Chapter 4 Economics RQ Flashcards
Identify a factor that would be analyzed in microeconomics.
A. GDP rose by 3.2% last quarter.
B. Employment growth in the housing industry was stronger than expected last year.
C. ABC Inc. decides to reduce overall production in the Canadian economy in the following year.
D. The Bank of Canada is expected to increase short-term interest rates gradually over the coming year.
C. ABC Inc. decides to reduce overall production in the Canadian economy in the following year.
Microeconomics generally applies to individual markets of goods and services. It looks at how businesses decide what to produce and who to produce it for, and how individuals and households decide what to buy.
Nigel has recently completed a certificate in financial accounting and has decided to leave his current employer. He will spend the next two months looking for a job that better suits his new skills. What type of unemployment would Nigel’s situation be classified as?
A. Frictional.
B. Cyclical.
C. Structural.
D. Nominal.
A. Frictional.
Nigel’s look for new work would be considered part of frictional unemployment, which is the result of normal labour turnover from people entering and leaving the work force and from the ongoing creation and destruction of jobs. Even in the best of economic times, people are looking for work because they have finished school, quit, been laid off or been fired from their most recent job. This is a normal part of a healthy economy.
If production capacity is growing, corporate profits are increasing, and job creation is steady, in which phase of the business cycle is the economy likely operating?
A. Recovery.
B. Peak.
C. Expansion.
D. Trough.
C. Expansion.
The economy is likely in the expansion phase of the business cycle. These are all signals of normal growth where the economy is steadily expanding.
Select the pattern of economic signals that indicate that the economy is at the peak of the business cycle.
A. Capacity utilization is low and the unemployment rate is high.
B. Inflation is increasing, interest rates are increasing and business investment declines.
C. Inflation is stable, corporate profits are increasing and unemployment is decreasing.
D. Inventories are increasing, profits decline and employment decreases.
B. Inflation is increasing, interest rates are increasing and business investment declines.
At the peak of the business cycle, demand exceeds the capacity of the economy. There are pressures on prices, wages and interest rates. These pressures begin to dampen demand for investments, housing and consumer goods.
What type of indicator is money supply considered?
A. Lagging.
B. Coincident.
C. Leading.
D. Contrarian.
C. Leading.
The progress of the business cycle can be tracked by observing certain economic indicators. Leading indicators tend to peak and trough before the overall economy. They are the most useful and widely used of the business cycle indicators since they anticipate change by indicating what businesses and consumers have actually begun to produce and spend. Among the most important leading data series are housing starts (which precede construction) and manufacturers’ new orders, especially for durables (which indicate expectations of higher levels of consumer purchases of such items as automobiles and appliances). Others include manufacturers’ new orders, which indicate expectations of higher levels of consumer purchases of such items as automobiles and appliances, commodity prices (which reflect rising or falling demand for raw materials), average hours worked per week (which result from changes in the level of output and anticipate changes in employment), stock prices (which suggest changing levels of profits) and money flows (which indicate available liquidity).
What is the likely impact on short-term interest rates if inflation is expected to rise over the next year?
A. Nominal interest rates will rise.
B. Real interest rates will fall.
C. Real interest rates will rise.
D. Nominal interest rates will fall.
A. Nominal interest rates will rise.
The role of inflation expectations is particularly important in determining the level of nominal interest rates. The nominal interest rate is one where the effects of inflation have not been removed. Other things equal, the higher the rate of inflation, the higher nominal interest rates will be. In contrast, the real interest rate is the nominal interest rate minus the expected inflation rate over the term of the loan.
Identify a factor that will contribute to economic growth.
A. High savings levels.
B. Lower levels of current consumption.
C. High interest rates.
D. Technological advances.
D. Technological advances.
Economists use the term productivity to describe output (GDP for example) per unit of input (labour and capital used to produce the goods and services). When productivity increases, more of something is produced with less expenditure, creating a net benefit for the economy. There is a link between growth in real GDP and productivity gains. Growth in GDP results from a variety of factors, but a few key factors contribute to gains in productivity: Technological advances; population growth; and Improvements in training, education, and skills.
Inflation has risen in a country over the past year due to companies increasing their prices as a result of an increase in raw materials. Identify the cause of the inflation the country has experienced.
A. Demand-pull inflation.
B. Cost-push inflation.
C. Economic growth.
D. Disinflation.
B. Cost-push inflation.
Inflation can rise or fall due to shocks from the supply side of the economy—that is, when the costs of production change. When faced with higher costs of production from higher wages or increases in the price of raw materials, firms respond by raising prices or producing fewer products. Thus, higher costs push inflation higher. This state of affairs is called cost-push inflation.
A country’s economists propose that current interest rates be reduced. Indicate the potential result of this action.
A. Reduce business investment.
B. Increase the portion of household income needed to service debt.
C. Increase the cost of borrowing, discouraging borrowers from spending.
D. Increase the possibility of profitable business investments.
D. Increase the possibility of profitable business investments.
Reducing interest rates could increase the possibility of profitable business investments. Higher interest rates affect the economy by raising the cost of capital for business investments; increase the cost of borrowing and the return from saving, which discourages consumers from spending, especially to buy houses and major durable goods like cars and furniture on credit, and encourages them to save more; and increases the portion of household income needed to service debt, such as mortgage payments.
If Canada’s inflation rate is consistently lower than that in the U.S., what impact will this likely have on the value of the Canadian dollar relative to the US dollar?
A. Decrease.
B. Increase.
C. Increase, but only if nominal interest rates fall by the inflation differential.
D. Increase the direct correlation between the two currencies.
B. Increase.
Predicting the direction of exchange rates consumes the attention of many economists and analysts. Over time, the currencies of countries with consistently lower inflation rise, reflecting their increased purchasing power relative to other currencies. If the inflation rate in Canada is consistently lower than the U.S. rate, the value of the Canadian dollar would most likely rise against the US dollar.
Given the following information in the table, select the equilibrium price for this product.
Price Quantity Demanded (units) Quantity Supplied (units) $400 6000 1000 $450 5000 2500 $500 4500 3000 $550 4000 4000 $600 3500 4500 $650 2000 5000 $700 1000 6000 A. $400 B. $500 C. $550 D. $700
C. $550
The one price that ensures a balance between the quantity demanded and the quantity supplied is $550. This intersection yields an equilibrium demand of 4,000 and an equilibrium supply of 4,000 units.
Real GDP grew by 4.6% last year, while nominal GDP grew by 8.2%. Calculate inflation for the period.
A. 0.56%
B. 1.78%
C. 3.60%
D. 3.77%
C. 3.60%
Real GDP is the amount of output adjusted for the effects of inflation because it eliminates the impact of changes in the prices of goods and services on the amount of output produced during the year.
Real GDP = Nominal GDP - Inflation; therefore Inflation = Nominal GDP - Real GDP.
Identify the lagging indicator.
A. Commodity prices.
B. Unemployment.
C. Average Hours worked per week.
D. Industrial production.
B. Unemployment.
Unemployment is a lagging indicator. Employers are reluctant to hire new workers until they are certain that the economy is expanding. As a result, unemployment typically will start to fall after the business cycle has bottomed. Commodity prices and average hours worked are leading indicators, while industrial production is a coincident indicator.
Identify a factor that can allow for further employment growth when an economy is at the natural unemployment rate.
A. Strengthening in the economy.
B. Increase in inflation.
C. Increase in the level of wages.
D. Increase in taxation.
C. Increase in the level of wages.
When the economy is already at the natural unemployment rate, further employment growth can be achieved through increased wages to attract people into the labour force. Only by increasing the overall labour supply can employment growth occur. The increase in wages may result in an increase in inflation.
Select the factor that has the least influence on interest rates.
A. Central bank credibility.
B. S&P/TSX Composite Index.
C. Foreign interest rates.
D. Demand and supply of capital.
B. S&P/TSX Composite Index.
A broad range of factors influences interest rates:
Demand and supply of capital: A large government deficit or a boom in business investment raises the demand for capital and forces up the price of credit (interest rates), unless there is an equivalent increase in the supply of capital. In turn, the higher interest rate may encourage people to save more. An increase in the savings of government, companies or households may reduce their demand for borrowing. This, in turn, may reduce interest rates.
Default risk: The greater the risk that borrowers may default on money they have borrowed, the higher the interest rate demanded by lenders. If the central government is at risk of defaulting on its debt, interest rates rise for everybody. This additional interest rate is referred to as a default premium.
Foreign interest rates and the exchange rate: Since Canada has an open economy and investors are free to move their money between Canada and other countries, foreign interest rates and financial conditions influence Canadian interest rates.
Central bank credibility: The central bank exercises its influence on the economy by raising and lowering short-term interest rates. One of its main responsibilities is to keep inflation low and stable. A well-established Central Bank can raise and lower interest rates by a small amount and still send a strong signal to the market to control inflation.
The S&P/TSX will generally react to changes in interest rates, but is not in itself considered an important determinant factor that influences interest rates.
