Macro Objectives
Which indicator measures economic growth?
The percentage change in real gross domestic product (RGDP).
Name one leading indicator of the business cycle.
Any suitable example: consumer confidence, business investment intentions, building approvals, new motor vehicle registrations, or inventory levels when used prospectively.
Name the five sectors in the five-sector circular-flow model.
Households, firms, financial sector, government sector, and overseas sector.
Which curve is vertical at potential output in the Monetarist AD-AS model?
Long-run aggregate supply (LRAS).
Name the two demand-management policies.
Fiscal policy and monetary policy.
Distinguish price stability from a fall in the price level.
Price stability means low and stable inflation; a falling price level is deflation.
In which phase are RGDP commonly falling and unemployment rising?
Contraction (or recession/downturn, if that is the class terminology).
Classify saving, taxation, and imports as leakages or injections.
All three are leakages.
What happens to the price level and real output in the short run when AD increases on an upward-sloping SRAS?
Both the price level and real output rise, other things equal.
Give one expansionary fiscal-policy action and its direct AD effect.
For example, higher government spending or lower taxation; it increases aggregate demand.
Inflation is 3.8% while RGDP growth is 0.6%. Identify the two macroeconomic concerns.
Price stability is under pressure from relatively high inflation, while weak RGDP growth indicates subdued economic growth.
Consumer confidence and building approvals have fallen for six months, but unemployment is unchanged. What do the indicators suggest?
A future slowdown or movement towards contraction: the leading indicators weaken before the lagging unemployment rate necessarily changes.
Government spending rises by $2 billion while taxation rises by $0.5 billion, with other flows unchanged. What is the initial net effect on injections relative to leakages?
Injections rise by $2 billion and leakages by $0.5 billion, so the initial net expansionary effect is $1.5 billion.
An oil-price shock raises firms' production costs. Identify the curve shift and the short-run macroeconomic effects.
SRAS shifts left: the price level rises, real output falls, and unemployment is likely to rise.
The economy is contracting with low inflation. Recommend a monetary-policy stance and give the transmission logic.
Expansionary monetary policy: lower interest rates can encourage consumption and investment (and may affect the exchange rate), increasing AD, output, and employment.
The unemployment rate falls, but the labour force participation rate also falls sharply. Why might the unemployment rate overstate improvement in full employment?
People who stop looking for work leave the labour force and are not counted as unemployed, so the rate can fall without more people being employed.
Retail sales rise, firms run down inventories, and investment intentions strengthen. Analyse the likely movement in the cycle.
Demand is strengthening; falling inventories may prompt firms to raise production, while stronger investment intentions support an expansion.
Why does a higher marginal propensity to consume (mpc) increase the expenditure multiplier?
More of each additional round of income is respent, so less leaks into saving and the cumulative change in income/expenditure is larger.
Starting below potential output, explain the short-run and long-run Monetarist adjustment after an increase in AD.
In the short run, output and the price level rise. If output exceeds or moves towards potential, wage/cost adjustment shifts SRAS left until output returns to LRAS, leaving a higher price level in the long run.
A government funds worker retraining during a downturn. Explain why this may have both demand- and supply-side effects.
Current spending can add to AD, while improved skills/productivity and reduced structural unemployment can increase SRAS/LRAS over time.
Explain one likely tension if demand-management policy is used to reduce unemployment when the economy is already near NAIRU.
Stronger AD may push unemployment temporarily below NAIRU, but create accelerating inflation; gains in employment may be difficult to sustain without supply-side improvement.
Why is it risky to classify the business-cycle phase from one indicator alone?
Indicators can move at different times and be affected by one-off factors. A reasoned classification should combine leading, coincident, and lagging evidence and acknowledge ambiguity.
Evaluate why an intended stimulus may produce a smaller multiplier effect in a very open economy.
A larger share of extra spending may purchase imports, creating an overseas leakage. The domestic rounds of income and expenditure are therefore weaker, limiting RGDP and employment effects.
Compare an AD increase with an LRAS increase against the three macroeconomic objectives.
An AD increase may raise short-run growth and employment but risks inflation and does not permanently raise potential output. An LRAS increase raises potential output, supports sustainable growth and employment, and reduces inflationary pressure, though it may take time.
Evaluate whether demand or supply management is more effective when inflation results from a persistent negative supply shock.
Demand restraint may reduce inflation but worsen output and unemployment. Supply measures target productive capacity/costs and may improve the trade-off, but often act slowly and can be costly or uncertain. A balanced recommendation should reflect timing and objectives.