Unit 2 Macroeconomics

Question 1

aggregate demand

Answer 1

total spending in the economy, made up of consumption spending, Investment spending, government spending and net export spending

Question 2

aggregate supply

Answer 2

total amount of domestic goods and services supplied by businesses and the government

Question 3

business cycle

Answer 3

diagram showing the cyclical fluctuations in economic activity; the business cycle shows that economies typically move through a pattern of economic growth with the phases: recovery, boom, recession, trough

Question 4

central bank

Answer 4

government’s bank; institution that is responsible for an economy’s monetary policy

Question 5

circular flow of income model

Answer 5

simplified model of the economy that shows the flow of money through the economy

Question 6

consumer price index

Answer 6

measure of the average rate of inflation which calculates the change in the price of a representative basket of goods and services purchased by the ‘average’ consumer

Question 7

consumption

Answer 7

spending by households on consumer goods and services

Question 8

cost-push inflation

Answer 8

persistent increase in the average price level as a result of increases in the costs of production and a decrease in aggregate supply

Question 9

crowding out

Answer 9

situation where the government spends more than it receives in revenue and needs to borrow money, forcing up interest rates and ‘crowding out’ private investment and private consumption

Question 10

cyclical unemployment

Answer 10

unemployment that exists when there is insufficient aggregate demand in the economy and wages do not fall to compensate for this; it is usually associated with a recession

Question 11

deflation

Answer 11

persistent fall in the average price level

Question 12

demand-pull inflation

Answer 12

persistent increase in the average price level as a result of increases in aggregate demand

Question 13

demand-side policies

Answer 13

policies to change the level of aggregate demand in the economy in order to achieve macroeconomic goals

Question 14

direct taxation

Answer 14

taxation imposed on people’s income or wealth, and on firm’s profits

Question 15

distribution of income

Answer 15

concerned with how much of an economy’s total income different individuals receive

Question 16

economic growth

Answer 16

growth of real output in an economy over time, usually measured as growth in GDP

Question 17

fiscal policy

Answer 17

government policies concerning its taxation and expenditure; fiscal policy may be used to manage the level of aggregate demand and may be expansionary or contractionary

Question 18

frictional unemployment

Answer 18

unemployment that occurs when people entering the workforce after leaving education, or people who have left one job and are searching for a new job

Question 19

full employment

Answer 19

exists when the number of jobs available in an economy is equal to or greater than the number of people actively seeking work

Question 20

full employment level of output

Answer 20

level of output that is produced by the economy when all factors of production are employed

Question 21

gross domestic product GDP

Answer 21

total money value of all final goods and services produced in an economy in one year

Question 22

GDP per capita

Answer 22

total money value of all final goods and services produced in an economy in one year per head of population

Question 23

Gini coefficient

Answer 23

coefficient that measures the income inequality; it is the ratio of the area between the Lorenz curve and the line of absolute equality to the total area under the line of equality; the higher the figure, the more unequal the income distribution

Question 24

gross national product GNP/ gross national income GNI

Answer 24

total money value of all final odds and services produced in an economy in one year, plus net property income from abroad

Question 25

government spending

Answer 25

spending by governments on goods and services

Question 26

green GDP

Answer 26

a measure of the total output of an economy having taken into account the environmental consequences (externalities) involved in the production of that output

Question 27

indirect taxation

Answer 27

tax on expenditure; it is added to the selling price of a good or service

Question 28

inflation

Answer 28

persistent increase in the average price level

Question 29

inflationary gap

Answer 29

gap that occurs when macroeconomic equilibrium occurs at a level that is above the full employment level of output

Question 30

infrastructure

Answer 30

capital typically provided by the government to make economic activity possible such as transportation and communications systems, water and power lines, and public institutions including schools

Question 31

injections

Answer 31

investment, government spending and export revenues that add spending to the circular flow of income

Question 32

interest rate

Answer 32

price of credit or borrowed money

Question 33

investment

Answer 33

spending by firms in capital goods

Question 34

Keynesian AS model

Answer 34

model showing the LRAS curve has three distinct phases; macroeconomic equilibrium may occur at a level of output that is less than full employment, and suggests that the economy remains at this level of output when there is no government intervention

Question 35

labour union

Answer 35

organization of workers whose goals include the improvement of working conditions and payments to workers

Question 36

leakages

Answer 36

savings, taxes and import spending that remove spending from the circular flow of income

Question 37

long-run aggregate supply LRAS

Answer 37

AS that is dependent upon the resources in the economy and that can only be increased by improvements in the quantity or quality of factors of production

Question 38

Lorenz curve

Answer 38

curve illustrating the distribution of income in an economy; the further the curve is from the line of absolute equality, the more unequal is the distribution of income

Question 39

monetary policy

Answer 39

government policies concerning an economy’s official interest rate and money supply; monetary policy may be used to manage the level of aggregate demand and may be expansionary or contractionary

Question 40

multiplier

Answer 40

amount by which an injection is multiplied in order to calculate the final addition to national income as a result of the injection

Question 41

natural rate of unemployment

Answer 41

rate of unemployment that is exists when the economy is at full employment level of output

Question 42

Neo classical AS model

Answer 42

model showing that the LRAS curve is vertical at the full employment level of output

Question 43

net national income NNP

Answer 43

GNP minus depreciation (capital consumption)

Question 44

nominal GDP

Answer 44

GDP, not adjusted for inflation

Question 45

Phillips curve in the short run

Answer 45

curve that illustrates the view that there is a short-run inverse relationship between the inflation rate and the unemployment rate

Question 46

Phillips curve in the long run

Answer 46

vertical line at the natural rate of unemployment that illustrates the view that there is no trade-off between the inflation rate and the unemployment rate

Question 47

privatisation

Answer 47

type of supply-side policy where the government sells public assets to the private sector

Question 48

progressive taxation

Answer 48

system of direct taxation where as income increases, the fraction of income paid as taxes increases

Question 49

proportional taxation

Answer 49

system of direct taxation where as income increases, the fraction of income paid as taxes remains constant

Question 50

real GDP

Answer 50

GDP, adjusted for inflation

Question 51

real wage unemployment

Answer 51

unemployment that exists when real wages in the economy get pushed up above their equilibrium, either by the government or by trade unions

Question 52

recessionary gap

Answer 52

gap that occurs when macroeconomic equilibrium occurs at a level that is less than the full employment level of output

Question 53

regressive taxation

Answer 53

system of direct taxation where as income increases, the fraction of income paid as taxes decreases

Question 54

savings

Answer 54

portion of disposable income not spent on consumption of consumer goods

Question 55

seasonal unemployment

Answer 55

unemployment that exists when people are out of work because their usual job is out of season, e.g. ski instructor in summer

Question 56

short-run aggregate supply SRAS

Answer 56

AS that varies with the level of demand for goods and services and that is shifted by changes in the costs of factors of production

Question 57

stagflation

Answer 57

situation where an economy facing stagnant growth, with high rates of unemployment and high rates of inflation

Question 58

structural unemployment

Answer 58

unemployment that exists when in the long term the pattern of demand and production methods change and there is a permanent fall in the demand for a particular type of labour

Question 59

supply-side policies

Answer 59

policies to shift the long-run aggregate supply curve to the right, thus increasing potential output in the economy

Question 60

transfer payments

Answer 60

payment from the government that is received when there is no good or service exchanged, e.g. unemployment benefits; transfer payments are a means of redistributing income in an economy

Question 61

underemployment

Answer 61

exists when workers are carrying out jobs for which they are overqualified or hen workers are employed part-time, even though they are available for full-time employment

Question 62

unemployment rate

Answer 62

number of unemployed workers expressed as a percentage of the total workforce

Question 63

unemployment

Answer 63

state of being without work, but wiling and able to work, and actively looking for a job