Edexcel A-level Economics Theme 2 Study Guide
Questions and Correct Answers
1). Macroeconomics
Ans: The study of the economy as a whole, including inflation, growth and
unemployment.
2). Aggregate demand
Ans: The total of all demands or expenditures in the economy at any given price.
3). Aggregate demand curve
Ans: Shows the relationship between the price level and equilibrium national income.
As the price level rises the equilibrium level of national income falls.
4). Animal spirits
Ans: Business confidence: the mood of managers and owners of firms about the
future of their industry and the wider economy.
5). Gross investment
Ans: The addition to capital stock, both to replace the existing capital stock which has
been used up (depreciation) and the creation of additional capital.
6). Investment
Ans: The addition to the capital stock of the economy.
7). Retained profit
Ans: Profit kept back by a firm for its own use which is not distributed to shareholders
or used to pay taxation.
8). Net exports or the net trade balance
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, Ans: Exports minus imports.
9). Aggregate supply curve
Ans: The relationship between the average level of prices in the economy and the
level of total output.
10). Full capacity
Ans: 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.
11). Short-run aggregate supply curve
Ans: The upward sloping aggregate supply curve which assumes that money wage
rates are fixed.
12). Supply-side shocks
Ans: Factors such as changes in wage rates or commodity prices which cause the
short run aggregate supply curve to shift.
13). Circular flow of income
Ans: A model of the economy which shows the flow of goods, services and factors
and their payments around the economy.
14). Closed economy
Ans: An economy where there is no foreign trade.
15). Income
Ans: Rent, interest, wages and profits earned from wealth owned by economic actors.
16). Injections
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, Ans: In the circular flow of income, spending which is not generated by households
including investment, government spending and exports.
17). National income
Ans: The value of the output, expenditure or income of an economy over a period of
time.
18). Open economy
Ans: An economy where there is trade with other countries.
19). Wealth
Ans: 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.
20). Withdrawals or leakages
Ans: In the circular flow of income, spending by households which does not flow back
to domestic firms. It includes savings, taxes and imports.
21). Marginal propensity to import (mpm)
Ans: The increase in imports divided by the increase in income that caused them (i.e.
change in M / change in Y)
22). Marginal propensity to save (mps)
Ans: The increase in saving divided by the increase in income that caused it (i.e.
change in S / change in Y)
23). Marginal propensity to tax (mpt)
Ans: The increase in tax revenues divided by the increase in income that caused them
(i.e. change in T / change in Y)
24). Marginal propensity to withdraw (mpw)
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