Macroeconomics definitions(Complete solutions)
Macroeconomics correct answers The study of the economy as a whole, including inflation,
growth and unemployment.
Aggregate demand correct answers The total of all demands or expenditures in the economy at
any given price.
Aggregate demand curve correct answers 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 correct answers Business confidence: the mood of managers and owners of firms
about the future of their industry and the wider economy.
Capital-output ratio correct answers The ratio between the amounts of capital needed to produce
a given quantity of goods and the level of output.
Depreciation (of the capital stock) or capital consumption correct answers The value of the
capital stock which has been used up or worn out.
Gross investment correct answers 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 correct answers The addition to the capital stock of the economy.
Retained profit correct answers 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 correct answers Exports minus imports.
Aggregate supply curve correct answers The relationship between the average level of prices in
the economy and the level of total output.
Full capacity correct answers 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.
Long-run aggregate supply curve correct answers The aggregate supply curve which assumes
that wage rates are variable, both upwards and downwards. Classical or supply side economists
assume wage rates may be 'sticky downwards' and hence the economy may operate at less that
full employment even in the long run.
Short-run aggregate supply curve correct answers The upward sloping aggregate supply curve
which assumes that money wage rates are fixed.
, Supply-side shocks correct answers Factors such as changes in wage rates or commodity prices
which cause the short run aggregate supply curve to shift.
Circular flow of income correct answers A model of the economy which shows the flow of
goods, services and factors and their payments around the economy.
Closed economy correct answers An economy where there is no foreign trade.
Income correct answers Rent, interest, wages and profits earned from wealth owned by economic
actors.
Injections correct answers In the circular flow of income, spending which is not generated by
households including investment, government spending and exports.
National income correct answers The value of the output, expenditure or income of an economy
over a period of time.
Open economy correct answers An economy where there is trade with other countries.
Wealth correct answers 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 correct answers 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) correct answers 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) correct answers 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) correct answers 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) correct answers 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 correct
answers 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
Macroeconomics correct answers The study of the economy as a whole, including inflation,
growth and unemployment.
Aggregate demand correct answers The total of all demands or expenditures in the economy at
any given price.
Aggregate demand curve correct answers 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 correct answers Business confidence: the mood of managers and owners of firms
about the future of their industry and the wider economy.
Capital-output ratio correct answers The ratio between the amounts of capital needed to produce
a given quantity of goods and the level of output.
Depreciation (of the capital stock) or capital consumption correct answers The value of the
capital stock which has been used up or worn out.
Gross investment correct answers 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 correct answers The addition to the capital stock of the economy.
Retained profit correct answers 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 correct answers Exports minus imports.
Aggregate supply curve correct answers The relationship between the average level of prices in
the economy and the level of total output.
Full capacity correct answers 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.
Long-run aggregate supply curve correct answers The aggregate supply curve which assumes
that wage rates are variable, both upwards and downwards. Classical or supply side economists
assume wage rates may be 'sticky downwards' and hence the economy may operate at less that
full employment even in the long run.
Short-run aggregate supply curve correct answers The upward sloping aggregate supply curve
which assumes that money wage rates are fixed.
, Supply-side shocks correct answers Factors such as changes in wage rates or commodity prices
which cause the short run aggregate supply curve to shift.
Circular flow of income correct answers A model of the economy which shows the flow of
goods, services and factors and their payments around the economy.
Closed economy correct answers An economy where there is no foreign trade.
Income correct answers Rent, interest, wages and profits earned from wealth owned by economic
actors.
Injections correct answers In the circular flow of income, spending which is not generated by
households including investment, government spending and exports.
National income correct answers The value of the output, expenditure or income of an economy
over a period of time.
Open economy correct answers An economy where there is trade with other countries.
Wealth correct answers 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 correct answers 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) correct answers 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) correct answers 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) correct answers 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) correct answers 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 correct
answers 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
