EDEXCEL A-LEVEL ECONOMICS PAPER 2
Macroeconomics - (ANSWER)The study of the economy as a whole, including inflation, growth
and unemployment.
Aggregate demand - (ANSWER)The total of all demands or expenditures in the economy at any
given price.
Aggregate demand curve - (ANSWER)Shows the relationship between the price level and
equilibrium national income. As the price level rises the equilibrium level of national income
falls.
Animal spirits - (ANSWER)Business confidence: the mood of managers and owners of firms
about the future of their industry and the wider economy.
Gross investment - (ANSWER)The addition to capital stock, both to replace the existing capital
stock which has been used up (depreciation) and the creation of additional capital.
Investment - (ANSWER)The addition to the capital stock of the economy.
Retained profit - (ANSWER)Profit kept back by a firm for its own use which is not distributed to
shareholders or used to pay taxation.
Net exports or the net trade balance - (ANSWER)Exports minus imports.
Aggregate supply curve - (ANSWER)The relationship between the average level of prices in the
economy and the level of total output.
Full capacity - (ANSWER)The level of output where no extra production can take place in the
long run with existing resources. The full capacity level of output for an economy is shown by
,the classical long run aggregate supply curve or the vertical part of a Keynesian aggregate supply
curve.
Short-run aggregate supply curve - (ANSWER)The upward sloping aggregate supply curve
which assumes that money wage rates are fixed.
Supply-side shocks - (ANSWER)Factors such as changes in wage rates or commodity prices
which cause the short run aggregate supply curve to shift.
Circular flow of income - (ANSWER)A model of the economy which shows the flow of goods,
services and factors and their payments around the economy.
Closed economy - (ANSWER)An economy where there is no foreign trade.
Income - (ANSWER)Rent, interest, wages and profits earned from wealth owned by economic
actors.
Injections - (ANSWER)In the circular flow of income, spending which is not generated by
households including investment, government spending and exports.
National income - (ANSWER)The value of the output, expenditure or income of an economy
over a period of time.
Open economy - (ANSWER)An economy where there is trade with other countries.
Wealth - (ANSWER)A stock of assets which can be used to generate a flow of production or
income. For example, physical wealth such as factories and machines is used to make goods and
services.
Withdrawals or leakages - (ANSWER)In the circular flow of income, spending by households
which does not flow back to domestic firms. It includes savings, taxes and imports.
,Marginal propensity to import (MPM) - (ANSWER)The increase in imports divided by the
increase in income that caused them (i.e. change in M / change in Y)
Marginal propensity to save (MPS) - (ANSWER)The increase in saving divided by the increase
in income that caused it (i.e. change in S / change in Y)
Marginal propensity to tax (MPT) - (ANSWER)The increase in tax revenues divided by the
increase in income that caused them (i.e. change in T / change in Y)
Marginal propensity to withdraw (MPW) - (ANSWER)The increase in withdrawals from the
circular flow (S + T + M) divided by the increase in income that caused them (i.e. change in W /
change in Y); this is the same as the sum of the marginal propensity to save, tax and import
(MPS + MPT + MPM).
Multiplier or national income multiplier or Keynesian multiplier or real multiplier -
(ANSWER)The figure used to multiply a change in an injection into the circular flow, such as
investment, to find the final change in income (assuming the injection is not determined by
income). It is the ratio of the final change in income to the initial change in an injection. It can be
calculated as
1
________
1 - MPC
or
1
___________________
MPS + MPT + MPM
or
, 1
____
MPW
Multiplier effect or process - (ANSWER)An increase in investment or other injection will lead to
an even greater increase in income (assuming the injection is not determined by income).
Gross domestic product (GDP) - (ANSWER)A measure of the output or value added of an
economy which does not include output or income from investments abroad or an allowance for
the depreciation of the nation's capital stock.
Gross national income (GNI) - (ANSWER)The value of goods and services produced by an
economy over a period of time (GDP) plus net overseas interest payments and dividends (factor
incomes).
Gross national product (GNP) - (ANSWER)The market value of goods and services produced
over a period of time through the labour or property supplied by citizens of a country both
domestically (GDP) and overseas.
Hidden, black or informal economy - (ANSWER)Economic activity where trade and exchange
take place but which goes unreported to the tax authorities and those collecting national income
statistics.
Net national income - (ANSWER)A measure of national income which includes both net income
from investments abroad and an allowance for depreciation of the nation's capital stock.
Per person or per head or per capita - (ANSWER)Per individual in the population
Purchasing power parities - (ANSWER)An exchange rate of one currency for another which
compares how much a typical basket of goods in one country costs compared to that of another
country.
Macroeconomics - (ANSWER)The study of the economy as a whole, including inflation, growth
and unemployment.
Aggregate demand - (ANSWER)The total of all demands or expenditures in the economy at any
given price.
Aggregate demand curve - (ANSWER)Shows the relationship between the price level and
equilibrium national income. As the price level rises the equilibrium level of national income
falls.
Animal spirits - (ANSWER)Business confidence: the mood of managers and owners of firms
about the future of their industry and the wider economy.
Gross investment - (ANSWER)The addition to capital stock, both to replace the existing capital
stock which has been used up (depreciation) and the creation of additional capital.
Investment - (ANSWER)The addition to the capital stock of the economy.
Retained profit - (ANSWER)Profit kept back by a firm for its own use which is not distributed to
shareholders or used to pay taxation.
Net exports or the net trade balance - (ANSWER)Exports minus imports.
Aggregate supply curve - (ANSWER)The relationship between the average level of prices in the
economy and the level of total output.
Full capacity - (ANSWER)The level of output where no extra production can take place in the
long run with existing resources. The full capacity level of output for an economy is shown by
,the classical long run aggregate supply curve or the vertical part of a Keynesian aggregate supply
curve.
Short-run aggregate supply curve - (ANSWER)The upward sloping aggregate supply curve
which assumes that money wage rates are fixed.
Supply-side shocks - (ANSWER)Factors such as changes in wage rates or commodity prices
which cause the short run aggregate supply curve to shift.
Circular flow of income - (ANSWER)A model of the economy which shows the flow of goods,
services and factors and their payments around the economy.
Closed economy - (ANSWER)An economy where there is no foreign trade.
Income - (ANSWER)Rent, interest, wages and profits earned from wealth owned by economic
actors.
Injections - (ANSWER)In the circular flow of income, spending which is not generated by
households including investment, government spending and exports.
National income - (ANSWER)The value of the output, expenditure or income of an economy
over a period of time.
Open economy - (ANSWER)An economy where there is trade with other countries.
Wealth - (ANSWER)A stock of assets which can be used to generate a flow of production or
income. For example, physical wealth such as factories and machines is used to make goods and
services.
Withdrawals or leakages - (ANSWER)In the circular flow of income, spending by households
which does not flow back to domestic firms. It includes savings, taxes and imports.
,Marginal propensity to import (MPM) - (ANSWER)The increase in imports divided by the
increase in income that caused them (i.e. change in M / change in Y)
Marginal propensity to save (MPS) - (ANSWER)The increase in saving divided by the increase
in income that caused it (i.e. change in S / change in Y)
Marginal propensity to tax (MPT) - (ANSWER)The increase in tax revenues divided by the
increase in income that caused them (i.e. change in T / change in Y)
Marginal propensity to withdraw (MPW) - (ANSWER)The increase in withdrawals from the
circular flow (S + T + M) divided by the increase in income that caused them (i.e. change in W /
change in Y); this is the same as the sum of the marginal propensity to save, tax and import
(MPS + MPT + MPM).
Multiplier or national income multiplier or Keynesian multiplier or real multiplier -
(ANSWER)The figure used to multiply a change in an injection into the circular flow, such as
investment, to find the final change in income (assuming the injection is not determined by
income). It is the ratio of the final change in income to the initial change in an injection. It can be
calculated as
1
________
1 - MPC
or
1
___________________
MPS + MPT + MPM
or
, 1
____
MPW
Multiplier effect or process - (ANSWER)An increase in investment or other injection will lead to
an even greater increase in income (assuming the injection is not determined by income).
Gross domestic product (GDP) - (ANSWER)A measure of the output or value added of an
economy which does not include output or income from investments abroad or an allowance for
the depreciation of the nation's capital stock.
Gross national income (GNI) - (ANSWER)The value of goods and services produced by an
economy over a period of time (GDP) plus net overseas interest payments and dividends (factor
incomes).
Gross national product (GNP) - (ANSWER)The market value of goods and services produced
over a period of time through the labour or property supplied by citizens of a country both
domestically (GDP) and overseas.
Hidden, black or informal economy - (ANSWER)Economic activity where trade and exchange
take place but which goes unreported to the tax authorities and those collecting national income
statistics.
Net national income - (ANSWER)A measure of national income which includes both net income
from investments abroad and an allowance for depreciation of the nation's capital stock.
Per person or per head or per capita - (ANSWER)Per individual in the population
Purchasing power parities - (ANSWER)An exchange rate of one currency for another which
compares how much a typical basket of goods in one country costs compared to that of another
country.
