Chapter 3 Flashcards
Review of Chapter 3
Macroeconomics
Macroeconomics – country’s overall economy
Microeconomics
Microeconomics – consumers, families, and businesses
Fiscal policy
Fiscal policy – taxation and spending decisions influence the economy; these decisions are designed to encourage growth, boost employment, and curb inflation
Monetary policy
Monetary policy – actions that shape the economy by influencing interest rates and the supply of money; controlled by the Bank of Canada
M1 money supply
M1 money supply – all currency – paper bills and metal coins – plus chequing accounts and traveller’s cheques
M2 money supply
M2 money supply – all M1 plus most savings accounts, money market accounts, and certificates of deposit (low-risk savings vehicles with a fixed term)
What does the Bank of Canada do?
Manages Canada’s monetary policy
Provides banking services for other banks and the government
Coordinates the cheque-clearing process
Maintains the federal government’s chequing account
Keeps the currency supply in good condition
Free market
Free market – private ownership, economic freedom, fair competition, and innovation and hard work
Who do businesses offer value to?
Businesses offer value to:
Customers
Employees
Suppliers
The Fundamental Rights of Capitalism
The right to own a business and keep after-tax profits
The right to private property
The right to free choice
The right to fair competition
Four Degrees of Competition
- Pure competition
- Monopolistic competition
- Oligopoly
- Monopoly
- The foundations of a free market
- Interaction of buyers and sellers
The foundations of a free market: How much can we make/sell? How much will consumers buy? At what price? Interaction of buyers and sellers: Impacts prices Competition
Supply
Supply – the relationship between the price of a good and the quantity that sellers are willing and able to offer for sale; sellers tend to supply a greater quantity as the price rises
Supply curve
Supply curve – a graph of the supply relationship; the supply curve slopes upward to the right showing that the quantity supplied increases as the price rises
Demand
Demand – the relationship between the price of a good and the quantity buyers are willing and can afford to buy; when price falls, consumers tend to buy more
Demand curve
Demand curve – a graph of the demand relationship; the demand curve slopes downward showing that the quantity demanded increases as the price falls
Equilibrium Price
- Forces of supply and demand drive equilibrium price
- The point where supply and demand intersect
- Market price adjusts to the equilibrium price
Socialism
Socialism – the government controls key enterprises; higher taxes designed to distribute wealth through society
Communism
Communism – public ownership of all enterprise; strong central government
What kind of market economy is Canada?
As a market-dominant economy, the Canadian government still owns/supports the postal service, universities, parks, libraries, health care, education, defence, and public works.
Inflation
- The rate of price changes across the economy is another basic measure of economic well-being.
- Inflation means that prices are rising.
- Hyperinflation is when average prices increase more than 50% per month.
Disinflation
Disinflation is when price increases slow down.
Deflation
Deflation is when average prices actually decrease.
How does the government measure prices?
The government measures prices using the consumer price index (CPI) and the producer price index (PPI).
Productivity
The relationship between inputs and outputs is productivity.
A high level of productivity correlates with a healthy GDP.
Canada has experienced strong productivity growth due to technology.
economy
A financial and social system of how resources flow through society, from production, to distribution, to consumption.
economics
the study of the choices that people, companies, and governments make in allocating society’s resources.
macroeconomics
the study of a country’s overall economic issues, such as the employment rate, the gross domestic product, and taxation policies.
microeconomics
the study of smaller economic units such as individual consumers, families, and individual businesses.
fiscal policy
government efforts to influence the economy through taxation and spending.
budget surplus
overage that occurs when revenue is higher than expenses is higher than revenue over a given period of time.
budget deficit
shortfall that occurs when expenses are higher than revenue over a given period of time.
federal debt
the sum of all the money that the federal government has borrowed over the years and not yet repaid
monetary policy
Bank of Canada decisions that shape the economy by influencing interest rates and the supply of money.
money supply
the total amount of money within the overall economy
open market operations
the Bank of Canada function of buying and selling government securities, which include treasury bonds, notes, and bills
bank rate
the rate of interest the Bank of Canada charges when it loans funds to banks
reserve requirement
a rule that specifies the minimum amount of reserves (or funds) a bank must hold, expressed as a percentage of the bank’s deposits.
economic system
a structure for allocating limited resources
Canada Deposit Insurance Corporation (CDIC)
a federal Crown corporation that insures deposits in banks and thrift institutions for up to $100,000 per customer, per bank.
capitalism
an economic system - also known as the private enterprise or free market system-based on private ownership, economic freedom, and fair competition
pure competition
A market structure with many competitors selling virtually identical products. Barriers to entry are quite low.
monopolistic competition
A market structure with many competitors selling differentiated products. Barriers to entry are quite low.
Oligopoly
A market structure with only a handful of competitors selling products that are either similar or different. Barriers to entry are quite high.
Monopoly
A market structure with one producer completely dominating the industry, leaving no room for any significant competitors. Barriers to entry tend to be virtually insurmountable.
natural monopoly
A market structure with one company as the supplier of a product because the nature of that product makes a single supplier more efficient than multiple, competing ones. Most natural monopolies are government sanctioned and regulated.
supply
The quantity of products that producers are willing to offer for sale at different market prices.
demand
the quantity of products that consumers are willing to buy at different market prices.
equilibrium price
the price associated with the point at which the quantity demanded of a product equals the quantity supplied.
socialism
An economic system based on the principle that the government should own and operate key enterprises that directly affect public welfare.
Communism
an economic and political system that calls for public ownership of virtually all enterprises, under the direction of a strong central government
mixed economies
economies that embody elements of both planned and market-based economic systems.
Gross domestic product (GDP)
Gross domestic product (GDP): The total value of all final goods and services produced within a nation’s physical boundaries over a given period of time.
Unemployment rate
The percentage of workers of employment age who don’t have jobs and who are actively seeking employment.
