Exam #3! Flashcards
1
Q
Why do we want to be efficient with time, resources and money?
A
Resources are scarce
2
Q
Economic decisions we make are decisions of…?
A
Constrained optimization
3
Q
What are the factors of production (3)?
A
Factors of production, also called “inputs” or “intermediate goods” include:
- Labour (# of workers &/or skills of workers)
- Land (natural attributes, resources, fisheries, the weather)
- Capital (technology - machinery, buildings, equipment, etc)
4
Q
What economic problems does scarcity cause (2)?
A
Scarcity causes:
Production (p’n) : what and how to produce
& Distribution (d’n): how to distribute production
5
Q
Economic systems attempt to solve…?
A
Economic systems attempt to solve the problems of production and distribution.
6
Q
What does it mean if a country is self-sufficient?
A
If a country is self-sufficient, it means that the country’s “needs” are being fulfilled (not necessarily the “wants”).
7
Q
If a country is self-sufficient, does it require an economic system? Why?
A
Even if a country is self-sufficient, it still requires an economic system because scarcity is always present.
8
Q
What are the types of economic systems (3)? Who makes the decisions in each case?
A
The types of economic systems include:
- Tradition (decisions made by tradition)
- Command (decisions made by govern’t)
- Market (decisions made by individual private firms and consumers)
9
Q
What kind of economic system does Canada have?
A
Canada’s economic system is a mixture of both market and command systems.
10
Q
What is a pro and a con of a tradition economic system ?
A
Pro: Social stability (everyone knows their role)
Con: Inflexible and resistant to change.
11
Q
What is a pro and two cons of a command economic system?
A
Pro: Effective system for creating change at the will of the leadership.
Con 1: Leadership can be destructive
Con 2: As a country becomes more industrialized, the more complex the decisions therefore becomes harder for government to make sound decisions.
12
Q
What is a pro and a con of a market economic system?
A
Pro: Efficient for complex industrialized societies
Con: Business cycle problems (inflation, unemployment, government budget deficits, trade problems, etc.)
13
Q
How do people tend to make short-term decisions?
A
People tend to make short-term decisions based on price changes (rising or falling) and how much money they have.
14
Q
How do people tend to make long-term decisions?
A
People tend to make long-term decisions (usually more expensive ones) based on forecasts. To understand forecasts, an understanding of how markets and the macro economy works is required.
15
Q
In a market system, who is involved in making decisions (3)?
A
In a market system, those who make decisions are
Firms, Households and the Government.
16
Q
What are firms’ goal in a market system?
A
Firms’ goal is to maximize profit by keeping costs (such as wages) down and output high.
17
Q
What are households’ goal in a market system?
A
Households’ goal is to maximize leisure and income.
18
Q
Firms compete with each other for…?
A
Firms compete for customers.
19
Q
Households compete with each other for…?
A
Households compete for jobs.
20
Q
Firms’ and households’ economic decisions are made primarily by _.
A
Primarily by competition - property rights
21
Q
What are the two kinds of markets?
A
Goods and Factor markets.
22
Q
What is a real flow?
A
A real flow is the delivery of goods/services.
23
Q
What is financial flow?
A
Financial flow is payments.
24
Q
What is accounting cost?
A
Accounting cost is the out-of-pocket expenses of performing an activity.
Ex/ Going to a concert includes:
Ticket + Transportation + Food = Accounting Cost
25
What is sunk cost?
Sunk cost is a cost that is irrelevant to making a decision.
Ex/ Going to a movie vs Going out for dinner: Transportation cost is involved in both, therefore it is a sunk cost.
26
What is opportunity cost?
Opportunity cost the value to you of what you gave up. Could be financial or not.
Ex/ Going to event vs Studying
Opportunity cost of going to event: Missing out on studying.
Opportunity cost of studying: Missing out on event.
27
What is economic cost?
Economic cost is the relevant accounting cost. (Accounting cost minus sunk cost)
28
What is the difference between positive and normative statements?
Positive statements can be verified, whereas normative statements are opinions (can be higher or lower quality depending on research done).
29
What are economic forecasts? What are they used for?
Economic forecasts are detailed probability estimates of future events. They are used to assess risk. People use them to make long-term decisions.
30
Variation in economic forecasts are caused by...?
There is variation in economic forecasts due to economists having different views about positive and normative statements because of different specializations.
31
What is the purpose of economic models?
Economic models are used to approximate the way things work in the real economy.
32
What is used to simplify assumptions in economic models?
Ceteris paribus (all other things held constant)
33
What are the 3 factors to be considered unemployed?
To be considered unemployed, the individual must be:
1) At least 15 years old
2) Actively seeking work
3) Available for work
34
What does the labour force (LF) include?
The labour force includes those employed and unemployed.
35
Does an individual have to work full-time in order to be considered employed?
No. Individuals can be part-time or full-time workers to be considered employed.
36
If an individual is on vacation or sick leave, can they still be considered employed?
Yes
37
How is the unemployment rate (UR) calculated?
UR = U/LF * 100
38
A recovery means...?
A recovery means that production of goods and services (Real GDP) has gone up.
39
A recession means...?
A recession means that production of goods and services (Real GDP) has gone down.
40
What are 3 reasons the UR can go up?
Reason 1: There is a recession, so production (Real GDP) decreases (some companies even close), therefore jobs are lost.
Reason 2: There is a recession, so those who lost their full-time jobs take on part-time jobs involuntarily
Reason 3: There is a recovery, so production (Real GDP) increases, therefore previously "discouraged workers" return to the work force.
41
How long does it take for a trend to be established?
It takes about 3-6 months worth of data to conclude there is a trend established.
42
What are 3 main measurement problems in the UR data? Determine whether it over/ or understates the problem.
Problems in the UR data include:
1) Unrealistic wage expectations (won't take a job less than a given amount). Overstates the problem. Without this counted in the data, the UR would be lower.
2) Discouraged workers. Understates the problem because they are not taken into account in the UR data.
3) Involuntary part-time workers. Understates the problem. Although they may be employed, they would like full-time jobs.
43
What are the 3 types of unemployment taken into account in UR? Describe.
1) Frictional (Fr) : Between jobs/contracts, business bankruptcy, taking time off
2) Structural (St) : Long-term changes in a particular region or industry causes a mismatch with the unemployed workers' skills and the skills required for available jobs.
3) Cyclical (Cy) : Temporarily unemployed due to recession. Government and banks can implement policies to make cyclical unemployment less severe.
44
What is the natural rate of unemployment (NR)?
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 present.
45
What does full employment mean?
Full employment means that those previously cyclically unemployed have found jobs (no cyclical unemployment)
46
If the country is at full employment, it is producing...
If the country is at full employment, it is producing its full potential level of Real GDP (Y). This is called potential output or full employment level of output, represented by Yfe.
47
What are 4 costs of unemployment that affect the whole country? Which is the largest cost?
1) Loss of potential output/income
2) Loss of human capital
3) Increase in health care and crime costs
4) Loss of tax revenue for the government
48
What is Okun's Law?
Okun's Law is the relationship between the UR and the Real GDP. It states that for every 1% drop needed in the UR to reach the NR, Real GDP must rise by 3%.
49
How is the rate of growth calculated (formula)?
Rate of growth = (present/past) - 1 * 100
50
What is the CPI?
The CPI is the Consumer Price Index. It measures the change in the general level of prices of goods and services that consumers buy.
51
What is the IPPI?
The IPPI is the Industrial Product Price Index. It measures the change in the general level of prices of goods and services (inputs) that industries buy.
52
What is the full name of the Deflator? What does is represent?
The Deflator is short for "GDP Implicit Price Deflator Index)"
53
Inflation rate is the...?
Inflation rate is the rate of growth of the price level.
54
What is inflation?
Inflation is when the price index increases.
55
What is deflation?
Deflation is when the price index decreases and becomes negative.
56
What is considered a healthy inflation rate?
1-3% per year is considered a healthy inflation rate.
57
What are the 5 degrees of severity of inflation?
1) Deflation inflation (negative inflation rate)
2) Creeping inflation (10% or less / per year)
3) Double-digit inflation (10-19% / per year)
4) Galloping inflation (20-60% / per year )
5) Hyper-inflation (600% + / per year)
58
How often is double-digit inflation noticeable?
Double-digit inflation is noticeable every month.
59
How often is galloping inflation noticeable?
Galloping inflation is noticeable every week or even day.
60
How often is hyper-inflation noticeable?
Hyper-inflation is noticeable every hour of every day.
61
What are two effects (on consumers and firms) of inflation?
(unanticipated) Inflation causes consumers uncertainty therefore they will change their behaviour and try to protect the purchasing power of their money. As for firms, they will cut back on new investment projects.
62
What are the three causes of inflation?
1) Excess demand or spending
2) Supply shocks
3) Excessive increases in the supply of money caused by government debt.
63
How does excess demand or spending cause the inflation rate to increase?
When there is an economic recovery, there are more jobs available and the demand for goods and services increases. Therefore, firms need more hands so will hire more. These are unskilled workers causing a shortage in both skilled workers as well as materials since they need to produce more. Because they are producing more, firms must spend more and that money comes from the profit. Therefore they will raise the prices of their goods/services to increase profit and the inflation rate will start to accelerate.
64
What is the effect of excess demand inflation?
S↓, r↑, I↓
65
Who are winners in the case of excess demand inflation?
Debtors and owner of real assets
66
Who are losers in the case of excess demand inflation?
Creditors and owners of financial assets
67
What is GDP?
GDP is Gross Domestic Product: the dollar value of all final goods and services produced within the geographical borders, regardless of ownership.
68
What is GNP?
GNP is Gross National Product: the dollar value of all final goods and services produced by (majority) Canadian-owned producers only.
69
What is not included when calculating GDP?
Not included in the GDP:
- Personal investment (savings, stocks and bonds)
- Transfer payments
- Production without recorded transactions
70
Why does GDP trend upwards (3)?
GDP trends upwards because of population growth, spread of technology and advancement in quality of technology.
71
What are the 4 parts in a business cycle?
Recession/Contraction, Trough (lowest point), Recovery/Expansion & Peak
72
How do we know there is a recession?
We know there is a recession occurring if 2 consecutive quarters have a negative % change in Real GDP.
73
How do we know there is a recovery?
We know there is a recovery occurring if the % change in Real GDP becomes positive again.
74
During a recession, there are _ people working, therefore the _ will increase quickly. The _ will tend to slow down, but remain _ because firm's demands for inputs are lower, therefore their prices don't rise as quickly.
During a recession, there are fewer people working, therefore the UR will increase quickly. The inflation rate will tend to slow down, but remain positive because firm's demands for inputs are lower, therefore their prices don't rise as quickly.
75
What is the difference between nominal and Real GDP?
Nominal GDP: Current output valued at current prices
| Real GDP: Current output valued at base year prices
76
Why does the UR go up in the first couple of years in a recovery?
The UR will go up because discouraged workers are reentering the labour force. It will go down again once they are rehired.
77
How is Real GDP calculated?
Real GDP= Nominal GDP/Price Index of Current Year * 100
78
True or False: Real GDP determines how well off the people in a country are.
False. If we divide it by population size... Doesn't say how money is distributed...Underground economy...
79
What are injections to the circular flow of money (3)?
1) Investments (I)
2) Government Spending (G)
3) Exports (X)
80
What are withdrawals from the circular flow of money (3)?
1) Savings (S)
2) Taxes (T)
3) Imports (M)
81
What is the purpose of the aggregate expenditure model?
The aggregate expenditure model's purpose is to forecast spending.
82
In the Aggregate Expenditure model, what do AE and Y represent?
```
AE = Aggregate Expenditure
Y = actual output
```
83
Constants in the AE model are referred to as _?
Constant in the AE model are referred to as autonomous, meaning independent.
84
In the AE models, the parts of spending that fluctuate are called _?
In the AE models, the parts of spending that fluctuate are called induced expenditure.
85
In the AE model, the slopes are called _?
In the AE model, the slopes are called marginal propensities. The amount increased per 1 unit.
86
What is disposable income?
Disposable income is what is left of income after taxes.
87
Yd = _+_?
Yd = C + S
Where Yd = Disposable Income
C = Consumption
S = Savings
88
MPC + MPS = _?
MPC + MPS = 1
89
What do investment vary with the most?
Investments vary mostly with interest rates.
90
When interest rates are high, investments tend to be _...? Why?
When interest rates are high, investments tend to be low. Businesses tend to keep their money in the bank to earn more interest at this time. Borrowing money from the bank to make investments would be too costly.
91
What is the difference between nominal and real interest rates?
Nominal interest rates (i) is what the bank charges on a loan or pays on a deposit.
Real interest rates (r) are what firms calculate to decide where and when to invest.
92
How is the Real interest rate (r) calculated?
r = i - p
Where r = Real interest rate
i = nominal interest rate
p = inflation rate
93
What is does each variable in the aggregate expenditure represent? AE = C + I + G - T + X - M
```
AE = C + I + G - T + X - M
Where AE = Aggregate Expenditure
C = Consumption (consumers)
I = Investments (businesses)
G = Government spending
T = Lump sum taxes (sales tax like GST and PST)
X = Exports
M = Imports
```
94
How is the trade balance calculated?
Trade balance = X - M
Where X = Exports
M = Imports
95
When exports (X) are greater than imports (M), is there a trade deficit or surplus?
Trade surplus.
96
When exports (X) are less than imports (M), is there a trade deficit or surplus?
Trade deficit.
97
When the AE equation line becomes steeper, that is a sign of economic ___?
When the AE equation line becomes steeper, that is a sign of economic expansion.
98
When the AE equation line becomes flatter, that is a sign of economic___?
When the AE equation line becomes flatter, that is a sign of economic contraction.
99
When AE is greater than production (Y), an inflationary gap, is this a recession or expansion? What will happen to firms' inventories?
Expansion. Firm's inventories will be falling unexpectedly and they will then increase production.
100
When AE is lower than production (Y), a recessionary gap, is this a recession or expansion? What will happen to firms' inventories?
Recession. Firm's inventories will be rising unexpectedly and they will cut back on production.
101
True or false? The economy corrects itself.
False. The economy is corrected by businesses matching production to consumer spending.
102
How is equilibrium Y (Ye) calculated?
Ye is calculated by:
1) Set AE expression = Y
2) Calculate multiplier K
3) K * constant
103
How is the multiplier (K) calculated?
```
K = 1/ (1-beta)
beta = slope of AE
```
104
What is the multiplier effect?
The multiplier effect is when there is an increases in a constant, Y increases by more than the increase in the constant. It is the effect the multiplier has when calculating Y.
105
How is the government budget calculated?
Government budget = tY + T - G
106
When is it a bad sign? When exports or imports decrease?
It's a bad sign when exports decrease because that means jobs will be lost.
107
Fiscal policy is run by the _?
Government.
108
Monetary policy is run by the _?
Bank of Canada.
109
Expansionary fiscal policy is when...?
Expansionary fiscal policy is when the government increases spending (G) and/or cuts taxes. AE will increase therefore there will be an expansion. If a recession is underway, expansionary fiscal policy can help reduce it.
110
Contractionary fiscal policy is when...?
Contractionary fiscal policy is when the government cuts spending and/or increases taxes to slow spending in the economy. This can prevent/reduce inflation.
111
Expansionary monetary policy is when...?
Expansionary monetary policy is when the Bank of Canada increases money supply to the banking system, making interest rates come down, therefore investments increase (and also AE). This would be used to prevent or reduce unemployment and recession.
112
Contractionary monetary policy is when...?
Contractionary monetary policy is when the Bank of Canada reduces the supply of money to the banking system. This makes interest rates rise, so investments and AE will slow down (contract). This would be used to prevent or reduce inflation.
113
Expansionary policies are essentially to prevent _?
Expansionary policies are essentially to prevent unemployment.
114
Contractionary policies are essentially to prevent _?
Contractionary policies are essentially to prevent inflation.
115
On the demand and supply diagram, what are the two variables?
Price (P) on the vertical axis.
| Production (Y) on the horizontal axis.
116
What is the Wealth Effect?
The Wealth Effect is when the demand for goods fall because purchasing power of wealth decrease as prices increase.
117
What is the International Substitution Effect?
The International Substitution Effect is when the Canadian dollar/prices rise while others remain stable. foreigners will buy less of our exports and we will buy more imports.
118
What can cause AD to shift?
AD shifts if there is a change in C, I, G, T, X, or M, as we;; as policies. Same as AE line.
119
What can cause SAS to shift?
SAS will shift if there is a massive country-wide change in input prices (wages or energy, ex), resources or technology.
120
What causes LAS to shift?
LAS will shift only if there is a country-wide shock to resources or technology.
121
What are the characteristics of money (3)?
1) Medium of Exchange
2) Unit of Account
3) Store of Value
122
What is commodity money?
Commodity money has intrinsic value (ex/ coins made of gold, silver or copper)
123
What is fiat money?
Fiat money is what we use today. It is an intrinsically worthless commodity. It's money because the government declares it to be.
124
What makes up the money supply?
Money supply (Ms) = Currency + Deposits
125
What are the two measures the Bank of Canada uses to keep track of money supply?
They use M1 (Currency + Checking accounts) and M2 (M1 + Savings accounts).
126
What are assets of the bank and examples (2)?
Assets of the bank are things that commercial banks own or things that represent money going into the bank such as reserves and loans.
127
Where are reserves kept in banks?
Reserves are kept in vault cash (machines) and on deposit at the Bank of Canada.
128
What is the Reserve/Deposit ratio?
The reserve/deposit ratio is the decided proportion by the commercial banks of how much money to keep for withdrawals and check clearing vs. how much to lend out.
129
If the R/D ratio is 0.2, for each $1 in deposits, banks will keep _ on reserve and _ to lend out.
If the R/D ratio is 0.2, for each $1 in deposits, banks will keep 20cents on reserve and 80cents to lend out.
130
What is the Currency/Deposit ratio?
The currency/deposit ratio is the decided proportion by consumers and firms of how much cash available deposit people keep on them.
131
How is the Deposit Multiplier (DM) calculated?
DM = 1/(R/D)
132
How is the Money Multiplier (MM) calculated?
MM = (1+ C/D) / (R/D + C/D)
133
Currency markets are...?
Currency markets are where volumes of foreign cash are bought and sold. (Foreign Exchange)
134
Equity or Stock Markets are...?
Equity or Stock markets are where shares of companies are bought and sold.
135
The debt market is made up of (2)?
The dept market is made up of the bond market and money market.
136
How is the yield of a bond calculated?
Yield = C/Pb *100
137
What is the Bank of Canada's main objective?
Bank of Canada's main objective is to keep the inflation rate between 1-3% per year. Their job is not to control unemployment.
138
What are the five functions of the Bank of Canada?
Bank of Canada:
1) Manages monetary policy of Canada
2) Controls Canada's money supply
3) Banker to the commercial/chartered banks
4) Support the financial system
5) Fiscal agent and financial advisor to the government
139
What are the 4 tools the Bank of Canada uses to change money supply and interest rates?
1) Open-Market Operations
2) Changing the Bank Rate
3) Government deposit switching
4) Changing the required reserve ratios
140
What are the 2 ways to implement fiscal policy?
1) Discretionary fiscal policy
| 2) Automatic Stabilization policy
141
What is fiscal drag?
Fiscal drag is the recovery-dampening effect of automatic stabilizers. Drag on recovery.
142
What are 2 ways the national debt can be resolved?
1) Money Financing (Govern't borrows from the Bank of Canada)
2) Debt Financial ( Internal and External )
143
Why do we also need external debt financing?
We need external debt financing because if it was solely internal, the strain on our savings would cause a drastic increase in internal interest rates, leading to a depression.
144
What is the problem with Money Financing?
Risk of hyper-inflation since the government is borrowing from the Bank of Canada when it owns and then more money would be circulating in the economy.
145
What is the problem with Internal Debt Financing?
Crowding out and income redistribution
146
What is the problem with External Debt Financing/.
Balance of payments deficit and weaker CAD $
147
The balance of payments is divided into _ and _?
The balance of payments is divided into the current account and the capital account.
148
What does the current account include?
The current account includes goods, services, and investment income (interest, dividends)
149
What does the capital account include?
The capital account includes direct (branch plants) and portfolio (buying and selling of stocks and bonds)
150
Is it better for a country to have a surplus in current or capital account?
Current account.
151
If the CAD appreciates, the government will...?
If the CAD appreciates, the government will buy foreign currencies.
152
If the CAD depreciates, the government will...?
If the CAD depreciates, the government will sell foreign currencies and buy more CAD.
153
Floating exchange rate means?
Floating exchange rate is when the level of the exchange rate is determined by the forces of global demand and supply of that currency.
154
Managed float means?
Exchange rate is flexible but the central bank intervenes to prevent exaggerated fluctuations.
155
Fixed exchange rate means?
Fixed exchange rate is when the exchange rate is maintained by the central bank of the country who buys or sells its own currency. (Hong Kong, e.g.)
