Macroeconomics Principles and Economic Indicators
Macroeconomic Foundations and the Great Depression
1. Explain why the Great Depression is an important event in the history of Macroeconomics?
The Great Depression (1929–1930s) caused a severe fall in GDP and very high unemployment. It showed that markets are not always self-correcting and led to the development of Keynesian macroeconomics.
2. List 3 main macroeconomic goals:
- High and stable economic growth
- Low unemployment
- Low and stable inflation
Measuring Economic Activity and GDP
3. Write down the main formula for calculating GDP (expenditure method), label the abbreviations:
GDP = C + I + G + (X – M)
(C = Consumption, I = Investment, G = Government Spending, X = Exports, M = Imports)
5. Explain the idea of purchasing power parity:
Purchasing Power Parity (PPP) equalizes the purchasing power of different currencies for the same basket of goods. It is used to compare living standards between countries.
6. What does the Gini coefficient measure?
It measures income or wealth inequality. A value of 0 represents perfect equality, while 1 represents maximum inequality.
7. What is the value (in USD) of the poverty line introduced by the World Bank in 2015?
$1.90 per day
Money, Banking, and Monetary Policy
8. Explain the term fiat money:
Fiat money has value because people accept it as money. It is not backed by gold or another commodity.
9. Explain the term seigniorage:
Seigniorage is the difference between the value of money and the cost of producing it.
10. What are the three motives for demanding money?
- Transactions motive
- Precautionary motive
- Speculative motive
11. Explain the term money laundering:
Money laundering is the illegal process of making money from criminal activities appear legal.
12. Explain the difference between quantitative easing and helicopter money:
Quantitative easing involves central banks buying assets to increase the money supply. Helicopter money means creating money and injecting it directly into the economy.
Inflation and Its Economic Impact
13. Write down the definition of inflation:
Inflation is the continuous increase in the overall price level in the economy.
14. Explain the difference between disinflation and deflation:
Disinflation occurs when inflation falls but remains positive. Deflation occurs when overall prices fall (negative inflation).
16. List three main theories of inflation:
- Quantity Theory of Money
- Demand-Pull Inflation
- Cost-Push Inflation
17. Explain the term tax distortions as a cost of inflation:
Inflation may increase taxes on nominal income even when real income does not increase.
Unemployment and the Labour Force
18. Write down the main formula for the unemployment rate:
Unemployment Rate = (Unemployed / Labour Force) × 100
19. Give 3 examples of people who can be classified as “not in the labour force”:
- Retired persons
- Students
- People taking care of children or family members
20. Explain the term discouraged-worker effect:
People stop looking for work and leave the labour force, reducing the unemployment rate.
21. Explain the term frictional unemployment:
Short-term unemployment caused by normal job searching and matching processes.
22. Would you prefer to be voluntarily or involuntarily unemployed? Explain why:
Voluntarily unemployed, because it is a personal choice. Involuntary unemployment means wanting a job but being unable to find one.
Comparative Economics and Business Cycles
23. Choose the country you would like to live in and explain why:
Country B: Because it has a lower Gini coefficient (0.3) and a higher HDI (0.72), which means less inequality and better living conditions.
25. Write the length for types of business cycles:
- Kitchin: 3–7 years
- Juglar: 7–11 years
- Kuznets: 15–25 years
- Kondratieff: 45–60 years
26. Explain what we can learn from the Great Depression and its reasons:
The Great Depression showed that low aggregate demand can cause long recessions and unemployment. Government intervention may be necessary to support the economy.
Functions of Money
- Medium of exchange
- Store of value
- Unit of account
- Standard of deferred payment
Central Bank Functions
- Regulating the banking system
- Clearing interbank payments
- Assisting banks in difficulties
- Managing exchange rates and reserves
Costs of Inflation
- Shoeleather costs
- Menu costs
- Tax distortions
- Relative price variability
- Confusion and inconvenience
- Redistribution of wealth
3 Methods of GDP Calculation
- Income Approach
- Expenditure Approach
- Production (Output) Approach