Chapter 4: What Macroeconomics is all about

Question 1

Key Macroeconomic Variables

Answer 1

national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports

Question 2

income

Answer 2

production of output

Question 3

Aggregation problem

Answer 3

a summary measure, such as GDP

Question 4

Nominal National Income

Answer 4

a method of aggregation which is measured in current dollars (CAD)

Question 5

Real National Income

Answer 5

a method of aggregation which is measured in constant (base-period) dollars, reflecting quantity changes

helps with inflation measurement. includes a base year.

Question 6

Real GDP

Answer 6

Measures the total output produced by the nation’s economy
annually

Question 7

Long-Run Trend

Answer 7

economic growth

USA economy vs. Canadian economy

Question 8

Short-Run Fluctuations

Answer 8

Business cycle

lack of workers, to high unemployment

Question 9

Potential Output

Answer 9

what the economy could produce if all
resources were employed at their normal levels of utilization

also referred to as the Full Employment Output

Question 10

Output Gap

Answer 10

Difference between potential output and actual
output

Question 11

Recessionary gap notated

Answer 11

Y < Y∗

Question 12

Inflationary gap notated

Answer 12

Y > Y∗

Question 13

why do economists look at long run trends?

Answer 13

The long-run trend in real per capita national income is an important determinant of improvements in a society s overall standard of living (economic growth makes people materially better off on average).

Question 14

why do economists look at short run trends?

Answer 14

This allows economists to make predictions. if there is recessionary gap, there is higher unemployment and suffering, lost output and economic waste. when there is an inflationary gap, there is risk of high inflation, causing goods to be expensive and money to be worth less.

Question 15

Employment

Answer 15

number of workers holding jobs

Question 16

Unemployment

Answer 16

Number not employed but actively seeking work

Question 17

labour force

Answer 17

employed + unemployed. does not include students or people actively looking for a job (stay at home wives)

Question 18

Unemployment Rate

Answer 18

Percentage of unemployed in the
labour force. equal to the number of people unemployed/number of people in the labour force x 100

Question 19

NAIRU

Answer 19

non-accelerating inflation rate of unemployment. Above = recession, Below = inflation. unemployment rate when Y = Y∗

what is natural for an economy

Question 20

Why was there a spike in the labour force and production starting around the mid-1970s?

Answer 20

Women entering the work force, immigration, allowed for growth in employment and the labour force

Question 21

Frictional unemployment

Answer 21

more short term. natural turnover, people get fired, rehired, moved departments, etc. normal for an economy.

Question 22

Structural unemployment

Answer 22

longer term. stems from too many jobs and too little workers, or too little jobs and too many workers

Question 23

Why does unemployment matter?

Answer 23

Loss of income, Loss of output, Associated with crime, mental illness, and social unrest.

Question 24

Productivity

Answer 24

A measure of output per unit of input. Often measured as GDP per worker or GDP per hour worked.

can be determinate in long-term living standards

Question 25

Price Level

Answer 25

Average level of all prices in the economy

Question 26

Inflation

Answer 26

The rate at which the price level is changing

Question 27

Consumer Price Index (CPI)

Answer 27

An index of prices used to measure the change in the cost of basic goods and services in comparison with a fixed base period

Based on price of a typical “consumption basket” relative to a base year

Question 28

purchasing power

Answer 28

Amount of goods/services a unit of money
can buy.

Question 29

Why does inflation matter?

Answer 29

it’s effects reduces purchasing power and the real value of sums fixed in nominal terms

Question 30

Unanticipated inflation

Answer 30

inflation which occurs completely against currently models or projections which exist

COVID, etc.

Question 31

effects of unanticipated inflation

Answer 31

leads to more changes in
the real value of prices and wages

Question 32

steady inflation level

Answer 32

keeping inflation around 2% allows for fluctuation and stability. wages and salaries have time to catch up with rising prices, incentivizing spending.

Question 33

Nominal interest rate

Answer 33

The rate expressed in money terms

Question 34

interest rate

Answer 34

the price of “credit”, and the flow of credit is
crucial to firms and households in a modern economy as it allows for stimulation and the flow of money

Question 35

Real interest rate

Answer 35

The rate expressed in terms of purchasing power

The burden of borrowing depends upon this

Question 36

prime interest rate

Answer 36

interest rate that banks charge
to their best business customers

Question 37

bank rate

Answer 37

interest rate that the Bank of Canada
charges on short-term loans to commercial banks

Question 38

Exchange rate

Answer 38

The number of Canadian dollars required to
purchase one unit of foreign currency.

1 Canadian dollar can buy 1.35 American Dollars

Question 39

Depreciation

Answer 39

Means that this currency is worth less on the foreign-exchange market

allows for a rise in exchange rate

Question 40

Appreciation

Answer 40

means that this currency is worth more on the foreign-exchange market

people want to buy more Canadian products, forcing them to buy CAD

Question 41

Monetary Policy

Answer 41

Higher interest rates attract foreign capital

appreciation

Question 42

Inflation

Answer 42

High inflation reduces demand for the currency

depreciation

Question 43

Fiscal Policy toward exchange rates

Answer 43

Deficits may weaken the dollar; economic growth can strengthen it

Question 44

Trade Balance toward exchange rates

Answer 44

Surpluses strengthen CAD; deficits weaken it