Chapter 4

Question 1

Difference between microeconomics and macroeconomics

Answer 1

Micro: individual markets of goods and services

Macro: Broader issues of economy

Question 2

Examples of microeconomic concerns

Answer 2

How prices are established

Why did price of bread increase

How do minimum wage laws affect labour and company

Tax on lumber affecting forest industry

Government tax on mutual funds

Question 3

Examples of macroeconomic concerns

Answer 3

Interest rates

Inflation

Recession

Government spending

Health of economy

Question 4

2 factors that largely determine the price paid for a product

Answer 4

Demand + Supply

Question 5

What is equilibrium price?

Answer 5

Buyers and sellers in the market are balanced

Question 6

Difference between intermediate good and final good

Answer 6

Intermediate: products used in the manufacture of final goods

Final: products purchased by the ultimate end user

Question 7

Describe income approach for GDP

Answer 7

Total spending = Total income generated by producing all goods

Adds all income generated by economic activity

Question 8

Describe expenditure approach for GDP

Answer 8

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

Adds consumer, business, government spending, with exports and imports

Question 9

Describe production approach for GDP

Answer 9

Value-added approach

Calculates output, subtracts value of goods used in production of output

Question 10

Identify the components of GDP = C + I + G + (X-M)

Answer 10

GDP = Consumer expenditures + Business spending + Government spending + (exports - imports)

Question 11

Difference between nominal and real GDP

Answer 11

Nominal GDP: Includes inflation

Real GDP: removes inflation

Question 12

Name 5 phases of the business cycle

Answer 12

Expansion: significant economic growth, inflation is stable, business invests in new capacity, corporate profits rise, start-ups > bankruptcy, markets rise, unemployment steady and falling

Peak: top of the cycle, demand > supply, inflation rises, interest rates rise, sales decline, stocks begin to fall

Contraction: decline in cycle, economic activity declines, GDP declines, reduced production, lay offs, failures > startups, consumer spends less,

Recession if more than 2 cycles

Trough: lowest point in cycle, interest rates and inflation falls, consumers start spending more, stocks and bonds rally

Recovery: returns to original peak, business production increases, no widespread layoff, no significant investments, unemployment still high

Question 13

Example of leading, coincident, and lagging indicators

Answer 13

Leading: anticipates cycle, housing, new work order, raw material prices, hours worked, stock prices, money supply

Coincident: same time, personal income, GDP, production, retail sales

Lagging: after cycle, unemployment, inflation rates, labor costs, equipment spending, loans

Question 14

Describe how Statistics Canada judges a recession

Answer 14

Depth: decline must be substantial

Duration: must be more than 2 quarters

Diffusion: must be whole economy, not single sector

Question 15

What does participation rate represent?

Answer 15

Participation Rate = Labour force / Working age population

Shows willingness of people to work

Question 16

How does Stats Canada calculate unemployment?

Answer 16

Unemployment rate = Looking for work / labor force x 100

Question 17

Compare cyclical, seasonal, frictional, structural employment

Answer 17

Cyclical: fluctuates with business cycle

Seasonal: some industries only operate at certain time of year

Frictional: normal, healthy unemployment, between jobs

Structural: lacking skills or education

Question 18

How do you define a discouraged worker?

Answer 18

People who are available and willing to work but cannot find jobs, and have not made recent efforts to find a job

Question 19

Name and explain determinants of interest rates (5)

Answer 19

Demand and supply of capital: increase in investments raise capital, raises interest rates, price of credit raises, consumers spend less

Default risk: if interest rates rise, borrowers struggle to pay debt, greater change of defaulting

Foreign interest rates/exchange rates: rise in US interest rates, Canadians will purchase USD, increasing supply of CAD, downward pressure on CAD. (Bank of Canada will intervene to raise short term interest rates)

Central bank credibility: Bank of Canada influences the economy with short term interest rates

Inflation: if inflation set to rise, lenders increase interest rates to compensate for purchasing power

Question 20

3 ways high interest rates may affect the economy

Answer 20

1. Reduce business investments
2. Encourage savings
3. Reduce compensation

Question 21

Appropriate method for determining real interest rate

Answer 21

Real interest rate = nominal interest rate - inflation

Question 22

Formula for CPI

Answer 22

CPI = CPI new - CPI old / CPI old

Question 23

List some impacts of inflation (4)

Answer 23

1. Erodes standard of living (especially those on fixed income)
2. Reduces real value of investments
3. Distorts the price signals sent to market participants
4. Raises interest rates and recession, more severe rise and fall in business cycle

Question 24

Describe difference between deflation and disinflation

Answer 24

Deflation: steady fall in prices

Disinflation: decline in the rate at which prices are rising. still rising, but at a lower rate

Question 25

What is an exchange rate

Answer 25

The price at which one currency exchanges for another

Question 26

Explain determinants of exchange rates (7 points) C,I,I,T,E,P,P

Answer 26

Commodities: Canada is heavily dependent on the export of natural resources, greater demand for commodities = rise in CAD

Inflation: currencies of countries with consistently lower inflation rates rise

Interest rates: high domestic interest rates attract foreign investors

Trades: when importing, must sell CAD to buy other country currency, puts downward pressure on CAD

Economic performance: strong economic performance attracts foreign investors

Public debts: debts are less attractive to foreign investors

Political stability`