Chapter 6: Macroeconomics: The Big Picture

Question 1

What is the definition of the unemployment rate?

Answer 1

Number of people looking for work who couldn’t find it, expressed as a percentage of the labour force

Question 2

What is microeconomics concerned with?

Answer 2

The consumption and production decisions of individual consumers and producers and with the allocation of scarce resources among industries

Question 3

What is at the core of macroeconomics?

Answer 3

The effort to understand economic slumps and find ways to prevent them

Question 4

What is the definition of macroeconomics?

Answer 4

Macroeconomics examines the overall behaviour of the economy - how all the actions of individuals and firms in the economy interact to produce a particular economy-wide level of economic performance

Question 5

What is the paradox of thrift?

Answer 5

When firms and individuals are worried about a recession or economic hard times, they cut back on spending. This reduction in spending depresses the economy as consumers spend less and businesses react by laying off workers. As a result, firms and individuals may end up worse off than if they hadn’t tried to act responsibly by cutting spending.

Question 6

What is a key insight about the behaviour of the macroeconomy?

Answer 6

The whole is greater than the sum of its parts - the combined effect of individual decisions can have results that are very different from what one individual intended, and the results are sometimes perverse.

Question 7

What are macroeconomists concerned with?

Answer 7

Questions about policy and what governments can do to make macroeconomic performance better

Question 8

What is the difference between monetary policy and fiscal policy?

Answer 8

Monetary policy uses changes in the quantity of money in circulation designed to alter interest rates, which in turn affects the level of overall spending

Fiscal policy uses changes in taxes and government spending designed to affect overall spending

Question 9

Why do we need macroeconomics in addition to microeconomics?

Answer 9

Many thousands or millions of individual actions compound upon one another to produce an outcome that isn’t simply the sum of individual actions (aka the whole is greater than the sum of its parts)

Question 10

What are Keynesian economics?

Answer 10

A school of thought emerging from the works of John Maynard Keynes; according to Keynesian economics, a depressed economy is the result of inadequate spending and government intervention can help a depressed economy through monetary and fiscal policy

Question 11

What are some examples of fiscal policy?

Answer 11

Increases in gov spending, reducing taxes, shoring up banks with loans, aid, and guarantees

Question 12

What is the difference between microeconomics and macroeconomics?

Answer 12

Microeconomics focuses on decision making by individuals and firms and the consequences of those decisions. Macroeconomics focuses on the overall behaviour of the economy. They differ in the types of questions they try to answer.

Question 13

What is the definition of a recession?

Answer 13

A widespread downturn, in which output and employment in many industries fall

Question 14

What is another word for recession?

Answer 14

Contraction

Question 15

What is the definition of expansion?

Answer 15

When the economy isn’t in a recession; when most economic numbers are following their normal upward trend

Question 16

What is another word for expansion?

Answer 16

Recovery

Question 17

What is the definition of the business cycle?

Answer 17

The short-run alternation between recessions and expansions

Question 18

What is the definition of a business cycle peak?

Answer 18

The point in time at which the economy shifts from expansion to recession

Question 19

What is the definition of a business cycle trough?

Answer 19

The point in time at which the economy shifts from recession to expansion

Question 20

What is the most important effect of a recession?

Answer 20

Its effect on the ability of workers to find and hold jobs

Question 21

What does policy guided by macroeconomic analysis help achieve?

Answer 21

Economic stability

Question 22

What is the definition of long-run economic growth?

Answer 22

The sustained rise in the quantity of goods and services the economy produces

Question 23

What is long-run economic growth per capita and what does it achieve?

Answer 23

A sustained upward trend in output per person. It is the key to higher wages and rising standards of living

Question 24

Why is long-run economic growth especially crucial in poorer countries?

Answer 24

Poorer countries would like to achieve a higher standard of living. The question of how to accelerate long-run economic growth is the central concern of economic policy

Question 25

What is the definition of inflation?

Answer 25

A rise of the overall level of prices

Question 26

What is the definition of deflation?

Answer 26

A decrease or fall in the overall level of prices

Question 27

Why do supply and demand not sufficiently explain inflation and deflation?

Answer 27

Supply and demand can only explain why a particular good or service becomes more expensive relative to other goods and services. It doesn’t explain overall rises and falls in price levels

Question 28

What is closely related to movements in inflation and deflation?

Answer 28

The business cycle (in the short run)

Question 29

What determines overall price levels?

Answer 29

Changes in the money supply - the total quantity of assets that can be readily used to make purchases

Question 30

What is the relationship between cash value and inflation & deflation?

Answer 30

When inflation occurs, cash value drops as prices go up. Cash can no longer purchase the same amount it was previously able to. Inflation discourages people from holding onto cash. When deflation occurs, the opposite happens. If the price level is falling, cash value goes up over time.

Question 31

What is the definition of price stability?

Answer 31

A situation in which the overall cost of living is changing slowly or not at all

Question 32

Why is price stability a desirable economic goal?

Answer 32

When inflation occurs, cash value drops and discourages people from holding onto cash. Cost of living goes up and people suffer. When deflation occurs, people are encouraged to hold onto cash. This can cause a recession due to a reduction in consumer spending. Both inflation and deflation cause problems for the economy.

Question 33

What is the definition of an open economy?

Answer 33

An economy that trades goods and services with other countries

Question 34

What is the definition of a trade deficit?

Answer 34

When the value of goods and services bought from foreigners (imports) is more than the value of goods and services sold to consumers abroad (exports)

Question 35

What is the definition of a trade surplus?

Answer 35

When the value of goods and services sold to consumers abroad (exports) is more than the value of goods and services bought from foreigners (imports)

Question 36

Explain the relationship between economic success and trade deficits/surpluses.

Answer 36

Trade deficits and surpluses reflect macroeconomic forces, especially differences in savings and investment spending. Countries running trade deficits can AFFORD to run a deficit and do more investment spending. They can build goods that in turn produce more goods and services in the economy, triggering economic growth. Therefore, many richer countries are running trade deficits. However, this is not a hard and fast rule. In reality, there is no simple relationship between economic success and trade deficits/surpluses.

Question 37

What are trade deficits or surpluses determined by?

Answer 37

A country’s savings and investment spending

Question 38

What event triggered Keynesian economics?

Answer 38

The Great Depression

Question 39

What is the relationship between the money supply and inflation & deflation?

Answer 39

Price levels impact the overall quantity of money in circulation

Question 40

What was the general economic thought before the Great Depression and Keynesian economics?

Answer 40

That the economy was self-regulating. Problems in unemployment would be corrected by “the invisible hand” and that government attempts to improve the economy would be ineffective or make things worse

Question 41

How do you calculate present value?

Answer 41

PV = Amount + (1+Interest)

Question 42

How do you calculate future value?

Answer 42

FV = PV + (1+interest)

Question 43

When did the Great Recession start and end?

Answer 43

December 2007 - June 2009

Question 44

When did the Great Depression start and end?

Answer 44

1929 - 1940

Question 45

What was the peak inflation rate during the Great Depression?

Answer 45

20%

Question 46

From 1929 - 1933, how much did economic output fall in Canada?

Answer 46

43%

Question 47

What is Keynes full name?

Answer 47

John Maynard Keynes

Question 48

What is the yield rate?

Answer 48

Investment return from purchased bonds

Question 49

When investors are expecting a recession, they will…

Answer 49

Buy more treasury bonds, causing the yield rate to fall

Question 50

A very low yield rate is a sign of…

Answer 50

Recessionary expectation

Question 51

How do you decide when a yield rate is “too low”?

Answer 51

Compare long run bond rates with short run treasury bill yields

Question 52

What is treasury spread?

Answer 52

Difference between the long-term bond and the short-term bond (Interest of long-term bond - interest of short-term treasury bill)

Question 53

How are bond interest and bond price related?

Answer 53

Inversely

Question 54

How do you calculate max. price you’re willing to pay on an old 2-year bond?

Answer 54

Max. price on 2 year bond = (coupon $/1 + new interest rate) + ((full return amount + coupon)/new interest rate^2)

Question 55

What factors cause inflation?

Answer 55

In the short run, the level of economic activities relative to the potential economic output. In the long-run, quantity of money supply in the economy

Question 56

What is the moderate inflation rate that economists favour?

Answer 56

2%-4%