IMAT Reading Skills and General Knowledge · Politics, Economics and Society
Basic Economics: Markets, Measures, Policy and Economists
How supply and demand set prices, what GDP, inflation and unemployment measure, how central banks and governments steer the economy, and which economist said what.
Why this matters
The Cambridge papers asked who introduced the invisible hand, which field studies the prisoner's dilemma, and which currency belongs to which country. Basic economic vocabulary also appears in reading passages, so it pays twice.
Concept 1 of 5: Supply, demand and market prices
In a market, buyers want more of a good when it is cheap and sellers offer more when it is expensive. The price settles where the two amounts match: the equilibrium. Anything that shifts the buyers' or the sellers' plans moves that price, in a direction you can work out.
Definition
- Law of demand: as the price rises, the quantity demanded falls.
- Law of supply: as the price rises, the quantity supplied rises.
- Equilibrium: the price at which quantity demanded equals quantity supplied.
- Market structures: perfect competition (many sellers), oligopoly (a few), monopoly (one seller), monopsony (one buyer).
| Change | Effect on price | Effect on quantity traded |
|---|---|---|
| Demand rises (more buyers, higher incomes, a fashion) | Rises | Rises |
| Demand falls | Falls | Falls |
| Supply rises (cheaper inputs, better technology) | Falls | Rises |
| Supply falls (bad harvest, new tax on producers) | Rises | Falls |
| Maximum price set below equilibrium (price ceiling) | Held down | Shortage: buyers want more than sellers offer |
| Minimum price set above equilibrium (price floor) | Held up | Surplus: sellers offer more than buyers want |
Practice this conceptself-check · 3 quick reps
A price floor causes a surplus, a ceiling a shortage
A minimum price above equilibrium keeps the price high, so sellers offer more than buyers want: a surplus. A maximum price below equilibrium keeps it low, so buyers want more than is offered: a shortage. Students often reverse them.
Concept 2 of 5: GDP, inflation and unemployment
Three numbers summarise how an economy is doing: how much it produces (GDP), how fast prices rise (inflation), and how many people who want work cannot find it (unemployment). Each has an exact definition, and exam options use the near-misses.
Definition
- Gross Domestic Product (GDP): the market value of all final goods and services produced in a country in a year. Real GDP removes the effect of inflation. GDP per capita is GDP divided by the population.
- Inflation: a general, sustained rise in prices, measured by a consumer price index. Deflation is a general fall.
- Unemployment rate: the unemployed (without work and looking for it) divided by the labour force (employed plus unemployed).
- Recession: a fall in real GDP, often defined as two quarters in a row.
| Measure | Definition | Note |
|---|---|---|
| GDP | Value of final goods and services produced within a country in a year | Counts production inside the borders, whoever owns it |
| GNI (formerly GNP) | Income earned by a country's residents, at home or abroad | Adds income from abroad, subtracts income paid abroad |
| Inflation | General rise in prices | The ECB aims for 2% a year over the medium term |
| Stagflation | High inflation with weak growth and high unemployment | Seen after the oil shocks of the 1970s |
| Unemployment rate | Unemployed divided by labour force | People not looking for work are outside the labour force |
| Budget deficit and public debt | Deficit: one year's spending above revenue; debt: total borrowing accumulated | EU limits: 3% and 60% of GDP |
| Gini coefficient | Measure of income inequality from 0 (all equal) to 1 (one person has everything) | Higher means more unequal |
Practice this conceptself-check · 3 quick reps
Unemployed means looking for work
A student, a retired person or someone who has stopped looking is not counted as unemployed; they are outside the labour force. The rate divides the unemployed by the labour force, not by the whole population.
Concept 3 of 5: Monetary policy, fiscal policy and central banks
Two levers steer an economy. The central bank controls the price of money (interest rates); the government controls taxes and its own spending. Pull both towards more spending in a recession, and towards less when inflation is too high.
Definition
- Monetary policy: set by the central bank, mainly through interest rates and buying or selling bonds. In the euro area this is the European Central Bank (Frankfurt), whose main goal is price stability; the Bank of Italy is part of the Eurosystem.
- Fiscal policy: set by the government and parliament through taxes and public spending (the budget).
- Expansionary policy (lower rates, lower taxes, more spending) fights recession; contractionary policy fights inflation.
- Modern central banks are independent of government.
| Term | Who acts | Tools or role |
|---|---|---|
| Monetary policy | Central bank | Interest rates, bond purchases, money supply |
| Fiscal policy | Government and parliament | Taxes and public spending |
| Expansionary policy | Either | Cut rates, cut taxes or raise spending to boost demand |
| Contractionary policy | Either | Raise rates, raise taxes or cut spending to cool inflation |
| European Central Bank | Euro area, Frankfurt (1998) | Sets interest rates for the euro; inflation target 2% |
| Federal Reserve | USA (1913) | Central bank of the United States |
| Bank of England | United Kingdom (1694) | One of the oldest central banks |
Practice this conceptself-check · 3 quick reps
Taxes are fiscal, interest rates are monetary
Central banks do not set taxes, and governments in the euro area do not set interest rates. Options that give the ECB power over tax rates, or a finance ministry power over the base rate, mix the two policies.
Concept 4 of 5: Economists and their ideas
Economic ideas are usually remembered by one phrase: the invisible hand, comparative advantage, creative destruction. Each phrase belongs to one thinker and one century. Learn the phrase, the name and the book.
Definition
- Classical economics (Smith, Ricardo, Malthus): markets left free tend to work well.
- Keynesian economics: in a slump, demand is too low, so the government should spend.
- Monetarism (Friedman): inflation comes from too much money.
- Game theory: the study of strategic decisions in which each player's best choice depends on the others'. Its best-known example is the prisoner's dilemma.
| Economist | Country and date | Key idea or work |
|---|---|---|
| Adam Smith | Scotland, 1776 | The Wealth of Nations; the "invisible hand" of the market; division of labour |
| Thomas Malthus | England, 1798 | Population grows faster than food supply |
| David Ricardo | England, 1817 | Comparative advantage: countries gain by specialising and trading |
| Karl Marx | Germany, 1867 | Capital: a critique of capitalism; class struggle |
| Vilfredo Pareto | Italy, about 1900 | Pareto efficiency; the 80/20 principle |
| John Maynard Keynes | England, 1936 | The General Theory: governments should spend to fight unemployment |
| Joseph Schumpeter | Austria, 1942 | Creative destruction by innovation |
| Friedrich Hayek | Austria, 1944 | The Road to Serfdom: against central planning |
| John Nash | USA, 1950 | Nash equilibrium in game theory; Nobel 1994 |
| Milton Friedman | USA, 1960s | Monetarism |
| Amartya Sen | India, Nobel 1998 | Welfare economics, poverty and famine |
Practice this conceptself-check · 3 quick reps
The invisible hand is Smith's, not Marx's or Keynes's
Adam Smith used the image of an invisible hand for the way self-interest in free markets can serve the common good. Marx criticised capitalism and Keynes argued that markets alone may not restore full employment, so neither is a natural owner of the phrase.
Concept 5 of 5: Currencies of the world
Currency questions give a list of pairs and ask which is wrong. The usual trap is an EU member that does not use the euro, or a currency name shared by several countries (dollar, peso, rupee, krone).
Definition
- Several currencies have the same name in different countries: dollar, peso, rupee, franc, krona/krone.
- Six EU members keep their own currency (2026): Sweden (krona), Denmark (krone), Poland (złoty), Hungary (forint), Czechia (koruna), Romania (leu).
- Italy's own currency before the euro was the lira; Turkey's currency today is also called the lira.
| Currency | Where it is used |
|---|---|
| Pound sterling | United Kingdom |
| Swiss franc | Switzerland and Liechtenstein |
| Krona or krone | Sweden (krona); Denmark and Norway (krone); Iceland (króna) |
| Złoty | Poland |
| Forint | Hungary |
| Koruna | Czech Republic |
| Leu | Romania and Moldova |
| Rouble | Russia |
| Yen | Japan |
| Yuan (renminbi) | China |
| Rupee | India, Pakistan, Sri Lanka, Nepal |
| Real | Brazil |
| Peso | Argentina, Mexico, Chile, Colombia and others |
| Rand | South Africa |
| Baht | Thailand |
| Won | South Korea |
| Lira | Turkey (and Italy until 2002) |
Practice this conceptself-check · 3 quick reps
EU membership does not mean the euro
Hungary, Poland, Czechia, Romania, Sweden and Denmark are all in the EU but keep their own currencies. A pair such as "euro: Poland" is wrong; Poland pays in złoty.
Summary — formulas & gotchas at a glance
A revision cheat-sheet for the formulas and gotchas above. Click any concept name to jump back to its full explanation.
Reference tables (5)
Supply, demand and market prices6 rows
| Change | Effect on price | Effect on quantity traded |
|---|---|---|
| Demand rises (more buyers, higher incomes, a fashion) | Rises | Rises |
| Demand falls | Falls | Falls |
| Supply rises (cheaper inputs, better technology) | Falls | Rises |
| Supply falls (bad harvest, new tax on producers) | Rises | Falls |
| Maximum price set below equilibrium (price ceiling) | Held down | Shortage: buyers want more than sellers offer |
| Minimum price set above equilibrium (price floor) | Held up | Surplus: sellers offer more than buyers want |
GDP, inflation and unemployment7 rows
| Measure | Definition | Note |
|---|---|---|
| GDP | Value of final goods and services produced within a country in a year | Counts production inside the borders, whoever owns it |
| GNI (formerly GNP) | Income earned by a country's residents, at home or abroad | Adds income from abroad, subtracts income paid abroad |
| Inflation | General rise in prices | The ECB aims for 2% a year over the medium term |
| Stagflation | High inflation with weak growth and high unemployment | Seen after the oil shocks of the 1970s |
| Unemployment rate | Unemployed divided by labour force | People not looking for work are outside the labour force |
| Budget deficit and public debt | Deficit: one year's spending above revenue; debt: total borrowing accumulated | EU limits: 3% and 60% of GDP |
| Gini coefficient | Measure of income inequality from 0 (all equal) to 1 (one person has everything) | Higher means more unequal |
Monetary policy, fiscal policy and central banks7 rows
| Term | Who acts | Tools or role |
|---|---|---|
| Monetary policy | Central bank | Interest rates, bond purchases, money supply |
| Fiscal policy | Government and parliament | Taxes and public spending |
| Expansionary policy | Either | Cut rates, cut taxes or raise spending to boost demand |
| Contractionary policy | Either | Raise rates, raise taxes or cut spending to cool inflation |
| European Central Bank | Euro area, Frankfurt (1998) | Sets interest rates for the euro; inflation target 2% |
| Federal Reserve | USA (1913) | Central bank of the United States |
| Bank of England | United Kingdom (1694) | One of the oldest central banks |
Economists and their ideas11 rows
| Economist | Country and date | Key idea or work |
|---|---|---|
| Adam Smith | Scotland, 1776 | The Wealth of Nations; the "invisible hand" of the market; division of labour |
| Thomas Malthus | England, 1798 | Population grows faster than food supply |
| David Ricardo | England, 1817 | Comparative advantage: countries gain by specialising and trading |
| Karl Marx | Germany, 1867 | Capital: a critique of capitalism; class struggle |
| Vilfredo Pareto | Italy, about 1900 | Pareto efficiency; the 80/20 principle |
| John Maynard Keynes | England, 1936 | The General Theory: governments should spend to fight unemployment |
| Joseph Schumpeter | Austria, 1942 | Creative destruction by innovation |
| Friedrich Hayek | Austria, 1944 | The Road to Serfdom: against central planning |
| John Nash | USA, 1950 | Nash equilibrium in game theory; Nobel 1994 |
| Milton Friedman | USA, 1960s | Monetarism |
| Amartya Sen | India, Nobel 1998 | Welfare economics, poverty and famine |
Currencies of the world17 rows
| Currency | Where it is used |
|---|---|
| Pound sterling | United Kingdom |
| Swiss franc | Switzerland and Liechtenstein |
| Krona or krone | Sweden (krona); Denmark and Norway (krone); Iceland (króna) |
| Złoty | Poland |
| Forint | Hungary |
| Koruna | Czech Republic |
| Leu | Romania and Moldova |
| Rouble | Russia |
| Yen | Japan |
| Yuan (renminbi) | China |
| Rupee | India, Pakistan, Sri Lanka, Nepal |
| Real | Brazil |
| Peso | Argentina, Mexico, Chile, Colombia and others |
| Rand | South Africa |
| Baht | Thailand |
| Won | South Korea |
| Lira | Turkey (and Italy until 2002) |
Watch out for (5)
- A price floor causes a surplus, a ceiling a shortage→ Supply, demand and market prices
- Unemployed means looking for work→ GDP, inflation and unemployment
- Taxes are fiscal, interest rates are monetary→ Monetary policy, fiscal policy and central banks
- The invisible hand is Smith's, not Marx's or Keynes's→ Economists and their ideas
- EU membership does not mean the euro→ Currencies of the world
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