The Economy (CORE) Unit 14 glossary
with correct answers 100%
aggregate demand - Correct Answer The total of the components of spending in the economy,
added to get GDP: Y = C + I + G + X - M. It is the total amount of demand for (or expenditure on)
goods and services in the economy. [13.4][14.1][KC12]
austerity - Correct Answer A policy where a government tries to improve its budgetary position
in a recession by increasing its saving. [14.6][17.11][KC17]
automatic stabilizers - Correct Answer Characteristics of the tax and transfer system in an
economy that have the effect of offsetting an expansion or contraction of the economy. An
example is the unemployment benefits system. [14.6][KC13]
autonomous consumption - Correct Answer Consumption that is independent of current
income. [14.2][KC13]
autonomous demand - Correct Answer Components of aggregate demand that are
independent of current income. [14.2][KC13]
co-insurance - Correct Answer A means of pooling savings across households in order for a
household to be able to maintain consumption when it experiences a temporary fall in income
or the need for greater expenditure. [13.5][14.6][KC12]
consumption function (aggregate) - Correct Answer An equation that shows how consumption
spending in the economy as a whole depends on other variables. For example, in the multiplier
model, the other variables are current disposable income and autonomous consumption.
[14.1][KC13]
crowding out - Correct Answer There are two quite distinct uses of the term. One is the
observed negative effect when economic incentives displace people's ethical or other-regarding
, motivations. In studies of individual behaviour, incentives may have a crowding out effect on
social preferences. A second use of the term is to refer to the effect of an increase in
government spending in reducing private spending, as would be expected for example in an
economy working at full capacity utilization, or when a fiscal expansion is associated with a rise
in the interest rate. [4.8][14.7][KC14]
cyclical unemployment - Correct Answer The increase in unemployment above equilibrium
unemployment caused by a fall in aggregate demand associated with the business cycle.
[9.7][14.10][KC13]
demand side (aggregate economy) - Correct Answer How spending decisions generate demand
for goods and services, and as a result, employment and output. It uses the multiplier model.
[14.10][KC13]
equity - Correct Answer An individual's own investment in a project. This is recorded in an
individual's or firm's balance sheet as net worth. [10.10][14.3][KC11]
exchange rate - Correct Answer The number of units of home currency that can be exchanged
for one unit of foreign currency. For example, the number of Australian dollars (AUD) needed to
buy one US dollar (USD) is defined as number of AUD per USD. An increase in this rate is a
depreciation of the AUD and a decrease is an appreciation of the AUD. [14.5][15.9][KC14]
exogenous - Correct Answer Coming from outside the model rather than being produced by the
workings of the model itself. [8.6][14.5]
expropriation risk - Correct Answer The probability that an asset will be taken from its owner by
the government or some other actor. [14.4][15.4]
fallacy of composition - Correct Answer Mistaken inference that what is true of the parts (for
example a household) must be true of the whole (in this case the economy as a whole). [14.6]
with correct answers 100%
aggregate demand - Correct Answer The total of the components of spending in the economy,
added to get GDP: Y = C + I + G + X - M. It is the total amount of demand for (or expenditure on)
goods and services in the economy. [13.4][14.1][KC12]
austerity - Correct Answer A policy where a government tries to improve its budgetary position
in a recession by increasing its saving. [14.6][17.11][KC17]
automatic stabilizers - Correct Answer Characteristics of the tax and transfer system in an
economy that have the effect of offsetting an expansion or contraction of the economy. An
example is the unemployment benefits system. [14.6][KC13]
autonomous consumption - Correct Answer Consumption that is independent of current
income. [14.2][KC13]
autonomous demand - Correct Answer Components of aggregate demand that are
independent of current income. [14.2][KC13]
co-insurance - Correct Answer A means of pooling savings across households in order for a
household to be able to maintain consumption when it experiences a temporary fall in income
or the need for greater expenditure. [13.5][14.6][KC12]
consumption function (aggregate) - Correct Answer An equation that shows how consumption
spending in the economy as a whole depends on other variables. For example, in the multiplier
model, the other variables are current disposable income and autonomous consumption.
[14.1][KC13]
crowding out - Correct Answer There are two quite distinct uses of the term. One is the
observed negative effect when economic incentives displace people's ethical or other-regarding
, motivations. In studies of individual behaviour, incentives may have a crowding out effect on
social preferences. A second use of the term is to refer to the effect of an increase in
government spending in reducing private spending, as would be expected for example in an
economy working at full capacity utilization, or when a fiscal expansion is associated with a rise
in the interest rate. [4.8][14.7][KC14]
cyclical unemployment - Correct Answer The increase in unemployment above equilibrium
unemployment caused by a fall in aggregate demand associated with the business cycle.
[9.7][14.10][KC13]
demand side (aggregate economy) - Correct Answer How spending decisions generate demand
for goods and services, and as a result, employment and output. It uses the multiplier model.
[14.10][KC13]
equity - Correct Answer An individual's own investment in a project. This is recorded in an
individual's or firm's balance sheet as net worth. [10.10][14.3][KC11]
exchange rate - Correct Answer The number of units of home currency that can be exchanged
for one unit of foreign currency. For example, the number of Australian dollars (AUD) needed to
buy one US dollar (USD) is defined as number of AUD per USD. An increase in this rate is a
depreciation of the AUD and a decrease is an appreciation of the AUD. [14.5][15.9][KC14]
exogenous - Correct Answer Coming from outside the model rather than being produced by the
workings of the model itself. [8.6][14.5]
expropriation risk - Correct Answer The probability that an asset will be taken from its owner by
the government or some other actor. [14.4][15.4]
fallacy of composition - Correct Answer Mistaken inference that what is true of the parts (for
example a household) must be true of the whole (in this case the economy as a whole). [14.6]
