Measures of Economic Performance
What is meant by the phrase "real GDP per capita"?
Real = accounting for inflation
GDP = value of all goods and services produced in an economy over a period of time
Per capita = per person
What is the difference between "demand pull" and "cost push" inflation?
Demand pull = AD shifts outwards
Cost push = SRAS shifts inwards
Identify and explain three types of unemployment.
Structural unemployment
Frictional unemployment
Seasonal unemployment
Cyclical unemployment
Real wage unemployment
Name the seven macroeconomic objectives
Inflation/Growth/Trade balance/Fiscal Balance/Unemployment/Environmental sustainability/Equality
What is PPP, and why is it used?
Purchasing Power Parity figures use the Nominal GDP figure of a country, and then adjusts this to reflect the cost of living in that country against the cost of living in another country.
How would an increase in home prices affect AD?
The wealth effect! Consumer confidence increases, consumption increases.
Identify one way inflation can negatively affect savers.
Inflation erodes the real value of money, so if interest rates on savings are lower than the inflation rate, the real return on savings becomes negative, reducing the purchasing power of savers.
Give an example of an interventionist and free-market supply side policy.
Education provision/infrastructure/government investment loans
Cutting income or corporate tax rates/reduce trade union power/remove regulations
Identify the three injections and three leakages in the circular flow of income.
Injections = Exports, investment, government spending.
Leakages = Imports, savings, taxes
In what situation could "crowding out" be used as a criticism of economic growth?
When AD/LRAS is driven by an increase in government borrowing and spending, reducing loans and factors available to the private sector.
What is the CPI, and how is it used to calculate inflation?
Consumer price index, which is a weighted average of items on which people spend their money. Weights are assigned to each item the household buys. The price change for each good is then multiplied by their weights to give the price index.
What is the difference between fiscal and monetary policy?
Fiscal policy concerns taxation and spending, monetary policy concerns the control of the money supply (IR, XR, QE)
How are index numbers calculated, and why are they used?
Index value = New number/base number X 100
To make raw data easier to compare, base year has a value of 100.
How does the marginal propensity to consume affect the multiplier?
The higher the MPC, the greater the size of the multiplier.
What is the difference between being unemployed, underemployed, and economically inactive?
An unemployed person is actively looking but unable to find work.
An underemployed person is either employed in an industry below their skillset or for less hours than they desire.
An economically inactive person does not have a job and is not seeking a job. This includes discouraged workers as well as students, etc.
Name two negative effects of expansionary fiscal policy.
1. If there is no spare capacity, expanding AD will only lead to inflation in the long run.
2. Significant government spending could increase the deficit, harming confidence as long-term debt increases.
Name three limitations of using real GDP per capita at PPP to compare countries.
Black market goods.
Distribution of income (inequality).
Standard of living (gender/racial equity, wellbeing)
Statistical errors.
GDP only shows income, not wealth!
What is the difference between Keynesian and Classical LRAS?
Keynes believed that the economy could run with output gaps in the long-term. Classicalists believed that in the long run, the economy would always run at full employment.
Explain how a fall in the exchange rate can lead to inflation.
A fall in the exchange rate makes imports more expensive, raising the cost of imported goods and raw materials. This can cause cost-push inflation as firms pass these costs onto consumers.
What is quantitative easing?
The buying of government bonds or financial assets by the central bank in order to increase the liquidity of money (money supply) and stimulate the economy.