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Macro > Exam 2 > Flashcards

Exam 2 Flashcards

1
Q

What are the conditions to be considered unemployed (3)?

A

1) 15 years of age or older
2) Actively seeking work
3) Available for work

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2
Q

Formula for unemployment rate?

A

U/LF X 100

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3
Q

What are reasons the unemployment rate could rise (2)?

A

1) Recession, therefore job losses
2) Discouraged workers returning to labour force (U increases)
3) Company closures
4) Smaller number of full-time jobs (E decreases)

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4
Q

How long does it take for a trend to be established?

A

3-6 months

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5
Q

What are the 3 main measurement problems the UR data?

A

1) Unrealistic wage expectations
2) Discouraged workers
3) Involuntary part-time workers

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6
Q

What are 4 types of unemployment?

A

Frictional, structural, cyclical, and seasonal

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7
Q

What is frictional unemployment?

A

Frictional unemployment is the # of those unemployed due to normal business conditions (e.g. contracts, business bankruptcy)

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8
Q

What is structural unemployment?

A

Structural unemployment is the # of those unemployed due to permanent changes in a particular region or industry (mismatch between skills and workers)

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9
Q

What is cyclical unemployment?

A

Cyclical unemployment is the # of those unemployed temporarily due to recession

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10
Q

What is the natural rate of unemployment?

A

The natural rate of unemployment is what the unemployment rate would be if there was no cyclical unemployment. We assume frictional and structural unemployment are always “naturally” there.

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11
Q

What is potential output (Yfe)?

A

Potential output is the potential Real GDP when the economy is fully employing its labour force (natural rate.

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12
Q

What are 4 costs of unemployment?

A

Loss of potential output, loss of human capital, increase in crime and health costs, and loss of tax revenue for the government.

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13
Q

What is Okun’s law?

A

Okun’s Law determines that potential output by stating that for every necessary 1% drop in the UR to reach the NR, Real GDP must rise by 3%.

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14
Q

What is the formula to calculate the rate of growth?

A

(Present/Past) -1 = X 100

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15
Q

What is CPI?

A

Consumer Price Index. Change in general levels of prices of goods and services consumers buy

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16
Q

What is IPPI?

A

Industrial Product Price Index. Change in general level of prices of inputs firms buy

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17
Q

What is the “Deflator” also known as? What is it?

A

The Deflator is also known as the GDP Implicit Price Deflator Index. It’s the average of all prices of everything in GNP and GDP.

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18
Q

How is the inflation rate calculated?

A

Inflation rate is the rate of growth (present/past -1 x 100) of the price level.

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19
Q

How can we tell there is deflation?

A

We could tell that there is deflation if the inflation rate is negative.

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20
Q

What is a healthy inflation rate?

A

A healthy inflation rate would lie between 1-3%

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21
Q

What are the 5 degrees of severity of inflation?

A

1) Deflation (-%)
2) Creeping (below 10%)
3) Double-digit (10-19%)
4) Galloping (20-60%)
5) Hyper-inflation (600+%)

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22
Q

What are 3 causes of inflation?

A

1) Excess demand or excess spending
2) Supply shocks
3) Excessive increases in money supply

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23
Q

What is the macro effect of excess demand inflation?

A

If sav

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24
Q

What is CPI?

A

Consumer Price Index. Change in general levels of prices of goods and services consumers buy

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25
Q

What is IPPI?

A

Industrial Product Price Index. Change in general level of prices of inputs firms buy

26
Q

What is the GNP?

A

GNP is Gross National Product. It is the dollar value of final goods and services produced by Canadian-owned (min 50%) producers only, within a quarter or year.

27
Q

How is the inflation rate calculated?

A

Inflation rate is the rate of growth (present/past -1 x 100) of the price level.

28
Q

How can we tell there is deflation?

A

We could tell that there is deflation if the inflation rate is negative.

29
Q

What is a healthy inflation rate?

A

A healthy inflation rate would lie between 1-3%

30
Q

What are the 5 degrees of severity of inflation?

A

1) Deflation (-%)
2) Creeping (below 10%)
3) Double-digit (10-19%)
4) Galloping (20-60%)
5) Hyper-inflation (600+%)

31
Q

What are 3 causes of inflation?

A

1) Excess demand or excess spending
2) Supply shocks
3) Excessive increases in money supply

32
Q

What is the macro effect of excess demand inflation?

A

If savings (S) drop, interest rates (r) go up and business investments (I) drop.

33
Q

What are the effects of excess demand inflation of these groups: Owners of real assets, debtors, owners of financial assets, and creditors?

A

Owners of real assets - winners because the value of the real assets will increase
Debtors - winners because the value of what was purchased with the borrowed money goes up
Owners of financial assets - losers because purchasing power of money in savings drops
Creditors - the lender (or creditor) will receive money back that has less purchasing power

34
Q

What is the GDP?

A

GDP is Gross Domestic Product. It is the dollar value of final goods and services produced within the geographic borders of Canada, by all producers regardless of their ownership, within a quarter or year.

35
Q

What is the formula to calculate Real GDP?

A

Nominal GDP/Current Price Index X 100

36
Q

Why does GDP trend upward all the time?

A

Population growth, advancement of quality of technology, and spread of technology leads the GDP to grow.

37
Q

What are the 4 parts of a business cycle?

A

Recession/Contraction, Trough, Recovery/Expansion, and Peak

38
Q

How do we know a recovery has begun?

A

We know a recovery has begun when % change in Real GDP becomes positive again.

39
Q

True or False: Does unemployment cause inflation or vice versa?

A

False. Changes in GDP causes changes in the unemployment rate and inflation

40
Q

What happens in a recession to the unemployment rate and the inflation rate?

A

In a recession, the unemployment rate will rise quickly and the inflation rate will tend to slow down but remain positive.

41
Q

What happens in a recovery to the unemployment rate and the inflation rate?

A

In a recovery, the unemployment rate will usually rise for the first year or two while discouraged workers are being re-hired, then slowly trend downwards for several years. The inflation rate will tend to accelerate.

42
Q

What is the difference between nominal and Real GDP?

A

Nominal (or current dollar) GDP is the current output valued at current prices. Real (or constant dollar) GDP is the current output valued at base year prices.

43
Q

What is the formula to calculate Real GDP?

A

Nominal GDP X [Price Index (Base Year)/Price Index Current Year]

44
Q

What is the formula to calculate Price Index?

A

(Same as Real GDP), Nominal GDP/Real GDP X 100

45
Q

What are real interest rates (r)?

A

Real interest rates (r) are what firms calculate because they consider the inflation rate. r= i-p, where i=nominal interest rate and p=inflation rate

46
Q

What happens when AE>Y?

A

When the economy is producing Y, but planned spending is higher than production Y, firms will notice that their inventories will be falling unexpectedly so they will increase production: economic expansion

47
Q

What happens when AE

A

When the economy is producing Y, but planned spending is lower than production Y, firms will notice that their inventories will be rising unexpectedly so they will decrease production: recession

48
Q

What does the Keynesian cross diagram show (2)?

A

1) The economy is stable: there is always an equilibrium point we are moving towards
2) The economy does not correct itself: businesses must match production to customer spending

49
Q

Why does the government budget matter?

A

The government budget matters because if it is in deficit, it almost always means taxes will be increased in the future, leading to the economy to slow down.

50
Q

Who and what is involved in fiscal policy?

A

The elected government runs fiscal policies and government spending and taxes are involved to affect the economy.

51
Q

What occurs in an expansionary fiscal policy?

A

In an expansionary fiscal policy, the government will increase spending and/or cut taxes so that AE will increase and there will be an expansion. It is used when the economy is on the verge of a recession or to reduce an occurring recession.

52
Q

What occurs in a contractionary fiscal policy?

A

In a contractionary fiscal policy, the government will cut spending and/or increase taxes to slow spending in the economy down to prevent or reduce inflation.

53
Q

Who and what is involved in monetary policy?

A

The Bank of Canada runs monetary policies and use of money supply to banks and interest rates are involved to affect the economy.

54
Q

What occurs in an expansionary monetary policy?

A

In an expansionary monetary policy, the Bank of Canada will increase the supply of money to the banking system, making interest rates come down and investment increases.

55
Q

What occurs in a contractionary monetary policy?

A

In a contractionary monetary policy, the Bank of Canada will reduce the supply of money to the banking system, making interest rates rise so that investments and overall spending slows down.

56
Q

What is the wealth effect?

A

The wealth effect is when purchasing power of wealth goes down as prices rise.

57
Q

What is the international substitution effect?

A

The international substitution effect is when demand for demand for exports (X) falls and imports (M) rises because if Canadian prices rise while trading partner’s prices remain stable, we will buy more imports and trading partners will buy less of our exports.

58
Q

What will make the AD curve shift?

A

Changes in C, I, G, T, X or M and fiscal or monetary policies can shift the AD curve.

59
Q

What will make the SAS curve shift?

A

Massive country-wide change in input prices like energy costs or wages will make the SAS curve shift. Also, if there is a country-wide shock to resources or technology.

60
Q

What makes the LAS curve shift?

A

If there is a country-wide shock to resources or technology, it will make the LAS curve shift.

Macro (8 decks)

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