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100
Define nominal vs real GDP
Nominal GDP refers to measures in current prices while real GDP refers to values taking into account the change of prices over time.
100
What is the formula for AD?
AD=C+I+G+(X-M)
100
How do you calculate unemployment?
Number of unemployed/labour force x 100
100
What factors of production can be interpreted as a type of “capital”?
Physical capital, Labour - human capital, Land - natural capital.
100
Define income inequality
Income inequality refers to how unevenly income is distributed throughout a population. The less equal the distribution, the greater the income inequality.
100
Calculate the real rate of interest when the rate of inflation is 20% and the nominal interest rate is 35%.
Real rate of Interest = Nominal Interest - Rate of Inflation → 35% - 20% = 15%
200
Define GNI and distinguish it from GDP.
Gross national income (GNI) refers to the total income of a country’s residents regardless of whether the factors of production are located within a country’s borders or not.
GNI = real GDP + net income from abroad
It is different from GDP as GDP only refers to the income produced by the domestic factors of production within a country’s borders.
200
List 3 determinants of aggregate demand in consumption spending
Possible answers:
1. Changes in consumption spending
2. Changes in income taxes
3. Changes in the level of household indebtedness
4. Expectations of future price levels
5. Changes in wealth
200
Distinguish between umeployment and underemployment
While unemployment refers to people of working age who are actively seeking a job but who are not employed, underemployment refers to people of working age with part-time jobs when they would rather work full time, or with jobs that do not make full use of their skills and education.
200
What are three examples of common pool resources?
Forest, water, atmosphere, irrigation systems, fishing grounds.
200
Draw and explain Lorenz curve and Gini coefficient
The Lorenz curve represents the income distribution of a country; the further the Lorenz curve of a country’s income distribution strays away from the line of perfect equality (below the line), the less equal the income distribution.
The Gini coefficient is a summary measure of the Lorenz curve
A/(A+B)
Its value can be between 0 and 1, with 0 representing the most equal income distribution - the line of perfect equality, and 1 representing the most unequal distribution of income.
200
What are the goals of the Monetary Policy?
Low and stable rate of inflation (around 2%) - inflation targeting
Low unemployment
Targeting cyclical unemployment
Reduce business cycles fluctuations
Promote a stable economic environment for long-term growth
External balance - trade balance
300
Define and draw the business cycle.
Fluctuations in the growth of real output, or real GDP, consisting of alternating periods of expansion (increasing real output) and contraction (decreasing real output).
300
Factors that shift SRAS curve shifts: list 4
Possible answers:
1. Changes in wages
2. Changes in non-labour resource prices
3. Supply shocks
4. Changes in indirect taxes
5. Changes in subsidies offered to businesses
300
What are the causes of hyperinflation?
Inflationary spiral
300
How can short-term and long-term growth be shown using a PPC?
Short-term growth can be shown as a shift of a point inside or along the PPC, while long-term growth is a shift of a PPC itself.
300
List some causes of inequality of opportunity
Parents’ level of eduction and occupation
Parents’ level of income
Place of birth
Gender
Race and ethnicity
300
Draw the Keynesian model with the ratchet effect and give a brief explanation.
400
What does the circular flow of income model show?
The circular flow of income shows that in any given time period, the value of output produced in an economy is equal to the total income generated in producing that output, which is equal to the expenditures made to purchase that output.
400
How does the AD curve and national income correlate?
They do not affect each other
400
Using the Keynesian AD/AS diagram, explain the conflict between low unemployment and inflation.
The reason behind increasing inflationary pressures is that as aggregate demand increases, resources are used more fully, giving rise to bottlenecks that result in higher resource prices. This process gives rise to higher product prices and a rising price level.
400
What are the ways to achieve actual growth vs long-term growth?
Actual growth is achieved by reduction of unemployment and increased efficiency, while long-term growth is achieved by increases or improvements in quality of factors of production.
400
Distinguish direct from indirect taxes and provide an example of each
Direct taxes: Taxes paid directly to the government tax authorities by the taxpayer, including personal income tax, corporate income taxes, and wealth taxes.
Indirect taxes: Taxes levied on spending to buy goods and services where payment of some or all of the tax by the consumer is involved, they are paid to the government authorities by the suppliers (firms) indirectly. An example of this is the VAT taxation system used in Europe
400
Give three constraints of the Monetary Policy and two strengths.
Constraints
Cannot deal with cost-push inflation or stagflation as they are supply-side causes of instability and the monetary policy is a demand-side policy.
Ineffective in a deep recession.
May be inflationary.
Conflict between the government objectives.
Strengths
The Monetary Policy is flexible.
Interest rate changes are reversible.
Interest rate changes are incremental.
Short time lags.
Limited political constraints.
No crowding out.
No budget deficit or debt.
500
Differentiate the three approaches to measuring the value of national output (or aggregate output).
1. The expenditure method counts the total expenditure in an economy. Real GDP = C+I+G+(X-M)
2. The income approach counts the total income of all factors of production in an economy.
3. The output approach measures the values of total goods and services produced in an economy over a time period.
500
Why is the LRAS curve vertical?
Since wages are now changing to match output pricen changes, firms costs of production remain constant even when price level changes.
500
How can a weighted price index (CPI) be used to calculate the rate of inflation
final value A - initial value of A / initial value of A x100
OR: percent change of CPI from base year to current year
500
What are three main factors that can be affected by economic growth?
Living standards, Environment, Distribution of income.
500
To what extent is progressive taxation the most effective at reducing poverty?
Is most effective because solves problem of income inequality more efficiently (better distribution of income)
500
Outline the difference between government debt and government budget deficit.
Government debt: total amount money owed to external and domestic creditors. Accumulates over time.
Budget deficit:contributes to the government debt; short-term financial outcome that reflects the annual imbalance between government spending and government revenue. It does not take into account the cumulative effect of past deficits or surpluses. Running a deficit is a tool that governments use to manage their fiscal policy. Deficit can be used to stimulate economic growth during recessions or fund essential public services; surplus can be used to pay down debt or save for future needs.
600
Define and write the formula for the GDP deflator
The GDP deflator is a method to convert nominal GDP values to real GDP. This is done through the use of price indices to deduce changes in prices over time.
600
Using a Keynesian model, explain why the economy can't move in the long run
Keynesians believe that governments should solve problems in the short run, instead of waiting for market forces to fix problems in the long run. They advocate to adjust policies every few months, to keep the economy at full employment.
600
What's the difference between short-term and long-term growth?
Short-term caused mainly by increases in aggregate demand, while long-term caused by increase of potential output.
600
What are some difficulties when measuring poverty?
1. Poverty has different meanings and different approaches to measurement.
a) Does not include homeless people.
b) Urban areas have higher costs of living.
c) The information provided by the households that are surveyed is subjective, so that different people may have different opinions on their economic situation.
d) Poverty lines tell us how many people (or the percentage of people) fall below the poverty line, but do not provide any information on how much they fall below the poverty line.
2. Overestimation or underestimation of the national poverty line.
- Overestimation results in a larger proportion of a population whose income falls below this line. This can be
used by governments to argue in favour of receiving more foreign aid or multilateral assistance.
- Underestimation results in a smaller proportion of
a population with an income below this minimum.
This can be used by governments formulating national strategies for poverty reduction, in the event that they would like to spend less on poverty reduction than on other activities demanding government funding.
700
Draw a circular flow of income model with leakages and injections with examples of the different flows.
Examples of flows:
Income flow
Expenditure flow
Leakages and injections flow
-Leakages: Savings, taxes, spending on imports
-Injections: Investments, Government spending, spending on exports
700
Using a diagram show the impact of the price of oil increasing & explain what happens to the SRAS curve
700
Why is economic growth impossible with cost-push inflation? Demonstrate with a graph.
Cost-push inflation is caused by decrease in aggregate supply. The leftward shift in the SRAS curve leads to a higher price level and a fall in real GDP, or negative economic growth, also known as stagflation. Positive growth cannot exist at the same time as negative one does.
800
Why do national income statistics, such as GDP and GNI not accurately measure 1) the ‘true’ value of output and 2) economic well-being? Give three points for each.
Give an example of an alternative measure and explain it.
GDP and GNI don't measure 'true' output because...
Do not include non-market output
Do not include output sold in underground (parallel) markets
Do not take into account quality improvements in goods and services
Do not account for the value of negative externalities
Do not take into account the depletion of natural resources
Do not account for differing price levels across countries (in relation to international comparisons of GDP)
GDP and GNI don't measure 'true' economic well-being because...
Make no distinctions about the composition of output (e.g. a country has a lower per capita GDP than another but higher levels of social services and merit goods provision than the other)
Cannot reflect achievements in levels of eduction, health and life expectancy
Provide no information on the distribution of income and output
Do not take into account increased leisure
Do not account for quality of life factors
OECD Better Life Index
OECD consists of 36 member countries as of 2020 and they developed OECD Better Life Index
Purpose: to provide a more accurate representation of well-being and to form the basis of policies intended to improve the quality of life and well-ebin more generally
OR
Happiness Index
Began to be compiled in 2012 by United Nations Sustainable Development Network which is focused on gathering scientific and technological knowledge to encourage policies for sustainable development
Goal is to address the interdependent economics, social and environment challenges faced by the world.
Based on the following dimensions:
Real GDP per capita
Social support
Healthy life expectancy
Freedom to make life choices
Generosity
Perceptions of corruption
OR
Happy Planet Index (HPI)
Developed by New Economics Foundation (NEF), a British nongovernment organisation (NGO) devoted to exploring new economic models ‘based on equality, diversity and economic stability’
HPI is intended to be a measure of sustainable well-being calculated with this formula:
Life expectancy: based on UN data
Well-being: population’s satisfaction measured by data collected by Gallup World Poll
Inequality of outcomes: inequalities between people with regard to life expectancy and well-being
Ecological footprint: impact on the environment of each individual in society on average
800
Why does the debate between the Keynesian and new classical exist? (why cant we pick one)
Both views contain some merit backed by empirical evidence and different economists have different beliefs based on their educational / historical context.
800
What is "credit rating" and what does it affect? (HL)
Credit rating is the assessment of the ability of a borrower (country) to pay back its loans. It affects a country's ability to borrow in the future. A high credit rating increases its chances of borrowing, while low credit ratings create difficulties for a country to do so.
800
Calculate the amount of income tax and average tax rate paid by a family with an annual income level of 31 000€ based on this table:
(.09*15000)+(.22*6000)=2670
2670/31000=8.61%