Key Concepts
1. Economic Growth and Business Cycles
– Economic growth: Increase in real GDP over time.
– Business cycle: Fluctuations in economic activity characterized by periods of expansion and recession.
– Gross Domestic Product (GDP): Total value of goods and services produced within a country’s borders in a specific time period.
– Gross National Product (GNP): Total value of goods and services produced by a country’s citizens, regardless of where they are located.
– Inflation: Sustained increase in the price level.
– Deflation: Sustained decrease in the price level.
2. Fiscal Policy
– Fiscal policy: Use of government spending and taxes to influence the economy.
– Expansionary fiscal policy: Increases government spending or reduces taxes to stimulate economic growth.
– Contractionary fiscal policy: Decreases government spending or increases taxes to reduce inflation.
– Multiplier effect: Increase in GDP that occurs as a result of an initial change in government spending.
– Crowding out effect: When government borrowing reduces private investment.
3. Monetary Policy
– Monetary policy: Use of interest rates and other tools by the central bank to influence the money supply and credit availability.
– Expansionary monetary policy: Lowers interest rates to stimulate borrowing and investment.
– Contractionary monetary policy: Raises interest rates to reduce borrowing and investment.
– Open market operations: Buying and selling of government securities by the central bank.
– Reserve requirements: Required amount of deposits that banks must hold with the central bank.
Answer Key
1. Economic Growth and Business Cycles
1. What is the definition of economic growth?
– Increase in real GDP over time.
2. What are the four phases of a business cycle?
– Expansion, peak, recession, trough
3. What is the difference between GDP and GNP?
– GDP measures production within borders, while GNP measures production by citizens.
4. What is the relationship between inflation and economic growth?
– High inflation can inhibit economic growth by reducing investment and increasing uncertainty.
5. What are the causes of deflation?
– Falling aggregate demand, excess supply, high debt levels
2. Fiscal Policy
1. What is the primary goal of fiscal policy?
– To influence the economy through government spending and taxes.
2. Explain the multiplier effect.
– An initial change in government spending leads to a larger increase in GDP.
3. What is the crowding out effect?
– Government borrowing can reduce private investment by increasing interest rates.
4. What are the tools of expansionary fiscal policy?
– Increased government spending, reduced taxes
5. What are the tools of contractionary fiscal policy?
– Reduced government spending, increased taxes
3. Monetary Policy
1. What is the primary tool of monetary policy?
– Interest rates
2. Explain the effects of expansionary monetary policy.
– Lowers interest rates, stimulates borrowing and investment
3. Explain the effects of contractionary monetary policy.
– Raises interest rates, reduces borrowing and investment
4. What are the tools of open market operations?
– Buying and selling of government securities
5. What is the impact of reserve requirements on the money supply?
– Higher reserve requirements reduce the money supply by requiring banks to hold more deposits.
4. Other Macroeconomic Concepts
1. What is the Keynesian Cross model?
– A graphical model that illustrates the relationship between aggregate demand and GDP.
2. What is the Phillips curve?
– A graphical model that shows the relationship between inflation and unemployment.
3. What is the Laffer Curve?
– A graphical model that shows the relationship between tax rates and tax revenue.
4. What is the Solow Growth Model?
– A model that explains long-term economic growth by considering factors such as technology and capital.
5. What is the Debt-to-GDP ratio?
– A measure of a country’s indebtedness, calculated by dividing its total debt by its GDP.