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Basic Economics Concepts
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Basic Economics Concepts
Basic Economics Concepts
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1
Question
How can government promote equity
Answer
Governments can promote equity by implementing policies that ensure equal access to resources and opportunities, such as progressive taxation, affordable education and healthcare, anti-discrimination laws, social welfare programs, and inclusive economic development initiatives.
2
Question
Explain how economic growth is measured.
Answer
Economic growth is measured by the percentage increase in real GDP over a period of time. Real GDP accounts for inflation so it reflects actual output changes rather than just price changes. The growth rate formula is: Growth rate = [(Real GDP current - Real GDP previous) / Real GDP previous] × 100.
3
Question
What does the Multidimensional Poverty Index (MPI) measure?
Answer
MPI measures poverty through 10 indicators across health, education, and living standards. An individual is considered multidimensionally poor if they lack at least one-third of these indicators, reflecting poverty beyond just income.
4
Question
What is monetary policy and how does it influence aggregate demand?
Answer
Monetary policy is when the central bank controls money supply and interest rates to influence aggregate demand. Lowering interest rates encourages borrowing and spending, increasing AD. Raising rates discourages borrowing, reducing AD.
5
Question
How can legislation regulate negative externalities of consumption?
Answer
By imposing limits on consumer consumption, shifting demand toward socially optimal levels, reducing welfare loss from overconsumption.
6
Question
What are potential drawbacks of free trade for domestic industries?
Answer
Domestic industries may be unable to compete with foreign firms, leading to job losses in uncompetitive sectors.
7
Question
What are the main goals of government intervention in microeconomics?
Answer
Government aims to earn revenue, support firms, support low-income households, influence production and consumption levels, correct market failure, and promote equity.
8
Question
How do subsidies support positive externalities?
Answer
They reduce costs for producers or consumers of products that generate positive externalities, encouraging higher production or consumption closer to the social optimum.
9
Question
What is regional trade?
Answer
Regional trade refers to trade agreements among several countries in a specific region to reduce or eliminate trade barriers.
10
Question
What is competitive supply?
Answer
Competitive supply refers to alternative products a firm could produce with its resources; producing more of one product usually reduces supply of the other.
11
Question
Describe quotas and their impact on the market.
Answer
Quotas are physical limits on the quantity or value of imports, which raise consumer prices and reduce choices by limiting foreign competition, protect domestic producers, but do not generate government revenue.
12
Question
Describe the effect of a decrease in supply on market equilibrium.
Answer
A decrease in supply shifts the supply curve left, causing shortage at original price, leading to a price increase. Consumers buy less, producers increase quantity supplied, establishing a new equilibrium with higher price and lower quantity.
13
Question
How can depreciation influence economic growth?
Answer
Depreciation makes exports cheaper, increasing international sales and aggregate demand, which can promote economic growth.
14
Question
List strengths of monetary policy.
Answer
Strengths include quick decision-making, adjustability and reversibility, independence of central banks allowing timely action, and effectiveness against demand-pull inflation by reducing spending through higher interest rates.
15
Question
What is an inflationary gap?
Answer
An inflationary gap occurs when aggregate demand exceeds the full employment output level, causing demand-pull inflation and the economy operating beyond sustainable capacity.
16
Question
Why do primary commodities generally have a lower PED compared to manufactured products?
Answer
Primary commodities tend to have lower PED because they are often necessities or lack close substitutes, making demand less sensitive to price changes compared to manufactured goods which have more substitutes and alternatives.
17
Question
How can inflation affect the purchasing power of fixed-income earners and debtors?
Answer
Inflation reduces the purchasing power of fixed-income earners since their income stays the same while prices rise. Debtors benefit because they repay loans with money that is worth less.
18
Question
Answer
C
19
Question
What is structural unemployment and what causes it?
Answer
Structural unemployment is caused by long-term changes in the economy's structure, such as automation, global competition, or skill mismatches. It often requires retraining or education for resolution.
20
Question
What are the potential negative outcomes of privatisation?
Answer
Privatisation can make essential services unaffordable or inaccessible, reduce service quality, cause job losses, and lead to loss of government control.
21
Question
How does degree of necessity influence PED?
Answer
Essential goods tend to have inelastic demand since consumers need them, while non-essential goods usually have more elastic demand.
22
Question
Define contractionary fiscal policy and its tools.
Answer
Contractionary fiscal policy reduces aggregate demand to lower inflation and close inflationary gaps. Tools include decreasing government spending, increasing taxes, and reducing transfer payments.
23
Question
How can lack of competition affect government service provision?
Answer
Lack of competition can reduce the incentive for improvement in government services, potentially leading to lower quality and inefficiencies.
24
Question
Explain the difference between actual economic growth and potential economic growth using the PPC.
Answer
Actual growth occurs when a point inside the PPC moves outward toward the curve by utilizing previously unemployed resources. Potential growth occurs when the PPC curve itself shifts outward due to an increase in quantity or quality of resources, increasing production capacity.
25
Question
What causes the Long-Run Aggregate Supply (LRAS) curve to shift to the right?
Answer
Improvements in efficiency (producing more output from the same input), technological advancements that boost production capabilities, reductions in unemployment by expanding the labor force and improving labor market flexibility all cause the LRAS curve to shift right, indicating increased potential GDP.
26
Question
Why does higher price lead to increased quantity supplied?
Answer
Higher prices offer higher profit margins, incentivizing suppliers to produce and supply more of the good.
27
Question
What are some market consequences of command and control regulation?
Answer
It can increase production or operational costs due to compliance, may encourage innovation or development, but also could create barriers for small or new businesses, limiting competition.
28
Question
Describe the effect of an increase in demand on market equilibrium.
Answer
An increase in demand shifts the demand curve right, causing shortage at initial price, leading to higher prices. Producers increase supply, consumers may reduce quantity demanded due to higher price, establishing a new equilibrium with higher price and quantity.
29
Question
What happens to social surplus at socially optimum output?
Answer
Social surplus, which is the sum of consumer and producer surplus, is maximized at the socially optimum output.
30
Question
How do international organizations and technology support global sustainability monitoring and enforcement?
Answer
They play roles in monitoring compliance, providing data, improving transparency, and facilitating cooperation to address sustainability challenges globally.