Economics - Questions 7

Economics - Questions 8

1. What is the distinction as between macroeconomics and microeconomics?

Give examples of two (a) macroeconomic and (b) microeconomic issues.

(Answer) Macroeconomics deals with the overall economy; microeconomics deals with particular parts.

Examples of macroeconomics are growth and inflation; microeconomics – the operation of a single market and costs of production for a firm

2. What are the major goals of economic policy?

(Answer) Economic growth, employment (and unemployment), inflation and balance of payments

3. What does the circular flow of income (and expenditure) demonstrate?

(Answer) It demonstrates how the level of economic activity is determined.

If expenditure is less than income, the level of national income will fall; if expenditure is greater than income it will rise (in money terms).

4. With respect to the Irish circular flow of income, are the following net injections, net withdrawals or neither? If there

is uncertainty explain.

(a) firms are forced to take a cut in profits in order to give a pay rise.

(b) Firms spend money on research

(c) The government increases personal tax allowances.

(d) The general public invests more money in building societies.

(e) Irish investors earn higher dividends on overseas investments.

(f) The government purchases US military aircraft.

(g) People draw on their savings to finance holidays abroad.

(h) People draw on their savings to finance holidays in Ireland

(i) The government runs a budget deficit (spends more than it receives in tax revenues) and finances it by borrowing from the general public

(j) The government runs a budget deficit and finances it by printing more money.

(Answer) (a) neither (b) injection (c) injection (d) withdrawal (e) injection (f) withdrawal (g) neither (h) injection (i) neither (j) injection

5. Distinguish as between the actual and the potential rate of growth in an economy.
(Answer) Actual refers to the growth rate that exists; potential refers to what (ideally) could be achieved if the economy was run in the most efficient manner. Often actual will fall short of potential growth (e.g. due to bad management)

6. What are the main phases of the building cycle?
At what point of the business cycle is the Irish economy at present?

(Answer) upturn, expansion, peaking out, slowdown (recession, slump)

Ireland is in the peaking out phase (where growth has slowed down).

7. For what reasons may one country experience a persistently faster rate of economic growth than another?

(a) high levels of capital investment; quantity and quality of workforce; availability of raw materials, enterprise culture (e.g. encouragement of market system); political factors such as good government, low taxation

Also if growth is starting from low base it may be easier to maintain momentum; also if growth is export led

8. Distinguish clearly (i) current v constant measurements of national income (ii) GDP v GNP

(i) current relates to money prices of year in which measurement takes place; constant relates to a common base year of prices enabling real comparisons as between different countries
(ii) GDP - Gross Domestic Product measures total of what is produced in country in a year; GNP measures what is produced after factor flows are accounted for

9. National income has doubled (in real terms) in Ireland in the last 12 years. Does this mean that we are now all twice as well off?

(a) not necessarily; population has increased; also the distribution of income has changed with a small number benefiting disproportionately; also there are diseconomies of growth such as traffic congestion which require large additional expenditure to deal with a problem caused by growth. Also expectations have increased so that people want more

10. Does it make sense to use national income statistics to compare living standards as between Ireland and - say - a poor Asian economy?

(a) No! many activities are not measured in money terms in poorer economies; also climate, lifestyle and expectations can vary greatly

11. Would it be desirable to have a zero level of unemployment?

(a) No! there will always be some unemployment e.g. people switching jobs, people unable or unwilling to work etc.

12. What would be the costs and benefits of increasing the rate of unemployment benefit?

(a) it would cost the gov. more in terms of social welfare payments; also it could lessen incentives reducing economic activity; the benefits would be largely social in providing a more equitable distribution of income

13. Consider the most appropriate policy for tackling each of the different types of unemployment

(a) market deficiencies - more flexibility e.g. reducing trade union power, removing minimum wages and social protection; structural - special attention to affected groups; demand deficient - a boost in overall expenditure

14. Do any groups gain from inflation?

(a) yes; speculators, borrowers, those who have power to lobby for compensating increases

15. If everyone's incomes rose in line with inflation would it matter if inflation were 100% or even 1000% per annum.

(a) perhaps not so much if the country has exclusive control over its currency; however otherwise it would matter greatly as it would lead to a rapid loss in domestic competitiveness