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ECON.102 > final exam > Flashcards

final exam Flashcards

1
Q

Gross Domestic Product (GDP)

A

The total value of all goods and services produced within a country in a specific period, usually measured annually or quarterly.

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2
Q

Inflation

A

The rate at which the general level of prices for goods and services is rising, leading to a decrease in purchasing power over time.

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3
Q

Unemployment Rate

A

The percentage of the labor force that is unemployed and actively seeking employment.

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4
Q

Aggregate Demand (AD)

A

The total demand for goods and services within an economy at a given price level and in a given period.

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5
Q

Aggregate Supply (AS)

A

The total supply of goods and services produced within an economy at a given price level and in a given period.

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6
Q

Fiscal Policy

A

The use of government spending and taxation to influence the economy, typically aimed at achieving full employment, stable prices, and economic growth.

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7
Q

Monetary Policy

A

The management of the money supply and interest rates by a central bank to achieve macroeconomic objectives such as price stability, full employment, and economic growth.

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8
Q

Macroeconomic Models:

A

Simplified representations of the economy used to analyze economic phenomena and make predictions about the effects of policy changes (eg. Keynesian, Neoclassical, IS-LM).

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9
Q

International Trade:

A

The exchange of goods and services between countries.

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10
Q

Exchange Rate:

A

The price of one currency in terms of another currency, determining the value of imports and exports and influencing international trade.

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11
Q

Economic Growth:

A

An increase in the production of goods and services over time, typically measured as an increase in real GDP.

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12
Q

Economic Development:

A

The process by which a nation improves the economic, political, and social well-being of its people (measured by factors such as GDP per capita, life expectancy, literacy rates, etc.)

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13
Q

Cyclical Unemployment:

A

Unemployment caused by fluctuations in economic activity, particularly downturns in the business cycle (eg. layoffs, temporary unemployment)

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14
Q

Cyclical unemployment Impact on AD:

A

short-term, the rise in unemployment contributes to a further decline in consumer spending, as unemployed workers have less income to spend, worsening the economic downturn; low long-term impact.

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15
Q

Cyclical unemployment Impact on AS:

A

low short-term impact; long-term, if firms cut back on investment in physical capital/a decrease in labor force participation leads to a decrease in economic potential growth/AS.

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16
Q

Structural Unemployment:

A

Unemployment caused by a mismatch between the skills or location of workers and the requirements of available jobs (eg. shift in industry demand, job displacement, long-term unemployment)

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17
Q

Structural Unemployment Impact on AD:

A

low short-term impact; long-term, higher unemployment can lead to a decrease in consumer spending

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18
Q

Structural Unemployment Impact on AS:

A

low short-term impact; long-term, higher unemployment decreases the economy’s potential output.

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19
Q

Frictional Unemployment:

A

Unemployment that occurs when individuals are between jobs or searching for their first job, it is typically voluntary in nature, meaning individuals are not unemployed due to layoffs or economic downturns but rather by choice/ circumstance (eg. entering/reentering the workforce, changing careers, or relocating to new areas.)

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20
Q

Frictional Unemployment Impact on AD:

A

low short-term impact; long-term, prolonged periods of job search and uncertainty about future employment prospects can decrease consumer confidence, reducing spending.

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21
Q

Frictional Unemployment Impact on AS:

A

low short-term impact; long-term, can lead to inefficiencies in the allocation of labor resources and slower productivity growth.

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22
Q

Job Displacement:

A

Involuntary loss of employment experienced by workers due to various factors such as technological advancements, economic downturns, or company closures → makes it difficult for workers due to their specialized skills in a low-demand industry.

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23
Q

Consumer Price Index (CPI):

A

A measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services

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24
Q

CPI Equation:

A

CPI = Cost of basket in current year / cost of basket in base year x 100

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25
Q

Economic Indicators:

A

Statistics used to gauge the health and performance of an economy (eg. GDP growth rate, inflation rate, unemployment rate, etc.)

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26
Q

Difference between nominal and real variables:

A
  • Nominal variables are not adjusted for inflation and represent values at current market prices.
  • Real variables are adjusted for inflation and represent values in terms of constant purchasing power.
27
Q

Constant purchasing power:

A

a certain amount of money can buy the same amount of goods and services over time, even if prices change due to inflation or deflation.

28
Q

Components of AD:

A

(C + I + G + NX); C = Consumption; I = Investment; G = Government spending; NX = Net exports

29
Q

Consumption (C):

A

refers to the total spending by households on goods and services, including durable goods, nondurable goods, and services.

  • Typically the largest component of aggregate demand in most economies.
    Reflects the spending patterns of households.
30
Q

Consumption Short-term impact on AD:

A

significant impact on AD, an increase in consumption stimulates demand for goods and services, prompting businesses to increase production to meet the increased demand; reduced consumer spending results in lower demand for goods and services, leading businesses to reduce production and potentially cut jobs.

31
Q

Consumption Long-term impact on AD:

A

impact may be more gradual and complex, changes in consumption patterns can affect investment decisions by businesses.

32
Q

Investment (I):

A

spending by businesses on capital goods (eg. machinery, equipment, structures, and residential construction).
Includes changes in business inventories (which can fluctuate due to changes in production levels, sales, and expectations about future demand).

33
Q

Investment Short-term impact on AD:

A

an increase in investment spending, increases AD by stimulating demand for goods and services related to the investment; a decrease in investment spending leads to a decline in AD, as reduced investment activity lowers demand for goods.

34
Q

Investment Long-term impact on AD:

A

increased investment leads to higher productivity, technological advancements, and improvements in infrastructure, which increases the economy’s capacity and potential output over time; conversely, a decrease in investment spending or underinvestment in critical areas may hinder productivity growth.

35
Q

Government Spending (G):

A

refers to expenditures by the government on goods and services

36
Q

Government Spending Short-term impact on AD: an increase in government spending

A

an increase in government spending leads to increased demand for goods and services in related sectors, this boost in demand stimulates the economy, creates jobs further increasing AD.

37
Q

Government Spending Long-term impact on AD:

A

Increases in government spending on investments in education, research and development, and infrastructure can enhance the economy’s productive capacity and potential output over time, however, if government spending is primarily directed towards consumption rather than investment, can decrease AD

38
Q

Net Exports (NX) / ((X - M)):

A

represents the difference between exports (X) and imports (M) of goods and services (measured by (X - M)

39
Q

Net exports Short-term impact on AD:

A

An increase in net exports results in an increase in AD.

40
Q

net exports Long-term impact on AD:

A

persistent changes in net exports can influence the economy’s overall health, affecting factors like debt levels and the ability to finance future consumption and investment.

41
Q

Positive net exports:

A

exports exceed imports, increase aggregate demand

42
Q

Negative net exports:

A

imports exceed exports, decrease aggregate demand.

43
Q

Factors that shift the AD curve:
- Increases in C, G, I and/or NX - result in an increase/rightward shift of the AD curve.

  • Decreases in C, G, I and/or NX - result in a decrease/leftward shift of the AD curve.
A

Factors that shift the AS curve:
- Increases in production costs - result in a decrease/leftward shift of the AS curve.

  • Technological advancements - improve productivity and result in an increase/rightward shift of the AS curve.
  • Increases in prices of key resources (eg. oil, minerals, etc.) - can increase production costs and result in a decrease/leftward shift of the AS curve.
  • An increase in government regulations can impact a businesses’ ability to produce goods and services, resulting in a decrease/leftward shift of the AS curve.
44
Q

How can fiscal policy be used to stabilize the economy during recession?

A

the government can implement expansionary fiscal policy by cutting taxes or investing in projects to create jobs and promote consumption/investment.

45
Q

How can fiscal policy be used to stabilize the economy during economic booms?

A

the government can implement contractionary fiscal policy by Decreasing government spending and increasing taxes, the demand for goods and services decreases.

46
Q

Expansionary fiscal policies:

A

Expansionary fiscal policy involves increasing government spending and/or decreasing taxes to increase AD.

47
Q

Contractionary fiscal policies:

A

Contractionary fiscal policy involves decreasing government spending and/or increasing taxes to decrease AD.

48
Q

How does the central bank control the money supply and interest rate?

A

Performing open market operations, setting the overnight interest rate, setting reserve requirements, providing forward guidance/communication.

49
Q

Open Market Operations:

A

The Bank of Canada buys and sells government securities (bonds) on the open market, when it buys bonds, it’s injecting money into the banking system, increasing the money supply. Conversely, when it sells bonds, it’s withdrawing money from the banking system, reducing the money supply.

50
Q

Setting the Overnight Interest Rate:

A

This is the interest rate at which banks lend and borrow funds among themselves overnight. By adjusting this rate, the BoC influences the cost of borrowing and lending in the economy. When the overnight rate increases, borrowing becomes more expensive, leading to lower spending and inflation. And when it decreases the overnight rate, borrowing becomes cheaper, encouraging spending and investment.

51
Q

Reserve Requirements:

A

These are the minimum amount of reserves that banks must hold against their deposits. Decreasing reserve requirements increases the amount of money that banks can lend, expanding the money supply. Conversely, increasing reserve requirements decreases the amount of money that banks can lend, contracting the money supply.

52
Q

Forward Guidance/Communication:

A

Guidance provided by the bank on its future monetary policy intentions. This guidance helps shape market expectations and influences interest rates and borrowing behavior.

53
Q

Expansionary Monetary Policy:

A

Involves actions by the central bank to increase the money supply, lower interest rates, and stimulate borrowing and spending in the economy.

  • This includes measures such as lowering the target interest rate, conducting open market purchases of government securities, or reducing reserve requirements for banks.
54
Q

Expansionary Monetary Policy Impact on AD:

A

Increased investment, higher consumer spending, and a potentially stronger export sector result in an increase in AD.

55
Q

Contractionary Monetary Policy:

A

Involves actions by the central bank to decrease the money supply, raise interest rates, and dampen borrowing and spending in the economy.

  • This includes measures such as raising the target interest rate, conducting open market sales of government securities, or increasing reserve requirements for banks.
56
Q

Contractionary Monetary Policy Impact on AD:

A

By making borrowing more expensive, this discourages spending by consumers and businesses, resulting in a decrease in AD.

57
Q

Difference Between Fiscal and Monetary Policies:

A
  • The primary tool used to implement monetary policy is the central bank’s control over the money supply and interest rates.
  • The primary tool used to implement fiscal policy is changes in government spending and taxation.
58
Q

The Keynesian Model:

A

Aggregate Demand: AD plays a central role in determining the level of economic activity.

Keynesian Cross Diagram: a simple diagram of the model; the horizontal axis represents total output or income (Y), while the vertical axis represents aggregate demand (AD). The 45-degree line represents the level of output where total spending equals total output (Y = AD).

Equilibrium Output: equilibrium (the level of output where total spending in the economy = total output) occurs where the AD curve intersects the 45-degree line.

Multiplier Effect: One of the key insights of the Keynesian model is the multiplier effect. When there is an increase in autonomous spending (such as government spending or investment), it leads to a chain reaction of increased income and spending throughout the economy.
Government Intervention: Keynesian economics advocates for government intervention to stabilize the economy; expansionary fiscal policy during recessions and contractionary fiscal policy during booms.

59
Q

The Neoclassical Model:

A

Consumers: Assumed to make rational allocations of their income to purchase goods and services that provide them with the highest level of satisfaction given their budget constraints.

Firms: Operate in competitive markets where prices are determined by supply and demand and they are assumed to maximize profits by choosing the optimal combination of inputs (such as labor and capital) to produce goods and services.

Markets: Assumed to be in equilibrium, where the quantity demanded equals the quantity supplied.

Government Intervention: reduced government intervention, emphasizing laissez-faire, the role of competition and the invisible hand of the market in influencing the actions of consumers and firms to achieve efficient outcomes.

60
Q

Comparative Advantage:

A

The ability of a country to produce goods or services at a lower cost than others.
It suggests that countries should specialize in producing goods or services in which they have a comparative advantage and trade with others for goods they can’t produce as efficiently.
This increases efficiency and overall output, leading to higher levels of consumption and economic welfare.

61
Q

Gains from Trade:

A

Refers to the benefits that countries gain by engaging in exchange and specialization.
Trade allows countries to consume a greater variety of goods and services at lower prices than would be possible through self-sufficiency, leading to higher levels of consumption and increased economic efficiency.

62
Q

Trade Barriers and Protectionism:

A

barriers (eg. tariffs, quotas, and trade restrictions) can reduce international trade by limiting the flow of goods and services across borders.
They aim to protect domestic industries from foreign competition but can lead to inefficiencies, higher prices for consumers, and retaliatory measures by trading partners.
International trade agreements aim to facilitate trade by reducing barriers and promoting cooperation among countries.

63
Q
A

ECON.102 (1 decks)

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