Chapter 4 - What Macroeconomics is All About Flashcards
What is the value of total production of goods and services of a nation
National product or national income
(or output)
Total output is measured in __________
dollars
With real national income, _______ are held constant to enable us to see changes in _________
prices
quantity
What is a nation’s potential output
When all of a country’s resources - its land, labour, and capital - are being employed at normal levels of utilization
(fully employed)
What is the output gap
Difference between actual and potential outputs
(Actual - Potential) = (Y - Y*)
When does an inflationary gap occur?
When the actual output is greater than the potential one
When does a recessionary gap occur?
When the potential output is greater than the actual one
What is the business cycle?
Recession –> Trough –> Recovery –> Peak –> …
What is the nominal national income?
The total national income measured in current dollars
What are 3 ways to increase nominal national income
1- Change in production
2- Change in price
3- Change in both
What is the GDP definition?
Market value of all final goods and services produced in a region over a period of time
Of what consists the labor force?
The unemployed and the employed
What type of unemployment is this:
Caused by the normal turnover of labor. New people enter the market, some quit or are fired.
Frictional
What is frictional unemployment?
Unemployment caused by the normal turnover of labor. New people enter the market, some quit or are fired.
What type of unemployment is caused by the mismatch between jobs and workers (between the structure of the supplies of labor and the structure of the demands of labor)
Structural
What is structural unemployment
Unemployment is caused by the mismatch between jobs and workers (between the structure of the supplies of labor and the structure of the demands of labor)
When does cyclical unemployment occur?
When real GDP is less than potential GDP
What are the 5 requirements to be unemployed?
1- Out of work
2- Able to work
3- Willing to work
4- Actively looking for a job
5- Aged 15+
What is the unemployment rate equation?
unemployed / # in the labor force
What is the measure of the amount of output that the economy produces per unit of input
Productivity
What is the definition of productivity?
The measure of the amount of output that the economy produces per unit of input
What is labor productivity (equation)
𝑙𝑒𝑣𝑒𝑙 𝑜𝑓 𝑟𝑒𝑎𝑙 𝐺𝐷𝑃 /
𝑙𝑒𝑣𝑒𝑙 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 (𝑡𝑜𝑡𝑎𝑙 ℎ𝑜𝑢𝑟𝑠 𝑤𝑜𝑟𝑘𝑒𝑑)
What is inflation?
A rise in the average level of all prices
What is the price level?
The average level of all prices in the economy,
expressed as an index number
What is the CPI and what does it measures
Consumer Price Index
Measures the average prices of goods and services bought by the typical Canadian household
What is the equation for the rate of inflation?
𝑅𝑎𝑡𝑒 𝑜𝑓 𝑖𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛=
(𝑁𝑒𝑤 𝐶𝑃𝐼−𝑂𝑙𝑑 𝐶𝑃𝐼) / (𝑂𝑙𝑑 𝐶𝑃𝐼) ∗100
Formula of real GDP per person?
Real GDP / Population
Formula of real GDP per hour worked
Real GDP / (number of full-time employed worker * hours worked per worker)
At what inflation rate do prices come closest to being stable?
If they’re close to 0%
When is the inflation rate closest to being stable for 2 consecutive years
When it stays the same
e.g., 2014: 2.7% and 2015: 2.7%
How do you calculate CPI
Total expenditures year x
/
Total expenditures base year
* 100
answer should be around 100 (but depends)
What is the real interest rate formula?
Real Interest Rate = Nominal Rate - Inflation Rate
Suppose Honest Rob’s Used Cars buys a used car for $5,000 and resells it for $6,200. The result of Honest Rob’s transactions is to
Increase the value of national income by $1,200
_________ are better off when real interest rate falls
Borrowers
________ are better off when real interest rate rises
Savers
What is the main result of long-term economic growth?
Rising average living standards
Understanding business cycles requires an understanding of __________
Monetary policy
How can actual GDP exceed potential GDP?
When labour works overtime
What is the actual output
What the economy actually produces
True or False
Economic growth makes everyone better off
False
e.g., shift from agriculture to manufacturing
What tend to be associated with long-term unemployment
Crimes, mental illness and general social unrest
What is the amount of goods and service that can be purchased with a unit of money
The Purchasing Power of Money
Inflation reduces, increases, or has no effect on purchasing power
It reduces it
What is the interest rate
The price to pay to borrow money for a stated period of time
What is the interest rate that banks charge their best customers
Prime interest rate
What is the prime rate?
The interest rate that banks charge their best customers
What is an exchange rate
The price of one currency in terms of the other
In our Class, it’s the number of CAD needed to buy 1 unit of another currency
If it now takes more CAD to buy one unit of foreign currency, the CAD has __________
Depreciated
If it now takes less CAD to buy one unit of foreign currency, the CAD has __________
Appreciated
A strong dollar is _____ for importing and _______ for exporting
good and bad
What are net exports
the balance between imports and exports
Exports - Imports
Who plays an important role in the credit market?
Banks
They intermediate between households and firms
Which type of growth has a larger effect for a society’s living standards?
Long-term growth
(but its less talked about in the medias)
When was the interest rate high in Canada? (2)
In the mid-1970s
and between 1980-1982
A rise in the exchange rate means that it takes _________ Canadian dollars to purchase one unit of foreign currency?
more $
a rise in the exchange rate is a depreciation of the Canadian dollar
What happens when the prime rate increases?
Most other rates in the economy increase as well
People may decide to join the labour force during booms because
more jobs become available and hence there are more opportunities to find a job.
Is there a link between productivity and employment?
No
Consider an imaginary 10-year period over which output per falls, but GDP increases. How can this happen?
This is possible if
the rate of technical progress is small
How the Bank of Canada uses its policies is associated with short-term fluctuations or long-term growth?
Short-term fluctuations
