Macroeconomics

Question 1

Aggregate demand=?

Answer 1

AD=C+I+G+(X-M)
consumption+investment+government spending+(export-import)

Question 2

Difference between AS classical theory and Keynesian theory?

Answer 2

Classical theory: self-adjustment to full employment
Keynesian theory: government intervention, not always full employment

Question 3

Definition of inflation?

Answer 3

A sustained increase in price level overtime.

Question 4

Measurement of inflation?

Answer 4

CPI (consumer price index)
A weighted basket of goods and services

Question 5

Reasons for inflation?

Answer 5

• Demand-pull inflation
• Cost-push inflation

Question 6

What is demand-pull inflation?

Answer 6

Aggregate supply cannot increase as equivalent as increase in aggregate demand.

Question 7

Reasons for cost-push inflation?

Answer 7

• Exchange rate decrease–>Px decrease, Pm increase relatively, Qx increase, Qm decrease, (X-M) increase–>AD increase–>demand-pull inflation
• excessive growth of money supply

Question 8

Consequences of inflation?

Answer 8

Positive:
- borrower
- importer
- encourage C&I–>AD increase
- increase GDP/output
- PED＜1–>revenue increase
Negative:
- lender
- saver
- fixed-income suffer
- exporter
- menu-cost: cost on reflecting higher price
- shoe-leather cost: cost on finding cheaper materials and better deals
- unemployment
- BOP deficit

Question 9

Policy to correct inflation?

Answer 9

Demand-side policy: fiscal (by gov.) & monetary (by central bank) policy
Supply-side policy: market-based & interventionist

Question 10

Examples of fiscal policy?

Answer 10

• Tax increase
• Government spending

Question 11

Examples of monetary policy?

Answer 11

• interest rate increase
• Exchange rate increase

Question 12

Examples of market-based policy?

Answer 12

• privatization
• deregulation
• labor reform
• taxation

Question 13

Examples of interventionist policy?

Answer 13

• education
• healthcare
• infrastructure (transportation and telecommunication)

Question 14

Limitation of GDP?

Answer 14

• inaccuracy for statistics
• population
• non-price factor–>quality of products
• externality: pollution/conjestion/depletion of natural resources
• income distribution

Question 15

Definition of recession?

Answer 15

A period of two or more consecutive quarters of negative economic growth.

Question 16

Indicators of living standard?

Answer 16

• real GDP per capita
• HDI (human development index)
• PPP (purchasing power parity)

Question 17

How to calculate unemployment rate?

Answer 17

unemployed/(unemployed+employed)

Question 18

Causes of unemployment?

Answer 18

• Friction unemployment
• Seasonal unemployment
• Structural unemployment
• capital-intensive replacing labor-intensive
• technological reasons
• cyclical unemployment, real wage inflexibility
• classical unemployment (unsatisfied with wages)
• voluntary unemployment

Question 19

Effects of unemployment?

(Hint: five dimensions)

Answer 19

Workers:
income decrease–>purchase power decrease

Business:
Supply of labor decrease–>wage increase–>cost increase–>output decrease

Government:
tax revenue decrease (direct tax & indirect tax)
G increase–>social welfare/unemployment benefits

Social problem:
Crime rate increase; uneven distribution of income

Economy:
export decrease; resource fully utilized

Question 20

Underemployment definition?

Answer 20

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.

Question 21

Significance of changes in employment and underemployment:

Answer 21

• public finance
• net migration
• confidence level

Question 22

What’s current account, financial account and capital account?

Answer 22

Current account: trade in invisible goods and services
Financial account: direct & portfolio investment, foreign reserve
Capital account: trademark copyright, patent, capital transfer

Question 23

Balance of current account=?

Answer 23

Balance of trade

Question 24

Reasons of current account deficit?

Answer 24

• Inflation rate higher in domestic economy
• Exchange rate increase, Px increase, Pm decrease
• Tariff: increase in imports

Question 25

Circular flow of wealth?

Answer 25

Household--purchase goods&services-->Firms --factors of production----------> <-Rewards for FOP----------------- <-Goods&services------------------

Question 26

Multiplier effect?

Answer 26

investment · multiplier=GDP 1/1-MPC=MPS (Marginal propensity to consume & supply)

Question 27

Causes of economic growth?

Answer 27

Actual growth (AD increase) and potential growth (LRAS increase)

Question 28

Evaluation of economic growth?

Answer 28

- Timeframe - nature of the country (export-led country or?)

Question 29

Conflicts between objectives?

Answer 29

- Inflation and unemployment (Philips curve) - economic growth and environmental protection (pollution, resource depletion) - inflation and balance of payment - Economic growth and income inequality

Question 30

Inflation-->exchange rate?

Answer 30

inflation-->price level increase-->price of exports increase, price of imports decrease relatively-->Qx decrease, Qm increase-->demand of ￥ decrease-->exchange rate decrease

Question 31

Exchange rate-->inflation?

Answer 31

Exchange rate decrease-->Px decrease relatively, Pm increase-->Qx increase, Qm decrease-->(X-M) increase

Question 32

Inflation-->BOP?

Answer 32

Inflation-->PL increase-->Px increase, Pm decrease relatively-->Qx decrease, Qm increase-->money inflow decrease, outflow increase-->trade balance deficit

Question 33

Evaluation of inflation and balance of payment contradicting?

Answer 33

If PED of export <1 offset: inflation decreases BOP, while decrease in exchange rate increases BOP

Question 34

Direct tax is a ____ tax, indirect tax is a _____ tax. The tax in between is _____?

Answer 34

progressive, regressive, proportional

Question 35

Definition of exchange rate?

Answer 35

Price of one currency in terms of another

Question 36

An increase in floating exchange rate is called____, and a decrease is called _____.

Answer 36

appreciation, depreciation

Question 37

An increase in fixed exchange rate is called____, and a decrease is called _____.

Answer 37

revaluation; devaluation

Question 38

How to revaluate?

Answer 38

- sell foreign reserve to buy domestic currency - interest rate increase---exchange rate increase

Question 39

How to devaluate?

Answer 39

- sell domestic currency to buy foreign reserve - interest rate decrease

Question 40

Advantages and disadvantages of floating exchange rate system?

Answer 40

Advantages: - adjust itself - no need of large amount of foreign reserve - no retaliation Disadvantages: - maybe too high or too low-->unstable exchange rate-->trade may worsen - speculation

Question 41

Advantages and disadvantages of fixed exchange rate system?

Answer 41

Advantages: - stable exchange rate---benefit international trade - no speculation Disadvantages: - retaliation - large amount of foreign reserve - information failure---gov. may over-/under-fix the exchange rate

Question 42

What's the Marshall-Lerner condition?

Answer 42

PED(X+M)>1, exchange rate decrease-->improve BOP//exchange rate increase-->worsen BOP

Question 43

What's J-curve?

Answer 43

- in the short run, PED inelastic--->exchange rate decrease may lead to decrease in export revenue - long run: PED elastic...