Chapter 4 part 3

Question 1

what is the natural unemployment rate?

Answer 1

The minimum unemployment rate mostly due to frictional unemployment. unemployment rate can never be zero

Question 2

explain how the bank of canada compares the actual unemployment rate compared to the natural unemployment rate?

Answer 2

If the actual unemployment rate is lower than the natural unemployment rate there is a shortage of workers and wages rise increasing inflation. when the actual unemployment rate is higher than the natural. there is a shortage of jobs, wages stay the same and inflation stays in check

Question 3

What are 5 factors that influence the bank of canada interest rate?

Answer 3

1. demand and supply of capital -
   large government deficits or a boom in business may raise interest rates. raised interest rates may cause people to save more. an increase in savings may cause there to be less borrowing.
2. default risk -
   if the central bank has a risk of defaulting on its debts , interest rates raise for everybody.
3. foreign interest rates and exchange rate -
   canada has an open economy where foreign investors can put there money so foreign interest rates and policy also effect the canadian interest rates.
4. central bank credibility -
   one of its main responsibilities is to keep inflation low and stable. the more credible and long established a commitment to low interest rates has been. the lower the interest rates will be to compensate for rising inflation.
5. Inflation -
   the higher the inflation rate, the higher the interest rate has to be to charged by lenders to compensate for the erosion of purchasing power over the loan.

Question 4

what are 3 effects of rising interest rates?

Answer 4

1. Less room for profitability because it costs more to borrow
2. less consumer spending on housing and major durable goods.
3. increasing the household income need to service debt can offset the increase interest for savers.

Question 5

what is the difference between nominal interest and real interest?

Answer 5

Nominal interest does not subtract inflation

Real interest shows how much interest will be made taking into account inflation

Question 6

What are the 3 traits of money?

Answer 6

1. medium of exchange
2. acts a unit of measurement to know how much goods cost
3. Store of value

Question 7

what is a monetary aggregate?

Answer 7

a way of measuring how much money is in circulation.

Question 8

What are 2 situations that are not considered inflation?

Answer 8

1. a one time jump in prices due to something like change in price of oil or change in sales tax
2. a singular product increasing in price due to something like scarcity

Question 9

What does the Consumer price index measure?

Answer 9

It measures inflation by measuring the cost of living

Question 10

what are 4 costs of inflation?

Answer 10

1. lowers standards of living
2. reduces returns of investments
3. distorts price signals as can be hard to determine if high prices are due to inflation or relative price change
4. accelerated inflation causes higher interest rates and recessions