40-47

Question 1

Fiscal Policy

Answer 1

Fiscal policy uses government spending and tax policies to influence macroeconomic conditions, including aggregate demand, employment, and inflation.

The government taxes us and spends to provide us with goods and services. If governments spend more than they collect in taxes, this will lead to borrowing and an increase in government debt. The decisions governments make as to the levels of taxation and spending as to what the tax and what to spend on have important ramifications, as often governments are a nation’s biggest customers.

Question 2

Monetary Policy

Answer 2

Monetary policy is a set of actions to control a nation’s overall money supply and achieve economic growth. Monetary policy strategies include revising interest rates and changing bank reserve requirements

Governments, through central banks, control the money supply, interest rates, and banking regulations. Changes in monetary policy make it more or less attractive for people to save or borrow in order to spend or invest.

Question 3

Regulatory Policy

Answer 3

Governments pass laws. Some of them have obvious implications for the economy, in particular labor laws (to do with minimum wages, unions, hours of work), environmental laws, and laws explicitly regulating businesses.

Question 4

Circular flow of income model

Answer 4

incorporates households and firms while introducing governments and foreigners as economic players

the horizontal arrows represent the flow of money, whereas the curved arrows represent the flow of tangible items. While I have to put all the leakages coming out of the household, and all the injections going into firms, in reality, they come out of and go into both.

factors of production go from households to firms

goods and services go from firms to households

Question 5

expenditure approach

Answer 5

Places observers at the same place, but instead of counting the goods going out, they could count the money coming in. Counts total spending on goods and services.

Question 6

Output approach

Answer 6

One way to measure GDP is by placing an observer in each firm to count the quantity of final goods produced and shipped.

Least practical because it would be difficult to compile the quantities of different goods into one number

Question 7

nominal gross national product

Answer 7

Nominal Gross Domestic Product (Nominal GDP) is the total market value of all goods and services produced in a country’s economy over a given period. Unlike other GDP measurements, nominal GDP is not adjusted to account for price changes from inflation and deflation.

value of final goods and services produced by factors of production by a country’s citizens
doesn’t account for inflation

Question 8

real gross domestic product

Answer 8

Real gross domestic product is the inflation-adjusted value of the goods and services produced by labor and property located in the country.

accounts for price inflation
counts total production of goods and services in a year

Question 9

Nominal vs. Real

Answer 9

Nominal figures are reported at current prices and so do not account for the tendency of prices to change (generally upwards) over time. Real figures do account for such price inflation by dividing the nominal figure by a price deflator. For instance, if the nominal GDP in 2010 was $100 million dollars, and in 2011 it was $110 million dollars, and if prices rose by 5% during the year, then the real GDP in 2011, measured in constant 2010 dollars would be only (110/1.05) = 104.8 million dollars

Question 10

Gross vs. Net

Answer 10

Gross figures count the total production of all goods and services in a year, while net figures do not count the production of equipment and machinery produced to replace such worn-out items of capital. Technically, Net = Gross less capital consumption or depreciation.

Question 11

GDP vs. GNP

Answer 11

GDP (ie domestic) measures the value of final goods and services produced by the factors of production in a country. GNP (ie National) on the other hand measures the value of final goods and services produced by factors of production owned by a country’s citizens, regardless of where in the world they are produced.

Question 12

Business Cycle

Answer 12

periodic or regular fluctuation in real national income/output/GDP over a period of time

low parts are trough
high parts are crests
going up is expansion
going down in recession/contraction

straight line in the productivity trend

debt drives the business cycle

Question 13

Recession

Answer 13

is a period of at least two quarters (ie 6 months) of negative economic growth (ie a decrease in GDP, not just a decrease in the rate of GDP).

Question 14

Creative Destruction

Answer 14

During booms, people take chances infrastructure is built and ideas are developed. During busts, the resources and ideas developed during booms are refined and redirected, and made more efficient.

Question 15

Aggregate Demand

Answer 15

the total planned spending on domestic goods and services at various possible average price levels per period of time.

can be broken down into consumption, investment, government spending, and exports - imports.

AD = C + I + G + ( X-M )

Question 16

Aggregate Supply

Answer 16

the total planned output of goods and services at various possible price levels per period of time

Question 17

Sticky Prices

Answer 17

Refers to the tendency of prices to remain constant or to adjust slowly, despite changes in the cost of producing and selling the goods or services.

Insight from Keynes was that prices (and especially wages) are ‘sticky downwards’, at least in the short run. For instance, in Keynes’ view, a worker would rather be unemployed for a time than accept work at a lower wage than he has come to expect. Similarly, landlords are likely to keep their properties unoccupied while they wait for suitable rents. This is the belief in sticky prices, while flatly contradicting the view held by classical economists that markets always clear at the equilibrium price, nonetheless did help to explain how high rates of unemployment could persist in a market economy

Question 18

Money Illusion

Answer 18

refers to the tendency of people to think of currency in nominal rather than real terms

Question 19

Keynesian Demand Management

Answer 19

The manipulation of government taxation, spending, and interest rates to spur (or sometimes when inflation is a problem, to constrain) spending and investment

Uses fiscal and monetary policies to reduce the vitality of the business cycle.

try to flatten the business cycle, but they end up making the peaks and troughs worse each cycle

Question 20

Keynesian Multiplier Effect

Answer 20

A small increase or decrease in what Keynes called ‘exogenous’ spending (or new spending from outside the system such as an increase in government spending, investment spending, or export recipes - think of injections from the circular flow model) could have a big impact on the overall level of spending, or aggregate demand.

Question 21

Interventionist supply-side policy

Answer 21

involve government investment in improved healthcare and education to improve the quality of the labor force (human capital) and in infrastructure to ease the transport of communication bottlenecks which ay have been limiting productivity. they may also involve direct government support for research and development in certain industries in the interests of improving the level of technological development and hence productivity which should in turn reduce price level.

Question 22

Market-Based supply-side policy

Answer 22

Similarly concerned with raising productive capacity, but do so by making improvements in the institutional framework. Deregulation, privatization, trade liberation, and anti-trust / anti-monopoly measures all tend to encourage competition and tend to result in increased output and employment and lower prices for consumers.

Question 23

Unemployment Rate

Answer 23

the unemployment rate is the number of unemployed divided by the number of people in the labor force, expressed as a percentage

Question 24

Participation Rate

Answer 24

Divide the labor force (people who are able and willing to work) by the active population

Question 25

Frictional Unemployment

Answer 25

Unemployment is due to people changing jobs. Often people quit their jobs before finding a new one.

Question 26

Seasonal Unemployment

Answer 26

Unemployment results from some work only being available for part of each year.

Question 27

Cyclical Unemployment

Answer 27

Unemployment results from a fall in the demand for labor during recessions.

Question 28

Structural Unemployment

Answer 28

Unemployment that results from changes to the economy. In any dynamic economy, some industries and jobs thrive while others disappear, If a worker has skills suited to a declining industry or suited to an obsolete technology, he or she is at risk of structural unemployment.

Question 29

Hidden Unemployment

Answer 29

When people are not looking for work because they have given up hope of getting a job.

Question 30

Unemployment

Answer 30

is when individuals who are able and willing to work and actively seeking work cannot find a job.

Question 31

market-based supply-side employment policies

Answer 31

Involve encouraging workers to move towards jobs. Allowances may be offered to workers to retrain and learn new skills. At the same time, unemployment benefits may be reduced or eliminated after a certain time period, to further encourage workers to adapt to change. In extreme cases, the government may even buy the homes of workers in one-industry towns where that industry has gone out of business to further enable and encourage them to move.

Question 32

interventionist supply-side employment policies

Answer 32

Involve trying to bring jobs to unemployed workers. Often, governments will move government jobs to areas of high unemployment. for instance, Canada’s immigration files are processed in an area of Nova Scotia that faced high unemployment after the closure of its coal mines and steel mills. Alternatively, governments may also offer subsidies or tax breaks to firms that agree to open businesses that can provide stable full-time jobs in areas of high seasonal or structural unemployment.

Question 33

why do recessions happen?

Answer 33

because there’s too much credit/debt, people over do it they borrow too much money, governments included, not just people like us

Question 34

Keynesian macroeconomics which is demand management, they try to move aggregate demand, why do they do that?

Answer 34

when they’re trying to do that they have to inflate the money supply so you have inflation when you get near the peak which boosts GDP

Question 35

3 macroeconomic goals

Answer 35

sustained economic growth - boost GDP
low inflation
low unemployment

Question 36

does Keynesian demand management work better in the short run or the long run?

Answer 36

works better in the short run because of the elasticity of the supply curve
in the long run you don’t get any increase in GDP, you just get a whole bunch of inflation

Question 37

how to draw graph

Answer 37

one axis - GDP
other axis - Price level

Question 38

how do interest rates and money supply work?

Answer 38

if they increase interest rates people borrow less and money supply drops
if they lower interest rates, people borrow more and money supply goes up

Question 39

Short-run aggregate supply

Answer 39

There is an inelastic portion but the whole thing isn’t inelastic
can increase or decrease production level

shift aggregate demand to the right to increase GDP and lower unemployment - tradeoff is price levels rise - inflation

Question 40

long-run aggregate supply

Answer 40

vertical stick
anchored in one spot
can’t affect aggregate supply, the economy is at its maximum production level
if you keep on shifting aggregate demand to the right in the long run, supply is anchored so it doesn’t do anything to GDP or unemployment, but it raises prices a lot - causes inflation

Question 41

what happens to Yeild (GDP), unemployment, and price levels in the short run

Answer 41

yield goes up
unemployment goes down
price levels go up

Question 42

what happens to Yeild (GDP), unemployment, and price levels in the long run

Answer 42

yield stays the same
unemployment stays the same
price levels go up a lot

Question 43

relationship between unemployment and GDP

Answer 43

if I increase GDP unemployment goes down because they’re hiring more people
if I reduce GDP businesses have to lay off more people

Question 44

if the government is going into a recession what do they do with taxes and spending?

Answer 44

increase aggregate demand by putting more money into your circular flow
cut taxes and spend more money to build roads, hospitals, and so on…

Question 45

if the government is going into an expansion what do they do with taxes and spending?

Answer 45

if the government is in a high inflation area (crest) it wants to increase taxes and decrease spending to decrease the amount of money in the circular flow diagram

Question 46

what do central banks do when the economy is going into a recession, what do they do with taxes and spending?

Answer 46

lower interest rates and increase the money supply

Question 47

what do central banks do when the economy is going into an expansion, what do they do with taxes and spending?

Answer 47

raising interest rates and lowering the money supply

Question 48

What will AD shift in response to?

Answer 48

Spending
If it is less spending shift it to the left
If it is more spending shift AD to the right

1. Changes in fiscal policy (taxes and spending)
2. Changes in monetary policy (interest rates)
3. Changes in the demand for your exports
4. Changes in the currency exchange rate which may influence export and import demand
5. Changes in the level of personal or corporate debt or wealth
6. Expected changes in income or inflation
7. Changes in confidence

Question 49

What will AS shift in response to?

Answer 49

Productive capacity
if it falls, shift to left
if it rises shift to right

1. A change in the quantity/ quality of capital
2. A change in the quantity/ quality of labor
3. Governments adopting supply-side policies designed to achieve ‘1’ or ‘2’, for instance, increasing tax breaks for investment in new equipment, or…
4. Reducing income tax and unemployment benefits to encourage people to work more
5. Regulatory changes affecting workers or firms 6. Investments in infrastructure (roads etc.)
6. Changes in the price or availability of key productive resources/