Chapter 19

Question 1

def. national product (output)

Answer 1

most comprehensive measure of a nation’s overall level of economic activity.

Question 2

what is national income equal to?

Answer 2

national product

Question 3

the production of output generates ________

Answer 3

income

Question 4

how do you measure total output in dollars?

Answer 4

we add up the values of many different goods produced

Question 5

what does adding up the values of many different goods give you?

Answer 5

nominal national income

Question 6

to get real national income what kind of prices do you need?

Answer 6

base-period prices

Question 7

what is one of the most commonly used measures of national income?

Answer 7

Gross Domestic Product (GDP)

Question 8

what does real GDP measure?

Answer 8

the quantity of total output produced by the nation’s economy over the period of a year

Question 9

What does real GDP fluctuate around? What does it show

Answer 9

Real GDP fluctuates around a rising trend:

• the trend shows long-run economic growth
• the short-run fluctuations show the business cycle

Question 10

def. potential output

Answer 10

what the economy could produce if all resources were employed at their normal levels of utilization

Question 11

what is another name for potential output?

Answer 11

full-employment output

Question 12

what does the output gap measure?

Answer 12

the difference between potential output and actual output

Question 13

Output Gap formula

Answer 13

Output Gap = Y – Y*

• When Y < Y*, there is a recessionary gap.
• When Y > Y*, there is an inflationary gap.

Question 14

Why does national income matter?

Answer 14

The long-run trend in real per capita national income is an important determinant of improvements in a society’s overall standard of living

Question 15

what does economic growth mean

Answer 15

economic growth makes people materially better off on average.

Question 16

In the short-run:

-When Y < Y*, what happens?

Answer 16

there is a recessionary gap. –> unemployment and suffering and lost output and economic waste.

Question 17

In the short run:

-When Y > Y*, what happens?

Answer 17

there is an inflationary gap –> risk of high inflation rates

Question 18

def. employment

Answer 18

the number of workers (15+) who hold jobs

Question 19

def. unemployment

Answer 19

the number who are not employed but are actively looking for one

Question 20

def. labour force

Answer 20

the total number of employed + unemployed.

Question 21

def. unemployment rate

Answer 21

the number of unemployed expressed as a percentage of the labour force

Question 22

T or F: unemployment doesn’t exist when Y= Y*

Answer 22

false

Question 23

what kind of unemployment exists when Y = Y*

Answer 23

• frictional unemployment (natural turnover)

* structural unemployment (mismatch between jobs and workers)

Question 24

what kind of unemployment exists when Y< Y*

Answer 24

cyclical unemployment

Question 25

what is the natural unemployment rate (NAIRU)

Answer 25

it is the unemployment rate when Y=Y*

Question 26

def. productivity

Answer 26

a measure of output per unit of input

-often measured as GDP per worker or GDP per hour of work

Question 27

What are probably the single largest determinant(s) of long-run increases in material living standards?

Answer 27

increases in productivity

Question 28

def. price level

Answer 28

the average level of all prices in the economy

Question 29

def. inflation

Answer 29

the rate at which the price level is changing

Question 30

Consumer Price Index (CPI)

Answer 30

an index of the average prices of goods and services commonly bought by households
**only useful when you are comparing it with another time period

Question 31

why does inflation matter

Answer 31

• the purchasing power of money is negatively related to the price level
• adds to the uncertainties of economic life (because it is hard to forecast accurately)
• hyperinflation can ruin economies

Question 32

def. interest rate

Answer 32

the price of “credit,” and the flow of credit is crucial to firms and households in a modern economy.

Question 33

def. nominal interest rate

Answer 33

the rate expressed in money terms

Question 34

def. real interest rate

Answer 34

the rate expressed in terms of purchasing power

Question 35

what does the burden of borrowing depend on?

Answer 35

the real interest rate

Question 36

prime interest rate

Answer 36

interest rate that banks charge to their best business customers

Question 37

def. bank rate

Answer 37

the interest rate that the Bank of Canada charges on short term loans to commercial banks

Question 38

def. exchange rate

Answer 38

the number of Canadian dollars required to purchase one unit of foreign currency

Question 39

def. depreciation

Answer 39

depreciation of the Canadian dollar means that it is worth less on the foreign exchange market
–a rise in the exchange rate

Question 40

is long-term growth or short-term fluctuations more important for a society’s living standards from decade to decade?

Answer 40

long-term growth

Question 41

Gov role in inflation

Answer 41

maintaining inflation low and stable will contribute to the economy’s growth

Question 42

gov role with budget surpluses

Answer 42

reduce need for borrowing, drives down interest rates, stimulates private investment

Question 43

what are short-term fluctuations often called?

Answer 43

business cycles

Question 44

describe the effectiveness of monetary and fiscal policy on short term fluctuations

Answer 44

• economists debate effectiveness in influencing them
• some economist argue that despite the “power” of policy to affect the economy, governments should not attempt to “fine-tune” the economy by making frequent changes in spending and taxing