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ECON 102 > Final 28-32 (no 31) > Flashcards

Final 28-32 (no 31) Flashcards

1
Q

What two options does BOC have in monetary policy?

A

Either target M-supply (increase M, i-rates fall) or target i-rate (drop i-rates, BOC accommodates the increase in demand for money by jacking up M)

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2
Q

What are the problems with targeting the M-supply?

A

(1) Although BOC can control reserves through OMO, it has no control over deposit expansion; no guarantee that dropping the bank rate will make banks increase loans (2) BOC is unsure about the position and slope of L

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3
Q

Which of the two approaches does BOC use?

A

Sets i-rates the accommodates by changing M-supply through OMO (buying/selling bonds), resulting in a change in L

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4
Q

What are the five buttons or policy instruments used to implement monetary policy?

A

overnight rate and bank rate, open market operations, buyback operations (fine-tuning), shifting government money between BOC and chartered banks, announcement effect

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5
Q

What are the operational or intermediate targets?

A

exchange rate, money supply, or interest rate to target inflation rate

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6
Q

What are the policy or ultimate targets?

A

Y: stable economic growth, U: low unemployment, P: low inflation

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7
Q

Yield curve/distribution of i-rates (moves in tandem)

A

term structure of i-rates; i-rates on borrowing increase as maturity increases; the longer the loan, the quality of borrower falls, risk increases

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8
Q

Overnight rate

A

1-day i-rate for banks to borrow either from each other or investment dealers if they have insufficient funds to clear cheques; cheapest and shortest maturity to the safest borrower; start of the yield curve

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9
Q

Prime rate

A

banks loan to reputable corporations

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10
Q

Mortgage rates

A

rate of interest charged in exchange for taking title of the debtor’s (borrower’s) property; banks can seize the home if borrower defaults on the loan

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11
Q

Overnight rate target

A

BOC’s desired ONR target announced 8x a year on fixed announcement dates

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12
Q

Overnight rate operational band

A

Within the operating band, which ranges 50 basis points (1 basis point= 0.01%) below the bank rate, ONR will hover around BOC’s target ONR

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13
Q

Bank rate

A

upper limit of the ONR operating band; rate that BOC charges to lend to banks

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14
Q

Deposit rate

A

lower limit of ONR operating band; rate that BOC pays to borrow from banks or i-rate paid on deposits at the Bank

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15
Q

What is the Canadian approach with the ONR?

A

BOC lowers the ONR by setting the bank rate instantly, ONR sets the distribution all i-rates and yield curve shifts down, demand for money increases along the L curve, BOC accomodates L by increasing M (a passive accomodation/endogenous)

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16
Q

What is the Canadian approach with OMO?

A

(1) Easy M-policy: As L increases, BOC buys bonds to increase excess reserves in banks, which may increase M-supply when banks loan out, and i-rates fall (2) Tight M-policy: the opposite

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17
Q

Quantitative easing

A

another form of OMO where BOC buys long term bonds e.g. G-bonds

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18
Q

Credit easing

A

another form of OMO where BOC buys long-term commercial bonds e.g. collateralized debt obligations or a loan with collateral if it goes into default

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19
Q

What are buyback operations?

A

BOC uses specials and reverses to stabilize ONR within 1 basis point of its ONR target; fine-tuning

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20
Q

Specials

A

special purchase and resale agreement; a transaction where BOC offers to purchase government securities from major financial players with an agreement to sell them back at a predetermined price the next business day; BOC puts cash into the system for a day to offset upward pressure on ONR

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21
Q

Reverses

A

sale and repurchase agreement; BOC offers to sell bonds and takes cash out of the system to offset downward pressure on ONR

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22
Q

What is shifting?

A

cash management when BOC shifts Govt’s deposits (e.g. tax revenue) between BOC and banks; a day-to-day instrument to reinforce ONR (specials and reverses)

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23
Q

How does shifting occur?

A

To chartered bank: increased reserves and M; From chartered bank: decreased reserved and M

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24
Q

Announcement effect (fixed announcement dates)

A

BOC announces ONR on 8 predetermined dates in the year (every 6 weeks); sends signal to the economy on BOC’s intentions with monetary policy (forward guidance)

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25
Q

Macro-prudential regulation

A

BOC announces that they want to be careful: flag asset bubbles (out of control inflationary increases in P of an asset) in advance, cooly command banks to pull back e.g. regulations, required reserves etc.

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26
Q

Taylor rule

A

Central banks link their i-rates to their inflation rates to their output gaps: i=i* + a(π-π) + b(y-y); if inflation and output are above their targets, BOC raises i-rates

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27
Q

What are the complications in inflation targeting?

A

Food and energy prices are volatile, inflation rate and exchange rate are inextricably linked (changes in ER affect inflation and output gap), regional differences in Canada (M-policy is a national lever)

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28
Q

Operational guide or Core CPI

A

CPI excluding food, energy, indirect taxes because P changes unrelated to GDP and output gaps

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29
Q

What can’t monetary policy do?

A

identify and correct asset price misalignments (e.g. asset bubbles), stabilize ER and inflation rate at the same time, mitigate regional or sectoral differences in growth rates

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30
Q

Recession

A

two quarters of negative economic growth; according to NBER: low output, high U, low personal, low sales; assess the duration, depth, and dispersion

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31
Q

What are the costs of unanticipated inflation?

A

reduction in purchasing power, arbitrary redistribution of income (e.g. money from creditors to debtors, employees to employers), creates uncertainty that lowers I, distorts P mechanism and allocation of resources

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32
Q

Price signal distortion hypothesis

A

inflation interferes with information conveyed by price changes

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33
Q

How do prices increase?

A

(1) decrease in supply = cost push inflation (2) increase in demand = demand pull inflation

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34
Q

Temporary inflation

A

one time price increase (goes up and stays); Y returns to Y* at higher prices (wage adjustment)

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35
Q

Constant inflation

A

sustained and constant P increase caused by expectation inflation; a stable rate of change in P

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36
Q

Accelerating inflation

A

sustained and increasing inflation caused by expectation inflation and gap inflation; a increasing rate of change in P

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37
Q

Disflation

A

decreasing rate of change in P; still moving forward but slowing down

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38
Q

Deflation

A

negative rate of inflation

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39
Q

Why do wages (input prices) change?

A

due to an “effect” or the effect of expectations or gap on nominal wages

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40
Q

Expectation effect- money wages can rise without an inflationary gap!

A

expected inflation gets built into wage demands; a self-fulfilling prophecy: if employees expect a 2% inflation, employees will negotiate wage contracts with a 2% increase in nominal wages (W), shifting SRAS vertically by 2%, keeping real wages constant

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41
Q

Real wages

A

w= W/P

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42
Q

What causes expectation inflation?

A

(1) Backward looking: history repeats itself, though may take a long time to develop psychological trend (2) Forward looking: workers look to govt. macroeconomic policy and make rational expectations (best possible use of all relevant info)

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43
Q

Gap effect or labour market effect

A

(1) Excess supply of labour causes W to fall: recessionary (2) Excess demand for labour causes W to rise: inflationary (3) When D=S for labour, Y=Y*=Y at FE, natural or normal U or NAIRU (frictional and structural)

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44
Q

Total effect on money wages

A

increase in the rate of change in W (due to increase in Pe or decrease in U) decomposed into expectation effect (psychological) topped up by the gap effect (excess DN)

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45
Q

Why does an increase in W cause an increase in P (output prices)?

A

Price setting model: businesses markup their prices; P=(1+m)W

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46
Q

Actual inflation

A

expectation inflation + gap inflation + exogenous supply shock inflation; all 3 cause SRAS to shift up to the left

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47
Q

Constant inflation

A

monetary validation by BOC where M is increased at a rate to guarantee actual inflation=expected inflation; Y returns to Y* at a higher price

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48
Q

Depression

A

long, protracted recessions

49
Q

Is monetary validation desirable?

A

it reinforces an inflationary spiral; if SRAS shocks and M validation are continuous and simultaneous, we could get stuck in stagflation (inflation + unemployment, a persistent recessionary gap with inflation

50
Q

Accelerating inflation

A

As long as BOC maintains the inflationary gap by validating it to maintain the good times, expectations will always be revised upward and inflation accelerates

51
Q

Phillips curve

A

inverse relationship between rate of change of W (W’) and unemployment rate (u) or real GDP; As Y approaches Y*, pressure on P to rise increases; As u increases, pressure on P to rise falls

52
Q

Expectations-augmented Phillips curve

A

includes the effects of expectation inflation

53
Q

Is inflation a monetary phenomenon?

A

Sustained inflation is everywhere and always a monetary phenomenon because the causes and consequences are monetary

54
Q

Is moderate inflation desirable?

A

(1) Downward nominal wage rigidity: if inflation is 0, real w cuts are difficult (2) Zero lower bound on nominal 0-rates: if inflation is 0, real i-rate cuts are difficult (3) Healthy and growing economies tend to have moderate inflation

55
Q

Unemployment and GDP in a recession

A

u > u* and y < y*

56
Q

Unemployment and GDP in an inflation

A

u < u* and y > y*

57
Q

What is the change in employment in the LR?

A

Growth in the labour force is matched by growth in employment (new jobs are created and old jobs are replaced)

58
Q

What is the change in employment in the SR?

A

Fluctuations in the unemployment rate

59
Q

Why has the supply of labour increased?

A

increase in population, participation, immigration, greying work force (older people still working), collaboration, “gig” or “precarious” work e.g. part-time jobs

60
Q

Has the demand for labour increased?

A

In some sectors where new technology is developed and due to economic growth

61
Q

Labour force

A

employed + unemployed

62
Q

Employed

A

15 years old and over who are willing and able to work, who have ANY kind of job (part-time, temporary, contract work, etc.)

63
Q

Unemployed

A

15 years old and over who are willing and able to work, who have NO job

64
Q

Full-time

A

working 30 hours or more per week

65
Q

Part-time

A

working less than 30 hours per week

66
Q

Unemployment rate

A

unemployed/labour force

67
Q

Employment rate

A

employed/population

68
Q

Participation rate

A

labour force/population

69
Q

Underemployment

A

includes discouraged workers (not willing and able to work), part-time, temporary workers, contract work; around 17% of Canadian population

70
Q

What happens to unemployment during booms and busts?

A

normally U falls during booms and U rises during busts

71
Q

Labour market

A

flows in and out of unemployment, rather than the simple U-rate

72
Q

Discouraged workers

A

workers not “actively seeking work,” thus not included in the labour force

73
Q

Labour force survey (LFS)

A

asks if you have a job, can include under-employed, temporary, and part-time

74
Q

What can cause a rise in the u-rate?

A

discouraged workers leaving the labour force

75
Q

Unemployment

A

all those who are willing and able to work, at the going wage rate, but are unable to find a job

76
Q

What are the effects of unemployment?

A

(1) micro level: psychological depression and human suffering (2) macro level: economic depression, decrease in national output per capita, thus a decrease in standard of living

77
Q

What is the major assumption for market clearing theories?

A

labour markets are flexible; there is a stable equilibrium

78
Q

What is unemployment at Y=Y* and U=U*?

A

only NAIRU (frictional and structural), no gap

79
Q

What is unemployment at YU*?

A

gap unemployment, greater than normal

80
Q

Cyclical/gap unemployment

A

U in excess of frictional and structural unemployment

81
Q

Demand for labour (DN)

A

willingness of firms to hire at a given wage rate

82
Q

Supply of labour

A

willingness of worker to work at a given wage rate

83
Q

Flexible labour market

A

automatic tendency to move to stable equilibrium when at w, N=N=NFE, Y=Y, U=U; no involuntary/cyclical/gap unemployment; classical or LR view

84
Q

What is the major assumption for non-market clearing theories?

A

downward sticky wages

85
Q

Downward sticky wages

A

nominal wages are reluctant to fall, leading to cyclical unemployment

86
Q

What are the causes of downward sticky wages?

A

long-term employment contracts: creates a disincentive for wages to fall, fringe benefits and job security are part of contract; menu costs: changing wages has an administrative transaction cost; unions: represents interests of the insiders; psychological effect of concessions

87
Q

Voluntary unemployment

A

“there is a job but it’s not for me” not willing and able to work so not in the labour force

88
Q

Efficiency wage

A

employer pays a wage that is higher than the equilibrium wage to increase efficiency of workers; creates an upward pressure on wages

89
Q

NAIRU

A

rate of unemployment that occurs when inflation is not accelerating; when there’s no cyclical unemployment

90
Q

Fricitional unemployment

A

turnovers or search unemployment e.g. length of time to find your first job or a new job

91
Q

Structural unemployment

A

mismatching S and D of labour e.g. worker supplies skills in logging and lives in Newfoundland (geography) but firm demands high-tech in Vancouver

92
Q

What’s the difference between structural and frictional unemployment?

A

Structural U may just be LR frictional U; number of unfilled jobs = number of people looking for work for both

93
Q

What causes an increasing NAIRU?

A

demographic changes, hysteresis, globalization and technological changes, government policy

94
Q

Demographic changes effect on NAIRU

A

greater participation rates results in higher u-rates, more young people (and women, historically), immigration increased NAIRU

95
Q

Hysteresis

A

lagged effect; current actual u-rate affects future normal u-rate (high now, higher tomorrow)

96
Q

Insider-outsider model

A

people employed use their power to keep outsiders out, increasing NAIRU

97
Q

Training model

A

recession prevents on-the-job training so that when the recession is over, these people are still unemployed, increasing NAIRU

98
Q

Globalization effect on NAIRU

A

decrease in transportation and communication costs causing increased competition and trade (rightsizing, restructuring, retooling, rationalizing) increases structural U

99
Q

Government policy effect on NAIRU

A

any G policy that reduces labour market flexibility will increase NAIRU e.g. employment insurance decreases search costs and increases search time, mandated job security in EU

100
Q

Methods of reducing unemployment

A

(1) frictional: decrease turnover time (2) structural: increase matching of S and D of labour, eliminate resistance to change, aid change e.g. retraining and relocation (3) cyclical: increase AD with fiscal and monetary policy

101
Q

Why has world trade grown faster than world GDP?

A

“current comparative advantage is a major determinant of trade under free-market conditions” - Ricardo

102
Q

Gains from trade

A

increase in world output due to the law of comparative advantage e.g. getting rid of tariffs

103
Q

Comparative advantage

A

lower opportunity cost

104
Q

What are the reasons for gains from trade?

A

people must be self-sufficient if there’s no trade, specialization leads to efficiency, efficiency leads to cost savings, which then leads to greater total output (more to go around) so people must trade

105
Q

Absolute advantage

A

when one country, compared to another, can produce more of a good from the same inputs

106
Q

What are the gains from specialization with constant costs?

A

Whenever opportunity cost differs, specializing on the good that you have a comparative advantage with creates gains from trade by increasing world per capita GDP (population constant).

107
Q

What are the gains from specialization with variable costs?

A

Whenever OCs differ, specialization and trading goods in which you have a comparative advantage increases production and decreases costs (cost savings)

108
Q

What are the reasons for cost savings as production increases?

A

(1) economies of scale and scope: volume discounts in a larger market, moves down the LRAC (2) learning by doing: gaining accumulated experience, LRAC shifts down

109
Q

Sources of comparative advantage

A

(1) natural factor endowments: natural advantage in resources creates cost advantages (2) acquired comparative advantage: what you develop; creates more productive workers (lower costs)

110
Q

3 safety nets that increase (acquired) comparative advantage

A

health, education, social services

111
Q

Law of comparative advantage

A

countries should specialize, then trade, in those good in which they have a comparative advantage

112
Q

Law of one world price

A

internationally traded goods sell at the same price in each country, adjusted for transport costs, tariffs, exchange rates

113
Q

Domestic price (Pd)

A

determined by domestic S and D if there is no foreign trade (closed=autarky=self-sufficient)

114
Q

World price (Pw)

A

determined by world S and D if there is foreign trade (open economy)

115
Q

Predictions from the law of one world price

A

CA exports those goods in which it has a comparative advantage until there is one world price

116
Q

Terms of trade (real exchange rate)

A

determine how the gains from trade are shared; how gains in world per capita GDP (standard of living) are shared among trading nations; Px/Pm

117
Q

Production possibility curve (PPC)

A

maximum output when using all input; slope is the OC between goods, the domestic price of export, and shows production possibilities inside country

118
Q

Slope of terms of trade

A

the international price of export, shows consumption possibilities outside the country

ECON 102 (3 decks)

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