Macro

Question 1

What is macroeconomics ?

Answer 1

• study of economy as a whole

Question 2

Why do economists use models ?

Answer 2

• economy is complex
• so economists use models to simplify + make sense of economy

Question 3

What does the ‘circular flow of income model’ show ?

Answer 3

• how income, output + expenditure circulate between households, firms, governments, financial sector + foreign sector

Question 4

Who are households ?

Answer 4

• employees

Question 5

Who are firms ?

Answer 5

• institutions / employers

Question 6

Name 4 basic flows of the circular flow of income model

Answer 6

1. households > firms (a)
2. firms > households (a)
3. households > firms (b)
4. firms > households (b)

Question 7

What does the basic flow of households > firms provide ?

Answer 7

• factors of production
• money spent on goods + services

Question 8

What are factors of production ?

Answer 8

• labour
• land
• capital
• entrepreneurship

Question 9

What are: labour, land, capital and entrepreneurship examples of ?

Answer 9

• factors of production

Question 10

What does the basic flow of firms > households provide ?

Answer 10

• firms pay: wages, rent, interest, profit
• firms provide goods + services for households to buy

Question 11

What’s the key idea of the circular flow of income model ?

Answer 11

• money circulates continuously, keeping the economy functioning

Question 12

What is a closed economy ?

Answer 12

• an economy with no imports or exports. All goods, services, and money circulate internally.

Question 13

What does the outer circle of the circular flow of income model show ?

Answer 13

• firms pay households income for supplying factors of production
• households spend this income on goods + services produced by firms

Question 14

What does the inner circle of the circular flow of income model show the flow of:

Answer 14

• households own the factors of production + supply them to firms
• firms use these inputs to produce (output) goods + services

Question 15

What do firms pay households for ?

Answer 15

• factors of production

Question 16

What do households spend this income on ?

Answer 16

• goods + services produced by firms

Question 17

What is the core identity of circular flow of income model

Answer 17

• income = output = expenditure
• (one person’s spending is another person’s)

Question 18

What is the equation for national income / total output (Y) ?

Answer 18

Y = C + I + G + (X-M)

Question 19

In the national income equation: Y = C + I + G + (X-M), what does C represent ?

Answer 19

• Consumption (household spending)

Question 20

In the national income equation: Y = C + I + G + (X-M), what does I represent ?

Answer 20

• Investment (firm spending on capital)

Question 21

In the national income equation: Y = C + I + G + (X-M), what does G represent ?

Answer 21

• government spending

Question 22

In the national income equation: Y = C + I + G + (X-M), what does X srepresent ?

Answer 22

• exports

Question 23

In the national income equation: Y = C + I + G + (X-M), what does M represent ?

Answer 23

• imports

Question 24

What’s the letter representing national income ?

Answer 24

• Y

Question 25

What’s the letter representing consumption (household spending) ?

Answer 25

- C

Question 26

What’s the letter representing investment ?

Answer 26

- I

Question 27

What’s the letter representing government spending ?

Answer 27

- G

Question 28

What’s the letter representing exports ?

Answer 28

- X

Question 29

What’s the letter representing imports ?

Answer 29

- M

Question 30

Define leakages

Answer 30

- income that exits the circular flow

Question 31

Name 3 leakages

Answer 31

- savings (S) - taxes (T) - imports (M)

Question 32

Define savings (S)

Answer 32

- household income not used to buy goods or services

Question 33

Define taxes

Answer 33

- government levies on households, firms, goods + services

Question 34

Define imports (M)

Answer 34

- goods produced abroad + sold domestically

Question 35

Define injections

Answer 35

- income that enters the circular flow

Question 36

Name 3 injections

Answer 36

- investment (I) - government spending (G) - exports (X)

Question 37

Define spending on capital goods (investment)

Answer 37

- Expenditure by firms or the government on capital goods (machines, tools, buildings, technology, infrastructure) that are used to produce other goods + services in the future

Question 38

Define government spending

Answer 38

- spending on public services (eg healthcare + education)