policy?

Answer 11

When the government incentives economic growth by cutting taxes and increasing expenditure.

Question 12

What is contractionary fiscal policy?

Answer 12

When the government aims to reduce the budget deficit by increasing taxes and cutting spending.

Question 13

What is the difference between a budget deficit and national debt?

Answer 13

The national debt refers to the total amount of money that the government has borrowed over time and still needs to pay back. A budget deficit is the borrowing of 1 year.

Question 14

What is Marginal Propensity to Consume (MPC)?

Answer 14

It measures the persons attitude to spending. It ranges from 0-1. If it is 1 then a consumer will spend £1 for every extra £1 they receive in income.

Question 15

What is one type of demand-side policy?

Answer 15

Changing direct taxation on households to increase/ decrease consumption.

Question 16

What are the components (and %s) of AD?

Answer 16

Consumption (C) 65%, Business Investment (I) 15-20%, Government spending (G), Net trade (X-M)

Question 17

What is the most important component of AD?

Answer 17

Consumption, it is the largest part of AD. If consumption falls significantly, the economy would rapidly decline.

Question 18

In regards to investment, what does the term ‘animal spirits’ mean?

Answer 18

It emphasises the role of the ‘gut instinct’ on behaviour. If a recession is predicted, businesses may postpone investments.

Question 19

What does the AD curve show?

Answer 19

The relationship between overall price level in the economy and economic growth through real GDP. It slopes downwards because when inflation increases, GDP declines.

Question 20

What causes movement along the AD curve?

Answer 20

A change in price level across the economy.

Question 21

What causes a shift in the AD curve?

Answer 21

Any of the AD components change.

Question 22

What is gross investment?

Answer 22

The total value of all physical capital (machinery, equipment, buildings) that is produced or purchased within an economy over a specific period.

Question 23

What is the net investment calculation?

Answer 23

Gross investment value - value of depreciation of existing capital

Question 24

How does the rate of economic growth affect business investment?

Answer 24

When the economy is growing at a healthy rate, business will need to invest in new capital to produce more goods or services to meet the new levels of demand.

Question 25

How does the demand for exports affect business investment?

Answer 25

Greater demand for exports will incentivise businesses to grow to fulfil foreign orders.

Question 26

How does interest rates affect business investment?

Answer 26

Lower interest rates decrease the costs of borrowing for businesses

Question 27

How does access to credit affect business investment?

Answer 27

Greater access to credit allows businesses to take out more loans for investment.

Question 28

How do government influences affect

Answer 28

Government policies such as subsidies can incentivise businesses to invest more.

Question 29

What is the trade cycle?

Answer 29

The fluctuations in economic activity that an economy experiences over a period of time.

Question 30

What are the 4 phases of the trade cycle?

Answer 30

Expansion (rising economic activity), Peak (highest economic activity), Contraction (Economic activity declining), Trough (Lowest economic activity).

Question 31

How does the trade cycle influence government expenditure?

Answer 31

The government will spend more in the Trough to improve the economy and less in the Peak as it is already high.

Question 32

What is fiscal policy?

Answer 32

Government decisions about spending and taxation to influence the economy.

Question 33

What is real income?

Answer 33

The income of individuals or nations adjusted to inflation.

Question 34

How does the change in real incomes affect net trade?

Answer 34

If income increases, there will be more imports and net trade will decrease.

Question 35

What are exchange rates?

Answer 35

The value of one currency for the purpose of converting it to another currency.

Question 36

How does changing exchange rates affect net trade?

Answer 36

If a currency depreciates, X is cheaper and M is more expensive.

Question 37

What is the state of the world economy?

Answer 37

The overall health and trends of the global economy.

Question 38

How does the change in the state of the global economy affect net trade?

Answer 38

If the global economy is experiencing growth, there will be higher exports for countries that are exporters.

Question 39

Define degree of protectionism.

Answer 39

Government actions that restrict international trade to protect domestic businesses.

Question 40

How does the degree of protectionism affect net trade?

Answer 40

The higher the degree, the less imports a country will have.

Question 41

What non-price factors affect net trade?

Answer 41

Quality and innovation, branding, trade agreements.

Question 42

What is a progressive tax?

Answer 42

A tax that marginally rises as income rises, causing a rise in the average tax rate.

Question 43

What is a proportional tax?

Answer 43

The marginal rate of tax is constant leading to a constant average tax rate.

Question 44

What is a regressive tax?

Answer 44

The rate of tax paid falls as incomes rise, the average rate of tax is lower for people on higher incomes.

Question 45

How does MPC affect AD.

Answer 45

The higher the MPC, the greater the consumption.

Question 46

How does income tax affect AD?

Answer 46

The higher the income tax, the less consumption.

Question 47

How do high levels of saving affect consumption and AD?

Answer 47

Higher saving means less consumption and less AD.

Question 48

How can a government increase investment to increase AD?

Answer 48

Decrease interest rates, Increase access to credit, Decrease regulations.

Question 49

What is CPIH?

Answer 49

Similar to CPI but also uses costs associated with owning a home.

Question 50

What is nominal GDP?

Answer 50

The monetary value of all goods and services produced in the economy (GDP at current prices)

Question 51

What is real GDP?

Answer 51

The nominal value of GDP adjusted for inflation (GDP at constant prices)

Question 52

What is the multiplier effect?

Answer 52

An injection into the economy will have a greater impact on incomes in the long run.

Question 53

What is the relationship between the multiplier and AD?

Answer 53

AD will increase x the multiplier rather than simply the initial injection.

Question 54

Define aggregate demand.

Answer 54

The total demands or expenditure in an economy at any given price.