Demand and Supply
What is the law of demand?
The inverse relationship between price and quantity demanded.
What does price elasticity of demand (PED) measure?
The responsiveness of quantity demanded to a change in price.
Name one macroeconomic objective.
Low unemployment, low inflation, economic growth, or equity in income distribution.
What is fiscal policy?
The use of government spending and taxation to influence the economy.
What is any benefit from international trade?
It allows countries to specialize in the production of goods and services where they have a comparative advantage.
Improvements in standards of living, development, any other relevant benefit.
Name one non-price determinant of demand
Income, tastes and preferences, future price expectations, price of related goods, or number of consumers.
What does a PED value greater than 1 indicate?
Demand is price elastic.
What does the Phillips curve illustrate?
The trade-off between unemployment and inflation in the short run.
What is the main goal of expansionary fiscal policy?
To increase aggregate demand and stimulate economic growth.
What is a tariff?
A tax imposed on imported goods to protect domestic industries or raise revenue.
Explain the law of diminishing marginal utility.
As additional units of a good are consumed, the satisfaction gained from consuming each extra unit decreases.
What is the formula for calculating income elasticity of demand (YED)?
YED = (% change in quantity demanded) / (% change in income).
What is the natural rate of unemployment?
The sum of structural, seasonal, and frictional unemployment when the economy is at full employment.
How does the central bank implement contractionary monetary policy?
By increasing interest rates or reducing the money supply.
What is the difference between absolute advantage and comparative advantage?
Absolute advantage refers to a country's ability to produce more of a good with the same resources, while comparative advantage is the ability to produce a good at a lower opportunity cost.
What happens to the demand curve when income increases for a normal good?
The demand curve shifts to the right.
How does the elasticity of demand for luxury goods differ from that for necessities?
Luxury goods have high income elasticity, while necessities have low income elasticity.
How is real GDP calculated from nominal GDP?
Real GDP = Nominal GDP / Price Index (deflator).
What is the Keynesian multiplier? Formula accepted too.
The ratio of the change in GDP to the initial change in spending that caused it.
1/1-MPC or 1/MPW
What are the main components of the balance of payments?
The current account, the capital account, and the financial account.
Describe the difference between a movement along the supply curve and a shift of the supply curve.
A movement along the supply curve occurs due to price changes, while a shift occurs due to non-price determinants like changes in technology or input costs
Why is the PES for primary commodities usually lower than for manufactured goods?
Because primary commodities often have long production times and less flexibility in resource allocation.
What is the difference between demand-pull and cost-push inflation?
Demand-pull inflation occurs when aggregate demand exceeds aggregate supply, while cost-push inflation occurs when production costs rise, reducing supply .
What is quantitative easing?
A monetary policy tool where the central bank purchases financial assets to inject liquidity into the economy .
Explain how an appreciation of a country’s currency affects its exports and imports.
An appreciation makes exports more expensive for foreign buyers and imports cheaper for domestic consumers, potentially reducing exports and increasing imports.