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?

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

What is the difference between Real GDP and Nominal GDP?

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

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

<p>Money that flows out of the economy (A)</p> Signup and view all the answers

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

<p>Interest rates (A)</p> Signup and view all the answers

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

<p>They are inversely proportional (D)</p> Signup and view all the answers

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

<p>Guaranteed Investment Certificates (GICs) (D)</p> Signup and view all the answers

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

<p>Loans involve borrowing money, while leases involve using an asset for a specific period. (C)</p> 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?

<p>Leasing the vehicle. (B)</p> Signup and view all the answers

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

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

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

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

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

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

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

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

Which of the following defines the concept of cash?

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

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

<p>Exactly 1 (B)</p> Signup and view all the answers

In what situation can unit elastic demand occur?

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

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

<p>Total revenue is unaffected (B)</p> Signup and view all the answers

Which of the following statements about elastic demand is true?

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

How does inelastic demand affect consumer behavior regarding price changes?

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

What happens to energy costs as production increases?

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

Which of the following accurately describes normal profit?

<p>When economic profit equals zero. (A)</p> Signup and view all the answers

In which market structure do firms have significant market power?

<p>Monopoly (B), Oligopoly (C)</p> Signup and view all the answers

What characteristic is common to firms in perfect competition?

<p>Homogeneous products (B)</p> Signup and view all the answers

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

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

What defines marginal cost?

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

Which market structure typically has small barriers to entry?

<p>Monopolistic competition (A)</p> Signup and view all the answers

What happens to production capacity in the short run?

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

What characterizes easy money policy?

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

Which fiscal policy is implemented during periods of high inflation?

<p>Contractionary fiscal policy (B)</p> Signup and view all the answers

What is the primary goal of tight money policy?

<p>To control inflation (A)</p> Signup and view all the answers

What effect does expansionary fiscal policy aim to achieve?

<p>Increase aggregate demand (A)</p> Signup and view all the answers

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

<p>Boosting aggregate demand (D)</p> Signup and view all the answers

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

<p>Recession with high unemployment (D)</p> Signup and view all the answers

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

<p>Reduced aggregate demand (D)</p> Signup and view all the answers

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

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

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

<p>To generate revenue for public spending (B)</p> Signup and view all the answers

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

<p>Consumer surplus decreases and producer surplus decreases (B)</p> Signup and view all the answers

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

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

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

<p>A shortage of the good occurs (B)</p> Signup and view all the answers

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

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

How does the government capture total tax revenue?

<p>Through higher consumer prices and reduced producer prices (C)</p> Signup and view all the answers

What is a consequence of price controls in a market?

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

What does a specific excise tax entail?

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

Flashcards

Bonds

Debt instrument where the issuer promises to pay back the principal amount borrowed plus interest by a specific date. It's like making a loan to a company or government.

Mutual Funds

A type of investment that allows you to own a basket of stocks and/or bonds, diversifying your risk and making it safer than investing in a single stock.

GICs (Guaranteed Investment Certificates)

A certificate that guarantees a certain interest rate for a fixed period, typically 1-5 years. You lock in your money, ensuring a safe return with less risk than a regular savings account.

Loan

A form of credit where you borrow money to buy something and repay it over time with interest. You own the item after completing the repayment.

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Lease

A contractual agreement where you pay to use an asset for a specific time, such as a car or office space. You do not own it and return it at the end of the agreement.

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Debit Cards

A card that allows you to spend money directly from your bank account. You can only spend what's available in your account and have a daily spending limit.

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Cash

Legal tender that can be saved or spent. Its value is determined by the currency it represents.

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Credit

A form of credit that allows you to borrow money from a financial institution and pay it back later with interest. Credit cards are the most common form, offering benefits like rewards and convenience, but also high interest rates.

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Marginal Cost

The additional cost incurred by producing one more unit of a product.

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Variable Costs

Costs that change with the level of production. These costs increase as production increases.

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Fixed Costs

Costs that remain constant regardless of production levels. These costs are unavoidable, even if no production takes place.

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Total Cost

The total cost of production, including both fixed and variable costs.

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Perfect Competition

A market structure where there are many sellers, no single seller has control over price, and products are identical.

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Monopolistic Competition

A market structure where there are many sellers, some control over price, and products are slightly differentiated.

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Oligopoly

A market structure where there are few sellers, a significant amount of control over price, and products are somewhat differentiated.

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Monopoly

A market structure where there is only one seller, complete control over price, and no close substitutes for the product.

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What is GDP?

The total market value of all final goods and services produced within a country in a given period. It measures a nation's economic performance.

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What is the Law of Diminishing Marginal Returns?

A fundamental economic principle that states when one input in a production process increases while other factors remain constant, there comes a point where each additional unit of that input produces a smaller increase in output.

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What is Aggregate Demand?

The total demand for all goods and services in an economy at a specific price level and time.

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What are the Determinants of Aggregate Demand?

Factors that influence consumer spending, such as income, wealth, consumer confidence, and interest rates.

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What is Aggregate Supply?

The total supply of goods and services produced in an economy at a given price level.

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What are Leakages?

Money that leaves the economy, reducing the flow of spending. Examples include imports, savings, and taxes.

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What are Injections?

Money that enters the economy, increasing the flow of spending. Examples include exports, investment spending, and government spending.

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How do Leakages and Injections affect the economy?

Injections boost economic activity, while leakages slow it down. This balance helps to determine the overall level of economic activity.

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Fiscal Policy

Government actions regarding taxes and spending to influence the economy.

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Expansionary Fiscal Policy

Government actions to increase aggregate demand by lowering taxes or increasing government spending, during times of recession.

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Contractionary Fiscal Policy

Government actions to decrease aggregate demand by raising taxes or cutting government spending, during times of high inflation.

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Monetary Policy

Central bank actions to control the money supply and interest rates to influence the economy.

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Easy Money Policy

Monetary policy that involves increasing the money supply and lowering interest rates to combat recession.

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Tight Money Policy

Monetary policy that involves decreasing the money supply and raising interest rates to control inflation.

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Recession

A period of economic decline characterized by high unemployment and low GDP growth.

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Inflationary Gap

A situation where aggregate demand exceeds aggregate supply, leading to rising prices and high inflation.

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Price Ceiling

A form of government intervention where a maximum price for a good or service is set, typically used to prevent prices from rising too high.

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Price Floor

A form of government intervention where a minimum price for a good or service is set, often used to ensure producers receive a fair return.

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Deadweight Loss

The loss of total welfare (consumer and producer surplus) that occurs because of government intervention, such as taxes, that discourages mutually beneficial transactions.

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Excise Tax

A tax levied on a specific good or service, usually based on a fixed amount per unit.

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Ad Valorem Tax

A tax levied as a percentage of the price of a good or service.

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Subsidy

A form of government intervention where financial assistance is provided to producers or consumers to reduce the cost of a good or service.

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Consumer Surplus

The total benefit that consumers derive from consuming a good or service, measured by the difference between what they are willing to pay and what they actually pay.

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Producer Surplus

The total benefit that producers derive from selling a good or service, measured by the difference between the price they receive and their cost of production.

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Price Elasticity of Demand

The responsiveness of quantity demanded to changes in price; it measures how much the quantity demanded of a good changes when its price changes.

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Unit Elastic Demand

When a 1% change in price leads to a 1% change in quantity demanded, resulting in no change in total revenue.

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Elastic Demand

When the quantity demanded changes significantly as the price changes.

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Inelastic Demand

When the quantity demanded hardly changes even when the price changes.

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Price Elasticity of Demand: Market Impacts

The impact of price changes on market outcomes, taking into account different demand elasticities.

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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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