Chapter 5

Question 1

The 3 Major Macroeconomic goals in Canada

Answer 1

Employment, Price-level stability, Economic Growth

Question 2

Employment

Answer 2

Maintaining employment of human resources at relatively high levels (keep employment up)

Question 3

Price-level stability

Answer 3

Keeping prices at relatively stable level so that economic agents can make better decisions.

Question 4

Economic growth

Answer 4

achieving a high rate of growth in real output over time to improve living standards.

Question 5

Real gross domestic product (RGDP)

Answer 5

• Measures the total value of all final goods and services produced in a given time period, (year/quarter) adjusted for inflation.
• Used to measure the level of output or production in the entire economy

Question 6

Labour force

Answer 6

someone who is 15+ and willing to work

Question 7

Unemployment Rate

Answer 7

The percentage of people in the labour force who are unemployed

Question 8

Unemployment statistics do not account for:

Answer 8

• discouraged workers: individuals who left the labour force because they could not find a job
• Part-time workers counted as fully employed
• underground/illegal workers are not counted in statistics

Question 9

Long term unemployment

Answer 9

(>13 weeks) accounts for 40-50% of total unemployment

Question 10

Labour force participation rate

Answer 10

percentage of population (15+) in the labour force.

Question 11

Frictional Unemployment

Answer 11

the temporary unemployment that results from workers searching for suitable jobs and firms looking for suitable workers. (From normal turnover, or while in between changing jobs)

Question 12

Structural Unemployment

Answer 12

unemployment due to lack of skills necessary for available jobs.

• Reflects the dynamic dimension of a changing economy.
• Unavoidable because of imperfections in the labour market.
• Government training programs help reduce this

Question 13

Cyclical unemployment

Answer 13

Unemployment due to short-term cyclical fluctuations in the economy

• Occurs during recession due to inadequate demand
• Viewed as correctable through government policies.
• High economic and personal cost

Question 14

Natural rate of unemployment

Answer 14

The amount of unemployment that is unavoidable, equal to sum of frictional and structural unemployment when they are at a maximum.

• It exists when the economy is
  neither in a recession nor a boom
• Around 6-7% in Canada

Question 15

Potential output

Answer 15

The amount of real output the economy would produce if all of its labour and other resources were fully employed. (Employed all who are willing to work)

Question 16

Employment Insurance

Answer 16

allows workers to maintain some income and spending, reducing hardship and severity of unemployment.

• Leads to more frictional unemployment.
• Eliminating it could reduce unemployment.
• Could reduce or enhance well-being if removed

Question 17

Price level

Answer 17

The average level of prices in the economy

Question 18

Inflation

Answer 18

a continuous rise in the overall price level

• Consumers and producers have difficulty coordinating their plans and decisions without price stability.

Question 19

Deflation

Answer 19

a decrease in the overall price level

Question 20

Consumer Price Index (CPI)

Answer 20

a measure of the prices of a basket of consumer goods and services, used asa standard measure of inflation

Question 21

Anticipated Inflation

Answer 21

Inflation rate that people expect

• Does not cause a problem because people see it coming and can prepare

Question 22

Winners and Losers during inflation

Answer 22

• Inflation lowers income for people on fixed-dollar incomes (working class)
• Erodes real wealth of the creditor
• Hurts people whose income are tied to long term contracts
• Debtors pay back dollars worth LESS in purchasing power

Question 23

Nominal interest rate

Answer 23

The reported interest rate, not adjusted for inflation.

Question 24

Real interest rate

Answer 24

Nominal interest rate, minus inflation rate (also called the inflation-adjusted rate)

Question 25

Four phases of business cycle

Answer 25

Expansion, Peak, Contraction, Trough

Question 26

Expansion

Answer 26

When output (RGDP) is rising significantly.

• Unemployment is falling
• Business and consumer spending are high

Question 27

Peak

Answer 27

When output is at its highest point

• When expansion comes to an end.

Question 28

Contraction

Answer 28

When the economy’s output is failing.
- After peak, Before expansion

• Spending and investments fall
• Also called recession: A period of significant decline in output and employment.

Question 29

Trough

Answer 29

When output stops declining.

• When business activity is at its lowest point in the cycle.
• Unemployment is relatively high, and may remain into expansion

Question 30

Leading economic indicators

Answer 30

Factors that typically change before changes in economic activity. (Like a symptom)

• Provide warning of a likely turndown but not its depth or duration