Question & Answer

What do you understand by the policy ineffectiveness proposition? On what assumptions is the proposition based?

What explanations can you give for the increase in both unemployment and inflation in the 1970s?

In what way may short-term demand-management policies help to stabilise the economy? What problems occur in the use of such policies?

Criticise the use of increasing government expenditure as a means of reducing unemployment.

Criticise the classical theory that higher government spending will necessarily crowd out private spending.

In what way will the nature of aggregate supply influence the effect of a change in aggregate demand on prices and real national income?

In a given economy, the supply of money is £10 billion; the velocity of circulation of money (spent on final goods and services) is 3; and the price index is 2.00.

         (a)  What is the level of real national income?

         (b)  How much have prices risen (in percentage terms) since the base year?

         (c)  Assume that money supply increases by 10 per cent and that the velocity of circulation remains constant. What will be the rate of inflation if (i) there is no increase in real national income; (ii) real national income increases by 10 per cent; (iii) real national income increases by 5 per cent?

Explain how you would derive a figure for households’ disposable income if you were starting from a figure for GDP?

List some factors that could cause an increase in the credit items of the balance of payments and a decrease in the debit items. What would be the effect on the exchange rate (assuming that it is freely floating)? What effect would these exchange rate movements have on the balance of payments?

The overall balance of payments must always balance. If this is the case, why might a deficit on one part of the balance of payments be seen as a problem?

What do you understand by people’s expectations of inflation becoming ‘anchored’? Why might this be important for actual rates of inflation?

Explain how the current account of the balance of payments is likely to vary with the course of the business cycle.

Imagine you had to determine whether a particular period of inflation was demand pull, or cost push, or a combination of the two. What information would you require in order to conduct your analysis?

If everyone’s incomes rose in line with inflation, would it matter if inflation were 100 per cent or even 1000 per cent per annum?

Do any groups of people gain from inflation?

Consider the most appropriate policy for tackling each of the different types of unemployment.

At what phase of the business cycle is the average duration of unemployment likely to be the highest? Explain.

Why will investment affect both actual (short-term) growth and the long-term growth in potential output? What will be the implications if these two effects differ in magnitude?

(i) Will the rate of actual growth have any effect on the rate of potential growth?

(ii) For what possible reasons may one country experience a persistently faster rate of economic growth than another?

For what reasons might GDP be a poor indicator of (i) the level of development of a country; (ii) its rate of economic development?

Explain the circumstances under which an increase in pensions and child benefit would (a) increase national income; (b) leave national income unaffected; (c) decrease national income.

Explain how equilibrium would be restored in the circular flow of income if there were a fall in investment.

Explain how the financial sector could amplify the effects of shocks to the economy, such as those from the COVID-19 pandemic.

(i) What do you understand by the term financialisaton? (ii) How might we assess the financial well-being of households?

Economists sometimes refer to the ‘twin characteristics of economic growth’. What are these characteristics?