Macroeconomics Quiz: Aggregate Demand and GDP

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Questions and Answers

Which of the following is NOT a factor influencing aggregate demand?

Consumer Confidence (correct)

The Money Supply

Interest Rates

Government Spending

What is the main economic principle that is illustrated by the burger shop scenario?

Increasing Returns to Scale

Law of Diminishing Marginal Returns (correct)

Opportunity Cost

Supply and Demand

What is the formula for calculating the Real GDP Growth Rate?

Year 2 / Year 1 x 100

(Year 2 - Year 1) / Year 1 x 100 (correct)

Year 1 / Year 2 x 100

(Year 1 - Year 2) / Year 1 x 100

Which of the following is an example of an injection into the economy?

A farmer exporting wheat to another country (D) Signup and view all the answers

What is the difference between Real GDP and Nominal GDP?

Real GDP is measured in constant prices, while Nominal GDP is measured in current prices. (A) Signup and view all the answers

What does the term 'leakages' refer to in macroeconomics?

Money that flows out of the economy (A) Signup and view all the answers

Which of the following is NOT a component of GDP as measured by the expenditure approach?

Interest rates (A) Signup and view all the answers

Which of the following best describes the relationship between aggregate demand and the price level?

They are inversely proportional (D) Signup and view all the answers

Which investment option is characterized by a guaranteed return over a fixed term, typically with lower risk?

Guaranteed Investment Certificates (GICs) (D) Signup and view all the answers

What is the primary difference between a loan and a lease agreement?

Loans involve borrowing money, while leases involve using an asset for a specific period. (C) Signup and view all the answers

A consumer wants to purchase a new car, but not own it at the end of the payment period. Which financial option is best?

Leasing the vehicle. (B) Signup and view all the answers

Why are mutual funds generally considered safer investments than individual stocks?

Mutual funds benefit from diversification, spreading risk across various investments. (A) Signup and view all the answers

What is the main characteristic of a bond in the context of financial investment?

It involves lending money to an issuer in return for interest payments. (A) Signup and view all the answers

What is a key difference between using a debit card and a credit card for a transaction?

Merchants pay higher transaction fees for credit card purchases than debit card purchases. (C) Signup and view all the answers

What is the main function of a dividend in the context of stock investments?

A portion of the company's profits paid to shareholders. (B) Signup and view all the answers

Which of the following defines the concept of cash?

Legal tender that can be saved or spent. (C) Signup and view all the answers

What is the value of price elasticity of demand (PED) in the case of unit elastic demand?

Exactly 1 (B) Signup and view all the answers

In what situation can unit elastic demand occur?

When price and demand changes are perfectly balanced (B) Signup and view all the answers

What impact does unit elastic demand have on total revenue when prices change?

Total revenue is unaffected (B) Signup and view all the answers

Which of the following statements about elastic demand is true?

It leads to significant shifts in quantity demanded with minimal price changes (D) Signup and view all the answers

How does inelastic demand affect consumer behavior regarding price changes?

Consumers are less responsive to price changes (B) Signup and view all the answers

What happens to energy costs as production increases?

Energy costs increase due to higher machine operation. (C) Signup and view all the answers

Which of the following accurately describes normal profit?

When economic profit equals zero. (A) Signup and view all the answers

In which market structure do firms have significant market power?

Monopoly (B), Oligopoly (C) Signup and view all the answers

What characteristic is common to firms in perfect competition?

Homogeneous products (B) Signup and view all the answers

How does the law of increasing returns to scale affect a business?

Output increases by a larger proportion than the input. (C) Signup and view all the answers

What defines marginal cost?

The cost of one additional unit of production. (B) Signup and view all the answers

Which market structure typically has small barriers to entry?

Monopolistic competition (A) Signup and view all the answers

What happens to production capacity in the short run?

At least one resource is fixed. (B) Signup and view all the answers

What characterizes easy money policy?

Low interest rates and easy availability of credit (C) Signup and view all the answers

Which fiscal policy is implemented during periods of high inflation?

Contractionary fiscal policy (B) Signup and view all the answers

What is the primary goal of tight money policy?

To control inflation (A) Signup and view all the answers

What effect does expansionary fiscal policy aim to achieve?

Increase aggregate demand (A) Signup and view all the answers

Which of the following is NOT a component of contractionary fiscal policy?

Boosting aggregate demand (D) Signup and view all the answers

During which economic condition would a central bank typically implement an easy money policy?

Recession with high unemployment (D) Signup and view all the answers

What is a potential consequence of raising taxes as a contractionary fiscal policy?

Reduced aggregate demand (D) Signup and view all the answers

How does government intervention through price controls typically affect consumer and producer surplus?

It may increase consumer surplus while decreasing producer surplus (A) Signup and view all the answers

What is the primary purpose of levying taxes in a market?

To generate revenue for public spending (B) Signup and view all the answers

What effect does introducing a tax have on consumer and producer surplus?

Consumer surplus decreases and producer surplus decreases (B) Signup and view all the answers

What is 'deadweight loss' in the context of taxation?

The loss of total welfare due to the tax (A) Signup and view all the answers

What happens when a price ceiling is set below the market equilibrium price?

A shortage of the good occurs (B) Signup and view all the answers

What is the main goal of implementing subsidies in the market?

To ensure that producers do not operate at a loss (B) Signup and view all the answers

How does the government capture total tax revenue?

Through higher consumer prices and reduced producer prices (C) Signup and view all the answers

What is a consequence of price controls in a market?

They can lead to shortages or surpluses (B) Signup and view all the answers

What does a specific excise tax entail?

A fixed amount charged per unit sold (B) Signup and view all the answers

Study Notes

CIE3M Exam Review Topics

Format:
- Section 1: Multiple Choice (30 marks, 40 minutes)
- Section 2: Short Answer (25 marks, 40 minutes)
- Section 3: Essay (20 marks, 40 minutes). Choose 1 of 2 essay questions, one micro and one macro.
Topics & Terminology:
- The Economic Problem - Scarcity:
  - Resources are limited, while human wants are unlimited. This forces choices in resource allocation.
  - Scarcity: a shortage of resources.
  - Limited Resources: land, labor, and capital.
  - Unlimited Wants: insatiable human desires for goods and services.
- Choice and Trade-offs: Limited resources necessitate choices, often involving trade-offs (sacrificing one option for another).
- Resource Allocation: Scarcity necessitates decisions on how to efficiently allocate resources.
- Factors of Production:
  - Land: natural resources (minerals, forests, etc.)
  - Labour: human effort (physical and mental)
  - Capital: man-made resources for production (machinery, buildings).
  - Entrepreneurship: organizing resources and taking risks to create goods and services.
  - Technology: knowledge and tools that improve production efficiency.
- 3 Economic Questions:
  - What to produce? Deciding on goods and services.
  - How to produce? Choosing production methods.
  - For whom to produce? Distributing goods and services.
- Production Possibilities Curve (PPC): A graphical representation showing the maximum combinations of two goods that can be produced with available resources.
  - Growth: increasing available resources, technological advancements, or increased worker skill
  - Decline: decrease in population, loss of land, natural disasters and/or a decline in worker health or education.
- Opportunity Cost: The value of the next best alternative given up when a choice is made.
- Positive vs. Normative Statements:
  - Positive: factual, testable (e.g., "Raising taxes increases revenue").
  - Normative: opinion-based, value-driven (e.g., "Taxes should be higher to reduce inequality").

Different Ways to Spend and Save Money

RRSPs (Registered Retirement Savings Plans):
- Investors can deduct contributions from their income, reducing current tax.
- Income tax is payable on withdrawals.
TFSAs (Tax-Free Savings Accounts):
- No tax deduction on initial investment, but withdrawals don't face income tax.
- Contributions are capped annually.

Types of Investments

Stocks: certificates representing ownership in a company, potentially high returns.
Bonds: loans to governments or corporations, typically lower risk and return.
Mutual Funds: a collection of stocks or bonds, a way of diversifying risk.
GICs (Guaranteed Investment Certificates): fixed period of investment with a guaranteed return.

Forms of Spending

Loans: borrowing money to buy something (e.g., house, car), repaying over time with interest. Owning the item.
Leases: paying to use something for a set period, not owning the item.
Debit Cards: spending from your bank account, transaction fees, no borrowing.
Credit Cards: borrowing money from a lender to make a purchase.

Microeconomics

Supply and Demand:
- Demand: relationship between price and quantity demanded.
- Supply: relationship between price and quantity supplied.
- Relationship in graphs
- Changes in supply & demand: shifts of entire demand/supply curve (non-price factors; inflation, taste/preference, technology etc.)
- Changes in quantities of supply & demand: movement along existing supply/demand curves(price changes)
Equilibrium: intersection of supply and demand—quantity demanded equals quantity supplied.
Surplus: quantity supplied exceeds quantity demanded (at a price above equilibrium)
Shortage: quantity demanded exceeds quantity supplied (at a price below equilibrium).
Determinants of Demand & Supply: factors that cause shifts in the demand or supply curves—e.g., prices of related goods/services, income, tastes, and preferences, expectations of future prices, number of consumers, etc.
Elasticity of Demand: responsiveness of quantity demanded to a change in price.

Macroeconomics

GDP (Gross Domestic Product): total market value of all final goods and services produced in a country during a set period.
Expenditure approach: GDP = Consumption + Investment + Government Spending + (Exports – Imports).
Income approach: GDP = Rent + Wages + Interest + Profits
Aggregate Demand (AD): total demand for all goods/services at any given time, shows relationship between price levels and output.
Determinants of Aggregate Demand (AD): consumption, investment, government spending, and net exports.
Aggregate Supply (AS): total supply of goods/services at any given time, shows relationship between price levels and output, supply, and price curves
Leakages & Injections:
- Leakages: money leaving the economy (imports, savings, and taxes).
- Injections: money entering the economy (exports, investment, and government spending).

Unemployment

Types of Unemployment:
- Frictional: between jobs
- Seasonal: tied to time of year
- Structural: skills no longer needed
- Cyclical: related to economic downturns
Unemployment Rate: percentage of labor force actively seeking employment but unable to find work at any given time.

Inflation

Inflation Rate: percentage change in the general price level of goods and services over a period
Consumer Price Index (CPI): a measure of average prices of consumer goods and services.
Interest Rates: impact how individuals borrow and lend money.

Fiscal/Monetary Policies

Fiscal Policy: Government actions (taxes and spending) to influence economic activity.
- Expansionary: increase spending or cut taxes to boost demand.
- Contractionary: decrease spending or raise taxes to cool down demand.
Monetary Policy: Central Bank actions to manage money supply and interest rates.
- Easy money: increase money supply, lower interest rates.
- Tight money: decrease money supply, increase interest rates.

Costs (microeconomics)

Fixed Costs: doesn't change with production/output (e.g. rent)
Variable Costs: changes with level of production/output (e.g. materials, labor)

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Description

Test your knowledge on macroeconomic principles including aggregate demand, GDP calculations, and investment options. This quiz covers essential concepts such as leakages, injections, and the differences between Real and Nominal GDP. Perfect for students studying macroeconomics or financial principles.