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Test Bank for IB Economics Macroeconomics 11th Edition by N. Gregory Mankiw
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Test Bank for IB Economics Macroeconomics 11th Edition by N. Gregory Mankiw
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Test Bank for IB EconomicsMacroeconomics 11th Edition by N.
Gregory Mankiw
Five major objectives of macroeconomic policies. - ANS•Economic growth: A steady rate of
increase of national output
•Full Employment: A low level of unemployment
•Price stability: A low and stable rate of inflation
•Satisfactory balance of payments
•Equal Income distribution : An equitable distribution of income
Describe, using a diagram,
the circular flow of income
between households and
firms in a closed economy
with no government. - ANSSee notes
Identify the four factors
of production and their
respective payments and
explain that these constitute
the income flow in the model. - ANS•factors of production households provide to firms:
→land
→labour
→capital
→enterprise.
•The firms, in return pay the factors of production:
→wages
→rent
→interest
→profit
Relationship between income flow, expenditure flow and output flow. - ANSIncome
flow=expenditure flow + output flow
Describe, using a diagram,
the circular flow of income
in an open economy with
government and financial
,markets, referring to leakages/
withdrawals (savings, taxes
and import expenditure)
and injections (investment,
government expenditure and
export revenue). - ANSSee notes
Define national income. - ANSMeasures the monetary value of the flow of output of goods and
services produced in an economy over a period of time.
3 measures of national income. - ANSMost commonly used measure of countries national
income is GDP. 3 different methods to calculate this:
1. The output method (measures actual value of goods and services produced)
2. The income method (value of all incomes earned in economy)
3. Expenditure method (measures value of all spending on goods and services)
Distinguish between GDP and GNP/GNI as measures of economic activity. - ANSGROSS
DOMESTIC PRODUCT (GDP):
•value of final goods and services produced within a country in a given period
•It is the total of all activities in a country, regardless of who owns the productive asset.
GROSS NATIONAL PRODUCT (GNP/GNI):
•market value of all products and services produced in one year by labour and property supplied
by the residents of a country.
Define and distinguish between gross national product (GNP) and gross domestic product
(GDP). - ANSGNP=GDP+net property income from abroad (income earned from assets
overseas)
GDP= C+I+G+(X-M)
Unlike Gross Domestic Product (GDP), which defines production based on the geographical
location of production, GNP allocates production based on ownership. It is the total income that
is earned by a country's factors of production regardless of where the assets are located.
Define and distinguish between gross national product(GNP) and net national product (NNP). -
ANSNNP=GNP-Depreciation (capital consumption)
Define and distinguish between nominal GDP and real GDP. - ANSReal GDP=Nominal GDP
adjusted for inflation.
Explain the uses of national income statistics. - ANSShows:
•economic growth (is an increase in national income over time)
•develop policies
•develop models of economy to make forecasts
•performance
•identifying changes in consumption, investment
, •evaluate living standards
•basis for comparing different countries
Explain the limitations of using national income statistics. - ANS•Inaccuracies unrecorded or
under-recorded economic activity
•external costs (resource depletion, pollution)
•other quality of life concerns (people may be earning higher incomes but not enjoy higher
standards of living, not account free activities such as volunteer work)
•composition of outputs (large part of countries output is in goods that do not benefit consumers
such as defence or capital goods)
Evaluating National income statistics. - ANS•GDP is a measure of the value of production in
terms of market prices
•indicator of economic activity, not a measure of a nations overall welfare
•unreliable show of an economies health as it:
→excludes nonmarket production (household services of homemakers)
→legal versus illegal activities
→not necessarily a good measure of well being of nation
→says little about environmental quality of life
→not necessarily reflect purchasing power
→different countries have different conventions
Explain the meaning and significance of "green GDP". - ANSGreen GDP= GDP-environmental
costs of production.
Measure of GDP that takes into account any environmental costs from the production of goods
and services.
Explain and illustrate the business cycle and its phases. - ANS•In developed country economies
generally see a pattern where there are periods of rising growth, followed by periods of slowing
growth and even falling growth.
•Cycle periodic fluctuations in economic activity measured by changes in real GDP.
•The long term growth trend is the potential output of the economy.
•Phases: boom, trough, recovery, recession
•RECOVERY PHASE:
→economic expansion with GDP increasing at a rising rate
→mainly driven by increase in AD
•BOOMS:
→increase in demand can result in increase price, can lead to increase in AD hence increase in
average prices
→inflationary pressure will build up and rate of growth of GDP will fall as economy nears its
potential output
•RECESSION:
→defined as two consecutive quarters of negative GDP growth that is falling GDP
→Fall in AD, fall in employment, low demand leads to lower inflation rates (even deflation)
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