Extras 2 Flashcards
why might people decide to join the labour force during booms?
because more jobs become available and hence there are more opportunities to find a job
explain why the unemployment rate might rise during a boom, even when the level of employment is rising?
the increase in EMPLOYMENT reflects the new hiring by firms to produce more output
the increase in UNEMPLOYMENT reflects an increase in the labour force
(recall: unemployment rate = unemployed people/labour force x 100)
if the rise in the labour force EXCEEDS the rise in employment, then the number of unemployed workers will increase
during recession, suppose unemployed workers leave the labour force because they’re discouraged about their inability to find a job. what happens to the unemployment rate?
it is likely to decrease because both the number of people unemployed and the number of people in the labour force decreased by the same absolute amount
“a declining unemployment rate is a clear positive sign for the economy” - is this statement true or false and why?
it is false
because there can be a decline in unemployment rate during recessions due to discouraged workers who decide to leave the workforce altogether
(recall: unemployed persons/labour force x 100 = unemployment rate)
depreciation of the Cad dollar means what for exchange rate?
depreciation of Cad dollar means it’s worth less in comparison to foreign currencies
means more Cad dollars are needed to buy one dollar of foreign currency
RISE in the exchange rate
this is good for exporters (their CAD goods are cheaper to foreign buyers) but bad for importers (costs more CAD dollars to acquire their imported goods)
determine the value added to Canadian national income: “A Canadian farmer pays $200 for seeds to grow organic beets, which she sells to a produce distributor for $1400. The distributor sells the beets to a restaurant for $1800, who then sells $2500 worth of beet salads.”
the value added is $2300
if we measure GDP from the income side, we’re adding 3 main components of FACTOR INCOMES - what are they?
- business profits
- wages and salaires
- interest
to the factor incomes that compose GDP measurement from the income side, what must we add?
NON-FACTOR PAYMENTS
- indirect taxes less subsidies
- depreciation
in the GDP calculation from the expenditure side, expenditures on furniture by firms are part of which component?
investment
because furniture is considered part of the New Plant and Equipment category
expenditures by Cad-owned insurance companies located in the US on new computers are included in which component of GDP calculation?
included in the GDP of the USA in the investment category
are the purchases of second hand cars and trucks included in calculation of GDP from the expenditure side?
no, because they were already counted in the prior year(s) when they were produced
is this equation an example of bidirectional causation? why or why not?
GDP = Ca + Ia + Ga + NXa
yes
consider causation between investment and GDP
increase in income provides incentive for more savings and in turn more investment, thus GDP causing investment
on the other hand, more investment provides more production capacity, more opportunities for jobs and higher wages resulting in higher income, so investment causing GDP
components of net domestic income at factor cost
part of the income side of GDP calculation
- wages and salaries
- business profits
- interest income
Suppose a government collects $12.3 billion in various tax revenues, and pays $2.8 billion in debt interest, $9.1 billion in social security benefits, and $0.4 billion in government employee wages. What is the direct contribution to GDP coming from this government’s fiscal actions?
0.4 billion
GDP deflator versus CPI
they measure different things
movements in the CPI measure the change in the average price of consumer goods
whereas movements in the GDP deflator reflect the change in the average price of goods produced in Canada
hence, the two rates of inflation will very likely differ
only instance where the 2 measurement would be exactly the same occurs if the country produces only consumer goods and engages in no trade with other countries
does CPI include imports?
yes - it’s a more general measure of inflation
whereas the GDP deflator is restricted to goods produced within a country’s borders
HDI
human development index
single index measure that captures 3 dimensions:
- life expectancy
- education
- material living standards
components of HDI
GDP is only one of them
crime rates, pollution, congestion, longevity, scenic beauty, income distribution, educational achievement, political freedoms
in the simple macro model, the aggregate expenditure function is written as what?
AE = a + bY
the simple macro model’s aggregate expenditure function has what on the vertical axis and what on the horizontal axis?
VERTICAL AXIS: desired aggregate expenditure
HORIZONTAL AXIS: actual national income
“High mortgage rates discourage new house purchases.” Assuming that housing construction falls when house sales fall… what happens to AE graph?
The purchase of new houses is the residential component of investment.
The investment function shifts down, assuming that housing construction falls when house sales fall.
This shifts the AE function down and reduces the equilibrium level of national income.
“Accelerated depreciation allowances in the new federal budget set off boom on equipment purchases.” what happens to AE graph?
The allowance of “accelerated depreciation” means that firms can claim larger costs for capital depreciation than normal, thus improving the profitability of any given investment.
The investment function shifts up, the AE function shifts up, and equilibrium national income increases.
effect on GDP - a tax rebate of $5 billion will add directly to what? what effect will this have?
will ADD DIRECTLY to DISPOSABLE INCOME
so the initial direct increase in aggregate demand will be $5 billion TIMES THE MPC
Can you offer one reason why the minister of finance might choose to emphasize increases in government spending rather than tax reductions in a federal budget in an effort to increase national income?
The eventual effect on national income (after the multiplier effect) will be smaller after a tax reduction than in the case of the increase in spending
This basic logic partly explains why the federal government emphasized increases in spending rather than tax reductions
t0 versus t1, and the equation that relates them
t0: the level of net tax revenues that would exist if national income were 0
t1: the net tax rate
T = t0 + t1 (Y)
how do net tax revenues enter the AE function?
indirectly
through effects on disposable income and consumption
NX is _________ related to national income
negatively
because as national income rises, imports rise
m0 versus m1 and the equation that relates them
m0 = autonomous level of import
m1 = marginal propensity to import
using the expenditure approach, GDP is always equal to the sum of consumption, investment, government purchases, and net exports.
equilibrium national income occurs when actual national income equals the sum of desired consumption, investment, government purchases, and net exports
does this mean that national income is always at its equilibrium level?
no
actual values are used when measuring national income
and desired values are used for its determination
the aggregate supply curve shifts in response to changes in…
- prices of inputs
- changes in technology
(shifts in response to EXOGENOUS changes)
what would a decrease in demand for Canada’s exports do to the AS curve?
cause a movement DOWNWARD and to the LEFT along the AS curve
exports are part of AGGREGATE DEMAND, so a decrease in export demand would decrease AD
this decrease in demand would typically lead to LOWER OUTPUT and LOWER PRICES in the short run
but WOULD NOT DIRECTLY SHIFT the AS CURVE
instead, the economy would experience MOVEMENT ALONG THE AS CURVE, because decrease in demand leads to reduction in output and employment at the existing price level
law of diminishing returns
exemplified by the AS curve’s increasing slope as output increases
law of diminishing returns to the variable factor (usually labour) means that increases in output may only be possible by driving up unit production costs, thus requiring a rise in prices
