Final Flashcards
Production possibilities frontier (PPF)
A line or curve that shows all possible combinations of outputs that can be produced using all available resources.
absolute advantage
when a producer can generate more output than others with a given amount of resources.
comparative advantage
when a producer can make a good at a lower opportunity cost than other producers.
specialization
when a country focuses on producing the good for which it has a comparative advantage, increasing total production
gains from trade
improvement in outcome that occurs when specialized producers exchange goods and services.
balance of trade
the value of exports minus the value of imports
trade deficit
a negative balance of trade
trade surplus
a positive balance of trade
foreign direct investment (FDI)
when a firm runs part of its operation abroad or invests in another company abroad
foreign portfolio investment
investment funded by foreign sources but operated locally
net capital outflow
the net flow of funds invested outside of a country.
balance-of-payments identity
an equation that shows the value of net exports is equal to the value of net capital outflow
exchange rate
the value of one currency in terms of another
exchange rate appreciation
when the value of a currency increases relative to the value of another currency.
floating exchange rate
currency that can be freely traded and its value is determined by the market.
fixed exchange rate
an exchange rate set by the government.
What can a fixed exchange rate manage?
It can’t conduct monetary policy, it can only manage investment.
nominal exchange rate
the stated rate at which ones country’s currency can be traded for another country’s currency
real exchange rate (definition)
the value of goods in one country in terms of the same goods in another country
real exchange rate (formula)
=nominal exchange rate x
domestic price level
——————————–
foreign price level
arbitrage
gaining financially due to discrepancies in exchange rates.
Crowding out effect
Theory that rising public spending drives down private spending
Due to the increased interest rates from the government borrowing to spend
Transfer payments
Payments from government accounts to individuals for programs that do not involve the purchase of goods or services
I.e. welfare
Taxation multiplier (formula)
-MPC
————
1 - MPC
Taxation multiplier (definition)
The amount GDP decreases when taxes increase by 1$
Government spending multiplier (formula)
1
————
1 - MPC
Government spending multiplier (definition)
The amount by which GDP increase when government spending dung increases by 1$
Marginal propensity to consume (MPC)
The amount by which consumption increases when after tax income increases by 1$
Short run and long run supply shock
Output and price move in opposite directions
Long run demand side shock
Output stays the same, price increases or decreases
Short run demand side shock
Price and output move the same direction
Classical / real-wage unemployment
The effect of wages remaining persistently above the market clearing level
Structural unemployment
Unemployment caused by a mismatch between the skills workers can offer and the skills that are in demand
Frictional unemployment
Unemployment caused by workers who are changing their location, job, or career.
Unemployment rate (formula)
of unemployed
———————— x 100
Labour force
GDP year A in terms of growth rate formula
GDP year B x
(1 + growth rate)^A-B
Years until income doubles
Rule of 70
70 ——————— Real growth rate
Real value year B in terms of CPI
= real value year A x
CPI year A
—————
CPI year B
Cost of living adjustment
Real year B =
Nominal year A x
CPI year B
——————
CPI year A
Real GDP per capital growth rate =
Nominal GDP growth rate - inflation rate - population growth rate
PPP adjusted GDP (formula)
Nominal dollars
————————————
1 - price level adjustment
Purchasing power parity (PPP)
Purchase power should theoretically be the same everywhere when stated in common currency
Consumer price index (CPI) (formula)
Basket price in desired year
————————————— x 100
Basket price in base year
GDP deflator
Measures change in price
Nominal GDP/real GDP x 100
Nominal GDP
Calculated with goods and services at current prices
Real GDP
Calculated with goods and services held at constant prices
Gross national product (GNP)
The sum of all final goods and services produced by the citizens of a country within a given period of time
Gross domestic product (GDP)
The sum of the market value of all final goods and services produced within a country in a given period of time
financial market
a market in which people trade future claims on funds or goods.
Functions of a bank
- It acts as an *Intermediary between borrowers and savers.
- *Liquidity: it makes it easier to have access to cash when and where you want it.
- It helps savers and borrowers *diversify risk
market for loanable funds
market in which savers, who have money to lend, supply funds to those who borrow for their investment spending needs.
savings
The portion of income that is not immediately spent on consumption of goods and services.
investment
spending on productive inputs such as factories, machinery, and inventories.
interest rate
the price of borrowing. the price charged by a lender to a borrower for the use of funds.
factors that shift the supply of savings (determinants of savings)
- culture
- social welfare policies
- wealth
- current economic conditions
- expectations about future economic conditions
default
when a borrower fails to pay back a loan according to the agreed upon terms.
credit risk
the risk of a borrow defaulting on a loan
risk-free rate
the interest rate at which one would lend if there were no risk of default. Usually approximated by interest rates on Canadian government debt
credit spread / risk premium
the difference between the risk-free rate and the interest rate a particular investor has to pay
financial system
the institutions that bring together savers borrowers, investors, and insurers in a set of interconnected markets where people trade financial products
financial intermediary
institutions that channel funds from people who have them to people who want them
liquidity
a measure of how easily a particular asset can be converted quickly to cash without much loss of value.
diversification
process by which risks are shared among many different assets or people, reducing the impact of a particular risk on any one individual.
stock
a financial asset that represents partial ownership of a company. An equity asset.
dividend
a payment made periodically, typically annually or quarterly, to all shareholders of a company.
loan
an agreement in which a lender gives money to a borrower in exchange for a promise to repay the amount loaned plus an agreed upon amount of interest
bond
a promise by the bond issuer to repay the loan at a specified maturity date, and to pay periodic interest at a specific percentage rate.
securitization
turns many loans into a single larger asset thus reducing the risk to the lender of any individual borrower defaults on the loan
derivative (futures contract)
an asset whose value is based on the value of another asset, such as a home loan, stock, bond, or barrel of oil.
mutual fund
a portfolio of stocks and other assets, managed by a professional who makes decisions on behalf of clients
index fund
mutual fund where the funds buy all the stocks representing a broad market, with a goal of mirroring the same return as the market average.
specialized fund
mutual fund where the dude is researching specific companies and picking stocks they hope will earn higher returns than the market average.
pension fund
professional managed portfolio of assets intended to provide income to company retirees
market risk (systemic risk)
any risk that is broadly shared by the entire market of economy
idiosyncratic risk
unique to a particular company or asset
standard deviation
a measure of how spread out a set of numbers is
net present value (npv)
a measure of the current value of a stream of cash flows expected in the future
efficient-market hypothesis
market prices always incorporate all available information and therefore represent true value as correctly as possible. Only in a closed economy?
closed economy
an economy that does not interact with other countries’ economies
open economy
interacts with other countries’ economies
net capital flow
the difference between capital inflows and capital outflows
capital outflow
when money saved domestically is invested in another country
capital inflow
when savings from another country finance domestic investment
fundamental analysis
refers to finds out as much information as possible on the firms or governments that issue securities
technical analysis
bases predictions for future security performance on past performance
money
the set of all assets that are regularly used to directly purchase goods and services
functions of money
store of value
medium of exchange
unit of account
store of value
an item that represents a certain amount of purchasing power that is retained over time.
medium of exchange
an item that can be used to purchase goods and services
barter
to directly offer a good or service in exchange for a desired good or service
unit of account
a standard unit of comparison
intrinsic value
value unrelated to an items use as money
commodity-backed money
any form of money that can be legally exchanged for a fixed amount of an underlying commodity
fiat money
money created by rule, without commodity to back it
demand deposits
funds held in banks that can be withdrawn by depositors at any time without advance notice
reserves
the cash that a bank keeps in its vault
reserve ratio (definition)
the ratio of the total amount of deposits at a bank to the amount kept as cash reserves.
reserve ratio (formula)
amount kept
= ————————- x 100
amount deposited
desired reserves
the amount the bank is desired to keep on hand
excess reserves
any additional amount beyond the desired reserves that the bank chooses to keep in reserve
money multiplier (definition)
the ratio of money created by the lending activities of the banking system to the money created y the governments central bank.
money multiplier (formula)
1
= ———-
reserve ratio
fractional-reserve banking
banking system in which banks keep on reserve less than 100% of their deposits
money supply
the amount of money available in the economy
M1
definition of money, includes cash (hard money) plus chequing account balances.
M2
definition of money, includes M1, personal savings accounts, and non-personal notice deposits where money is locked away for a specified period of time.
central bank
the institution ultimately responsible for managing the nations money supply and coordinating the banking system to ensure a sound economy
monetary policy
actions by the central bank to manage the money supply, in pursuit of certain macroeconomic goals
reserve requirement
the regulation that sets the minimum fraction of deposits banks must hold in reserve
open market operations
sales or purchases of government securities by the central bank to or from banks on the open market.
contractionary monetary policy
actions that reduce the money supply in order to decrease aggregate demand
expansionary monetary policy
actions that increase the money supply in order to increase aggregate demand
overnight rate
the interest rate at which banks choose to lend reserves held at the Bank of Canada to one another, usually just overnight
liquidity preference model
explains that the quantity of money people want to hold is a function of the interest rate
inflation
an overall rise in prices in the economy. each dollar becomes less valuable over time.
deflation
an overall fall in prices in the economy
core inflation
a measure of inflation that excludes goods with historically volatile prices
headline inflation
a measure of inflation that includes goods with historically volatile items.
overall inflation
a measure of inflation that includes virtually all of the goods that the average consumer purchases.
aggregate price level
a measure of the average price level for GDP and is measured by either CPI or the GDP price deflator
neutrality of money
the idea that aggregate price levels do not affect real outcomes in the economy
quantity theory of money
the aggregate price level is determined by the money supply. That inflation/deflation are primarily the result of changes in money supply.
velocity of money (definition)
the number of transactions in which a typical dollar is used during a given period.
velocity of money (formula)
money supply
menu costs
the cost of changing prices to keep pace with inflation
shoe leather costs
the cost people must spend managing cash in the face of inflation
nominal interest rate
the reported interest rate
real interest rate (definition)
the interest rate adjusted for the effects of inflation
real interest rate (formula)
nominal interest rate - inflation rate
disinflation
a period during which overall inflation rates, while still positive, are falling.
hyperinflation
extremely long-lasting and painful increases in the price level, usually enough to render currency completely valueless or close to it
potential output
the total amount of output the country could reasonably produce if all of its people and capital resources were fully engaged
output gap
when an economy’s actual output differs from its potential at some point in time
Phillips curve
the negative relationship between inflation and unemployment.
non-accelerating inflation rate of unemployment (NAIRU)
the lowest possible unemployment rate that will not cause the inflation rate to increase
demand pull inflation
occurs when the price level changes in response to changes in the business cycle
cost-push inflation
occurs when the price of a key input increases suddenly
Why can an economist compare apples and oranges?
When they calculate GDP they convert production to its dollar value.
Which approach to calculating GDP best highlights
the relative importance of different factors of
production?
The income approach
In a press conference, the president of a small country
displays a chart showing that GDP has risen by 10
percent every year for five years. He argues that this
growth shows the brilliance of his economic policy.
However, his chart uses nominal GDP numbers. This
chart might be wrong because it:
relies on nominal GDP which might have
increased because of price increases and not
output increases.
A major category of economic activity that is not counted as part of GDP is: a. firm production b. consumption c. Illegal drug trade d. imports
c. Illegal drug trade
What is not included in calculating GDP
a. Prime Minister’s Salary
b. International student paid tuition fee
c. Factory releases contaminated water that
severely effect the fishing industry.
d. Computer newly produced that year but unsold
and keeping in a warehouse
c. Factory releases contaminated water that
severely effect the fishing industry.
If a country experiences a negative growth rate in
real GDP, it means
There are less goods to allocate in the
economy than before.
What is not the theoretical explanation of
economic convergence?
a. Diminishing return to capital accumulation
b. Technological transfer
c. Growing in labor input
d. Government decreases income tax rate
d. Government decreases income tax rate
Gross National Product is (nasty formula you should know)
GDP + (Net income earned by domestic residents/businesses from overseas investments) – (Net income earned by foreign residents/businesses from domestic investments)
Which activity is included in the GDP
a. Value of stock local stockbroker executes for
clients
b. Bike store sells used bikes
c. Foreign tourists buy souvenir from a dutyfree shop
d. The government pays $100 million to war
veterans.
c. Foreign tourists buy souvenir from a dutyfree shop
If the GDP was 1,500,000 million dollars in 2005,
the real economic growth is constant at 4 percent
annually. What was the approximate value of GDP
in 2018?
2,500,000
When the market basket is tracked over time
the goods within the basket remain the
same, so only changing prices are captured
The GDP deflator differs from the CPI in its
measurement of inflation in that
it measures the price changes of all goods,
not just those in a typical consumer’s
basket.
The Big Mac index
is a simple measure that indicates
differing costs of living in different
countries
In 1976, the cost of a movie was $4. In 2012, it’s
$9. If the CPI for 1976 is 56, and 228 for 2012,
then we could say the cost of a 1976 movie in 2012
would be:
$16.29, so the cost of movies has not
increased as much as general inflation
What is the difference between headline inflation
and core inflation?
Core inflation excludes energy and food
from the market basket.
The labour force includes:
those who want to work.
If we wanted to describe unemployment in terms
of supply and demand, we could say
there is a surplus of labour.
An economic slow-down predicts the new
equilibrium wage would be
lower because the labour demand curve
shifts left
What is not the impact of aging population due to
the change in demographic structure?
a. Labour Force declines.
b. Government revenue increases.
c. Government expenditure on health care
increases.
d. Pension fund will require higher funding.
b. Government revenue increases.
If the minimum wage is set at a level above the
equilibrium wage
it could cause unemployment.
The Canadian labour force as of 2018 was 32.7
million. There were 30.9 million employed. What
the unemployment rate would be?
5.5
If economy has experienced the long economic
recession, the number of discourage worker
increases and hence we would expect:
Labour Force Participation Ratio to
decrease
. If Canadian prices increase relative to the rest of
the world, we would expect
net exports to decrease.
A decrease in business confidence will cause:
a shift in aggregate demand to the left.
. Stagflation refers to a situation in which the
economy is experiencing
low economic growth and high inflation.
If a hurricane were to wipe out the majority of the
eastern seaboard in Canada, it would likely cause a:
long-run supply shock.
“Fracking” is a newly invented technology that
allows drillers to extract significantly larger
quantities of natural gas from existing deposits
than was previously possible. How is this
discovery likely to affect the economy? This
discovery will likely:
a. increase AD, SRAS, and LRAS, leading to a
long-term increase in output and an
uncertain change in prices.
b. increase both SRAS and LRAS, leading to
a long-term increase in output and
decrease in prices.
c. decrease both SRAS and LRAS, leading to a
long-term decrease in output and increase in
prices.
d. increase AD but decrease both SRAS and
LRAS, leading to an uncertain change in
long-term output and a decrease in prices
b. increase both SRAS and LRAS, leading to
a long-term increase in output and
decrease in prices.
. Suppose that a statement by the governor of the
Bank of Canada about the state of the economy
causes a loss of consumer confidence. What will
be the long-run impact on the economy if the
government allows the economy to adjust without
a policy response?
Output will return to its initial level in the
long run but the price level will be lower.
If the government undertakes expansionary fiscal policy, it might: a. increase income taxes. b. decrease income taxes. c. decrease government spending. d. increase corporate income taxes
b. decrease income taxes
A bank allows us to diversify risk because:
it has a big pool of borrowers and savers, so the risk of repayment is
spread among many.
An example of a seller in a financial market would be:
individuals who have a savings account.
A persistent government budget deficit can hurt a closed economys ability to engage
in economic investment because in a closed economy national savings is
equal to economic investment.
Which of the following is a way to describe the risk of a financial asset?
(a) Interest rate
(b) Overnight rate
(c) Standard deviation
(d) Inflation rate
(c) Standard deviation
Your buddy says. Have you ever noticed that you can get the same type and size of
tire for 30 dollars cheaper in the next county over? Ive got a way to make profits for
yearswell buy the tires where theyre cheaper and bring them back here to sell.” What
is the financial term for the transaction your friend wants to make?
Arbitrage
Does the level of taxation in a closed economy have an impact on national savings?
No. Taxes increase public savings but decrease private savings.
If citizens expect to bear more of the burden for their own health care and retirement
costs in the future, then we would expect their:
supply of loanable funds further right than it would otherwise be.
As the real interest rate rises, the quantity of loanable funds:
supplied also rises
Money contributes to economic activity and allows for a more complex society than
barter does because:
barter is inefficient. Each time you want to make a trade, you have to
find a partner who has something you want and wants what you have
to offer.
The essential functions of any central bank are:
managing the money supply, and acting as a lender of last resort.
If the reserve ratio was 100 percent, then:
no lending would occur using deposits.
If a central bank wanted to increase the money supply, they could do what to the reserve requirement?
decrease the reserve requirement, reducing the reserve ratio
If a central bank wanted to increase the money supply, they could: (in respect to a bond)
buy a bond from a bank, giving the bank cash in return, which it can
then lend out.
If the reserve ratio is 5 percent, then the money multiplier is approximated to be:
20
If a central bank wanted to decrease the money supply, one way to make an enormous
impact would be to:
increase the reserve requirement, which would decrease the money multiplier.
When the Bank of Canada buys bonds through open market operations, it gives banks
money in return, which:
increases their ability to lend, and increases aggregate demand.
In the liquidity-preference model, the money supply curve:
is vertical, and moves at the sole discretion of the Bank of Canada.
An decrease in interest rates:
increases aggregate demand, increasing economic activity.
If the economy is in a recession, the Bank of Canada is likely to:
buy bonds through open market operations.
According to the quantity theory of money, a decrease in prices would be due to:
a decrease in the money supply.
If an economy produces 4,000 units of output with a price level of 2 and with a velocity
of money of 8, we know that the money supply must be:
1,000.
According to the quantity theory of money, increasing the money supply:
leads to inflation.
The severe oil shortages can create:
cost push inflation.
Suppose the nominal interest rate is 7 percent annually, and you deposit 1,000. Inflation in the economy throughout the year is 7 percent. At the end of the year, you
have earned:
no increase in your purchasing power
. If the nominal interest rate is the same as the real interest rate, then inflation must
be:
0
The net result of deflation is to:
decrease consumption and investment, decreasing aggregate demand
Conducting expansionary monetary policy when the economy is at its long-run equilibrium causes the Phillips Curve:
to shift straight up
