Macro

Question 1

Balanced budget multiplier

Answer 1

An increase in government spending accompanied by a equal rise in taxes results in an increase in output

Question 2

Fine tuning

Answer 2

Frequent discretionary adjustments to policy implementation

Question 3

Stabilisation policy

Answer 3

Deliberate govt actions aimed at keeping actual GDP close to potential

Question 4

Automatic stabilisers

Answer 4

Mechanisms in the economy that reduce the response of GDP to shocks

Question 5

Easy money

Answer 5

Monetary policy stance in which the central bank increases the money supply and allows the interest rate to fall

Question 6

Efficiency wage theory

Answer 6

Firms may rationally pay wages above the market clearing to raise productivity

Question 7

Efficiency wage theory - 4 mechanisms

Answer 7

Worker effort - reduce shirking
Worker turnover - reduce costly training
Worker quality - better applicants
Worker health - better nutrition and productivity

Question 8

Implications of efficiency wage theory

Answer 8

Moral hazard - arises after hiring
Adverse selection - arises before hiring

Question 9

Cyclical unemployment

Answer 9

Caused by insufficient AD as labour is a derived demand. Wages are sticky downward which prevents market clearing.
Policy response is expansionary policy.

Question 10

Classical Unemployment - Real wage

Answer 10

Occurs when real wages are too high due to unions or min wage - creates excess labour supply

Question 11

Structural unemployment

Answer 11

Declining demand for particular skills
Persists due to:
skills mismatch
location mismatch
resistance to wage cuts
gender segmentation

Question 12

Frictional Unemployment

Answer 12

Short term unemployment arising from job search and matching - influenced by the replacement ratio and duration of benefits

Question 13

Replacement ratio

Answer 13

Ratio of unemployment benefits to income

Question 14

Policy induced shocks

Answer 14

Monetary tightening to curb inflation or fiscal stimulus to fight recession

Question 15

Supply shocks

Answer 15

oil prices increasing or tech breakthroughs

Question 16

Why do cycles recur?

Answer 16

Policy lags
Authorities overshoot
Expansion causes inflation which requires contraction

Question 17

Multiplier

Answer 17

Extra autonomous spending creates a larger rise in income through consumption feedback via MPC

Question 18

Expectations augmented Phillips curve

Answer 18

Workers and firms adjust wages and prices based on expected inflation. SR trade off exists only while expectations lag. Once expectations adjust, inflation rises without permanent employment gains.

Question 19

Transmission mechanism from money to AD

Answer 19

CB increases MS
Interest rates fall
Rise in investment, borrowing and asset prices
Wealth effect causes confidence and consumption rise
Exchange rate depreciation
Net exports rise
AD shifts right

Question 20

Current income hypothesis

Answer 20

Consumption is determined by current income
Most income is spent in SR
Doesn’t consider future expectations

Question 21

Permanent income hypothesis

Answer 21

Consumption depends on expected lifetime income
Consumption smoothing
Relies on access to credit

Question 22

Okuns law

Answer 22

Relationship showing that a 1% rise in unemployment above the natural rate is associated with roughly a 2% fall in GDP below potential

Question 23

Natural rate

Answer 23

Rate when the labour market is at equilibrium - removing cyclical unemployment

Question 24

Accelerator model

Answer 24

Changes in investment spending are a multiplied response to changes in national income or demand. Investment depends positively and more than proportionally on the change in GDP not its level

Question 25

Real business cycle theory

Answer 25

Theory that short term fluctuations in total output reflect fluctuations in potential output rather than demand shocks

Question 27

Classical model

Answer 27

School of thought that assumes wages are fully flexible. Economy is expected to return automatically to full employment without the need for demand management policies.

Question 28

Money illusion

Answer 28

When individuals confuse nominal variables with real variables

Question 29

SRAS schedule

Answer 29

The prices firms charge at each level of output given the nominal wages they have to pay, which are fixed in SR. Typically upward sloping because higher output increases marginal costs

Question 30

Real Balance Effect (Pigon effect)

Answer 30

When prices fall, the real value of money balances rises, increasing household wealth and consumption so AD rises

Question 31

IS schedule

Answer 31

The combinations of income and interest rates for which the goods market is in equilibrium Downward sloping

Question 32

LM schedule

Answer 32

The combinations of income and interest rates for which the money market is in equilibrium Upward sloping Depends on sensitivity of Md to income and interest rates

Question 33

Crowding out

Answer 33

Increased govt spending causes an increase in AD and interest rate so private investment falls

Question 34

Sacrifice ratio

Answer 34

Percentage of GDP which must be sacrificed in order to reduce inflation by 1%

Question 35

Shoe leather costs

Answer 35

The costs that people incur to minimize their cash holdings during times of high inflation

Question 36

Unemployment responds to GDP with a 2 quarter lag due to...

Answer 36

Labour hoarding Uncertainty over whether it is permanent or temporary

Question 37

Frisch Slutsky paradigm

Answer 37

Economic fluctuations like business cycles are caused by an impulse mechanism (random shocks) that triggers a propagation mechanism (the endogenous dynamics of the economy that causes the initial shock to develop into a full blown cycle)

Question 38

Why booms persist

Answer 38

Inflation inertia - wage contracts adjust slowly Over investment during expansions Lower unemployment = greater consumption Policy response is delayed

Question 39

Why recessions persist

Answer 39

Unemployment hysteresis as long term unemployed lose skills Weak demand discourages investment Credit constraints