MACRO ECONOMICS

Sample questions
Short questions:
1. Define Microeconomics and Macroeconomics
2. What are the basic macroeconomic question?
3. Define GDP and distinguish between Nominal and Real GDP.
4. Write a short note on the circular flow of income for three sector
economy.
5. Write a short note on the circular flow of income for two sector
economy.
6. Define the terms NNP, NDP, GDP, GNP and Depreciation.

Broad Questions:
1. Describe the major macroeconomic goals or objectives.

Measuring Macroeconomic Variables:

Output growth; unemployment; price level; consumption function;
price indexes; inflation; Phillips curve; business cycle; circular flow of
economy; two, three and four sectors economy.

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Short question

Question 1 :
Define Microeconomics and Macroeconomics.
Answer :
Microeconomics and Macroeconomics are two approaches to
economic problems and analysis.
Rangner Frich as the first to use the terms ‘micro’ and ‘macro’ in
economics in 1933.
Microeconomics :
Microeconomics relates to the study of individual economic units.
Microeconomics is called price theory.
Price Theory explains the composition, or allocation, of total production
why more and some things are produced than of others.
Macroeconomics :
Macroeconomics is a study of the economy as a whole.
Macroeconomics is called Income Theory.
Income theory explains the level of total production and why the level
rises and falls.

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Question 2 :
What are basic macroeconomics questions?
Answer :
a) Why do output and employment sometimes fall, and how can
unemployment be reduced?
All market economics show patterns of expansion and contraction
known as business cycle. During the business cycle downturn , such as
the recession of 1990—1991 , production of goods and services fall,
and millions of people lose their jobs. For much of the postwar period,
one key goal of macroeconomic policy has been to use monetary
Employed: Persons who are employed in a paid job.
Working Age population: 15-64 years old.
Unemployed: Persons who are seeking job but unable to find.

b) What are the sources of price inflation, and how can it be kept under
control?
Inflation: Inflation is the consistent increase in average price level.
Inflation rate = ( Price t year— price t-1 year / price t-1 year ) * 100
Economists have learned that high rates of price inflation have a
corrosive effect on market economics. A market economy uses prices
as a yardstick to measure economic values and as a way to conduct
business. During periods of rapidly rising prices, the yardstick loses its
value: People become confused, make mistakes, and spend much of
their time warring about inflation eating away at their time worrying
about inflation eating away at their incomes. Rapid price changes lead
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to economic inefficiency and fiscal policy to reduce the severity of

business-cycle downturns and unemployment.

c) How can a nation increase its rate of economic growth?

Macroeconomics is also concerned with the long-run prosperity of a
country. Over a period of three decades and more, the growth of a
nation’s productive potential is the central factor in determining the
growth in its real wages and living standards. Over the last 45 years,
rapid growth in Asian countries such as Japan, South Korea and Taiwan
sent average incomes for their citizens soaring. Nations want to know
the ingredients in a successful growth recipe.

d) How can we get GNP from GDP?

GNP (Gross National Product): GNP is the total market value of all final
goods and services produced by the residents of the economy in a
particular fiscal year.
GNP = GDP+ Net factor income
Net factor income = Factor income from abroad - Factor payment to
abroad
GNP = GDP + Factor income from abroad - Factor payment to abroad

Labor Force: Number of people who are willing and able to work.
(Employed + Unemployed)

Price level: Weighted average of the prices of basket of commodities.

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Economic growth or GDP growth = (GDP t – GDP t-1/GDP t-1) * 100

Question 3 :
Define GDP and distinguish between Nominal and Real GDP.
Answer :
Gross Domestic Product (GDP): The most comprehensive measure of
the total output in an economy is the GDP. GDP is the measure of the
market value of all final goods and services – food, shelter, cars,
airplane rides, health care and so on – produced in a country during a
year.
There are two ways to measure GDP.
Nominal GDP : It is measured in actual market prices; it is the market
value of final goods. Quantitatively it is the product of the quantity of
goods and services produced times their respective prices.
Real GDP : It is calculated in constant or invariant prices (say for the
year 2005).When current year prices are used in measuring output,
nominal (current dollar) GNP includes the effect of price changes during
the current year. To eliminate the effect of price changes, prices in a
selected year can be used to measure output in preceding and
proceeding years; this provides a measure of real (constant dollar) GNP.

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Question 4 :
Write a short note on the circular flow of income for three sector
economy.
Answer :

Measuring Output in a Private Two-sector Model :

1. Business sector : We assume that the business sector is the organizer
of economic resources and the producer of all goods and services.
2. Household sector.

Question 5 :
Write a short note on the circular flow of income for two sector
economy.
Answer :
Measuring Output in a Three-sector Model :
1. Household consumption (C)
2. Investment (I)
3. Government (G)
Income from the production of goods and services is paid to
households or received by government as direct or indirect taxes. The
household sector pays direct taxes to the government sector. Indirect
taxes are imposed at the production level upon goods produced.
Household income is allocated to (direct) taxes, consumption spending
and saving. When the federal budget is balanced, tax revenue equals
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government purchases of goods and services.

Question 6 :
Define the terms NNP, NDP, GDP, GNP and Depreciation.
Answer :
Net National Product (NNP): It is the measure of net output available
for consumption by the society.
NNP = Gross National Product – Depreciation

Net Domestic Product (NDP): When depreciation allowance is

subtracted from gross domestic product we get net domestic product.
NDP : GDP – Depreciation

Gross Domestic Product (GDP): The most comprehensive measure of

the total output in an economy is the GDP.

Gross National Product (GNP): GNP is the total market value of all final
goods and services produced by the residents of the economy in a
particular fiscal year.
GNP = GDP + Factor income from abroad - Factor payment to abroad

Depreciation: Depreciation is the consumption of capital in the

production process—the wearing out of plant and equipment.

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Disposable Personal Income (DPI): The total amount of money

available for an individual or population to spend or save after taxes
have been paid.

1. NNP from GNP : NNP= GNP - Depreciation

2. NI from NNP: NI= NNP - Indirect Business Tax
3. PI from NI : PI = NI + (Dividends Income + Personal Interest Income +
Government and Business Transfer) – (Net Interest + Corporate Profit +
Social Security Contribution)
PI= NI + () - ()
4. DPI from PI : DPI = PI – Tax and Nontax Payments.

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Broad Question

Question 1:
Describe the major macroeconomic goals or objectives of an
economy.
Answer :
Output growth: The ultimate objective of economic activity is to
provide the goods and services that the population desire. What could
be more important for an economy than to produce ample shelter,
food, education, and recreation for its people?
Market Value = Price x Quantity
Potential GDP: It is the long-run trend in GDP. It represents the long-
run productive capacity of the economy or the maximum amount the
economy can produce while maintaining stable prices.
High Employment, Low Unemployment: The next major objective of
macroeconomic policy is high employment, which is the counterpart of
low unemployment. A person is considered employed if he or she spent
most of the previous week working at a paid job. A person is
unemployed if he is on temporary lay off, is looking for a job, or is
waiting for the start date of a new job. A person who fits neither of the
first two categories, such as a full-time student, homemaker, or retiree,
is not in the labor force.
Unemployment Rate = (Number of unemployed/ Labor force) x 100
People want to be able to find high-employing and stable job without
searching or waiting too long. The unemployment rate tends to move
with the business cycle. When output is depressed, the demand for
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labor falls and the unemployment rate increases. When a country

shows a steady long-term economic growth unemployment rate
reduces and exhibits an improvement in living standard of the people.
Stable Prices: The third macroeconomic objective is to maintain stable
price within free markets. The first part of this goal is the existence of
free market. In the free market, prices are determined by supply and
demand to the maximum possible extent, and governments abstain
from controlling the prices of individual goods. Only by allowing firms
to make their production and pricing decisions freely can society
harness the profit motive for the public interest.

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UNEMPLOYMENT

Short Questions

Question 1 : What is unemployment?

Unemployment: Unemployment is a phenomenon that occurs when a
person who is actively searching for employment is unable to find work.
Unemployment is often used as a measure of the health of the
economy.

Question 2 : Define unemployment rate.

Unemployment Rate: The most frequently measure of unemployment
is the unemployment rate, which is the number of unemployed people
divided by the number of people in the labor force.

Question 3 : Define labor force.

Labor Force: The labor force is defined simply as the people who are
willing and able to work. The size of the labor force is used to
determine the unemployment rate.

Question 4 : Define voluntary and in voluntary unemployment.

The broadest two categories of unemployment are voluntary and
involuntary unemployment.
a)Voluntary Unemployment : When unemployment is voluntary, it
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means that a person has left his job willingly in search of other
employment.
b)Involuntary Unemployment : When it is involuntary, it means that a
person has been fired or laid off and now must look for another job.

Question 5 : Briefly discuss the costs of unemployment.

The economic and social costs of unemployment include personal costs
(lost income), costs to government (lost tax revenue) and costs to
society in general (social problems, lost GDP)

The Costs to the Individual : The costs of unemployment to the

individual are not hard to imagine. When a person loses his or her job,
there is often an immediate impact to that person's standard of living,
Prolonged unemployment can lead to an erosion of skills, basically
robbing the economy of otherwise useful talents.
At the same time, the experience of unemployment (either direct or
indirect) can alter how workers plan for their futures - prolonged
unemployment can lead to greater skepticism and pessimism about the
value of education and training and lead to workers being less willing to
invest in the long years of training some jobs require.
On a similar note, the absence of income created by unemployment
can force families to deny educational opportunities to their children
and deprive the economy of those future skills.

Costs to Society : The social costs of unemployment are difficult to

calculate, but no less real. When unemployment becomes a pervasive
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problem, there are often increased calls for protectionism and severe
restrictions on immigration. Protectionism can not only lead to
destructive tit-for-tat retaliation among countries, but reductions in
trade harm the economic well-being of all trading partners.
Other social costs include how people interact with each other. Studies
have shown that times of elevated unemployment often correlate both
with less volunteerism and higher crime.

Costs to the Country : Unemployment leads to higher payments from

state and federal governments for unemployment benefits .

Broad Questions

Question 1 : Discuss Frictional Unemployment, Structural

Unemployment and Cyclical Unemployment.
Both voluntary and involuntary is broken down into three types.
1)Frictional Unemployment : Frictional unemployment arises when a
person is in-between jobs. After a person leaves acompany, it naturally
takes time to find another job, making this type of unemployment
short-lived. It is also the least problematic from an economic
standpoint.
Arizona, for example, has faced rising frictional unemployment in May
of 2016, due to the fact that unemployment has been historically low
for the state. Arizona citizens feel confident leaving their jobs with no
safety net in search of better employment.

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2)Cyclical Unemployment : Cyclical unemployment comes around due

to the business cycle itself. It rises during recessionary periods and
declines during periods of economic growth.
For example, the number of weekly jobless claims in the United States
has slowed in the month of June, as oil prices begin to rise and the
economy starts to stabilize, adding jobs to the market.
3)Structural Unemployment : Structural unemployment comes about
through technological advances, when people lose their jobs because
their skills are outdated.
Illinois, for example, after seeing increased unemployment rates in May
of 2016, seeks to implement "structural reforms" that will give people
new skills and therefore more job opportunities.

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