1. What are the methods to calculate GDP?

2. Can GDP be used to measure standard of living?

3. Explain what do you understand by 'aggregate demand'?

Consumption expenditure+ investment+ government+ exports - imports = aggregate demand

4. Briefly explain the determinants of consumption and investment

Consumption=disposable income (income - taxes), interest rate, future prospect

Investment = interest rates, optimism/pessimism,

5. What is macroeconomic equilibrium?

Aggregate demand = national income

Aggregate demand is the consumption expenditure + investment expenditure + government expenditure and exports minus imports

6. What is the effect of rise in government expenditure on the equilibrium income?

This is fiscal policy: a rise in government expenditure raises aggregate demand and national income increases; there is a multiplier effect, employment increases and equilibrium income rises (ref to handouts)

7. What is the effect of a rise on proportional tax on the equilibrium income?

This is another fiscal policy instrument

A rise in tax decreases income and hence consumption falls; aggregate demand falls and national income falls

8. What is budget deficit and explain how it can be financed?

Tax revenue - revenue = budget deficit

Three ways = borrow from international banking institutions or foreign countries (this leads to high rates of interest), borrowing from the public by selling treasury bills - this raises interest rates, and by borrowing from central banks (this increases the money supply)

Question 3, 4, 5, 6,7 and 8 are related to an understanding of fiscal policy

9. What do you understand by full employment income?

This is the potential of the economy when all resources are fully employed: land, labour, capital and entrepreneurship