Macro Flashcards
Macroeconimics Definition
the examination of the aggregate behavior of the economy (i.e. how the actions of individuals and firms in the economy interact to produce a particular level of ecnomic performance as a whole)
the three macroeconmic goals
- GDP growth (expanding economy)
- full employment / low unemployment
- stable prices / low inflation
4 sectors of the economy
households, firms, government, and the rest of the world
three types of markets
- the factor markets
- the markets for goods and services
- the financial market
How do funds flow from firms to households?
through wages, profit, interest, and rent through factor markets
What happens through the financial markets?
private savings and funds from the rest of the world are channeled into investment spending by firms, government borrowing, foreign borrowing and lending and foreign transaction of stocks.
product market
anywhere things are sold or bought
resource market
the households sell thing to businesses
factor payments = types of income
land -> rent
labor -> wages
capital -> interest
enterpreneurship -> profit
the public sector
the part of the economy run by the government
the business cycle
the short-run alternatiation between econimic downturns and economic upturns
depression definition
a very deep and prolonged downturn
recession definition
periods of economic downturns when output and employment are falling (for 2 quarters/6 months)
- aggregate output falls
expansions (aka recoveries)
periods of economic upturns when output and employment are rising
business cycle peak
the point at which the economy turns from expansion to recession
business cycle trough
the point at which the economy turns from recession to expansion
long run economic growth
sustained upward trend in the economy’s output ovvver time
bubble definition
an economic cycle that is characterized by the rapid escalation of market value, particularly in the price of assets
crash or bubble burst
fast inflation followed by a quick decrease in value (or contraction
economic bubbles characteristics
- created by a surge in asset prices that is driven by exuberant market behaviour
- assets typically trade at a price or whtin a price range that greatly exceeds the asset’s intrinsic value
inflation
a rising aggregate price level
deflation
the falling aggregate price level
Inflation and deflation are fluctuations in the value of currency over time
inflation rate
the annual percent change in the aggregate price level
price stability
when the aggregate price level is change only slowly
stagflation
when there is high inflation and low or no GDP growth
hyperinflation
a rapid spike in extreme inflation, usually at a rate of at least 50% per month
cost push inflation
when prices rise due to the rising costs of factors of production and raw materials
demand pull inflation
when prices rise due to increases in demand for goods and services that outpace the growth in supply of goods and services
open economy
an economy that trades goods and services with other countries
trade defiticit
when the value of goods and services bouth from foreigners is more than the value of goods and services it sells to them
trade surplus
when the value of goods and services bought from foreigners is less than the value of the goods and services it sells to them
productivity
the amount of goods and services produced for each hour of a worker’s time
when is long-run economic growth sustainable
if it can continue in the face of the limited supply of natural resources and the impact of growth on the environment
The financial system
- the group of insitutions in the economy that help to match on person’s saving with anothe person’s investment
- moves scarve resources from savers to borrowers
Three tasks of a financial system
- reducing transaction costs
- reducing financial risk
- providing liquid assets
transaction costs
the cost of making a deal
financial risk
the uncertainty about future outcomes that involves financial gains and losses
liquid assets
assets that can be quickly converted into cash
Gross Domestic Product (GDP)
measures the total value of al final goods and services produced in the economy during a given year. It does not include the value of intermediate goods
The 3 ways GDP can be calculated
- add up the value added of all produces
- add up all income paid to factors of productoin
- add up all spending ondomestically produced final goods and services. Results in the equation where GDP is represented by Y.
Y equation
Y = C + I + G + (M - X)
I
business investment
- inventory
- most volatile
C
consumption spending
- rent
- clothes
- largest portion
G
government spending
- middle part of circular demand
X
exports
M
imports
Real GDP
GDP adjusted for inflation
nominal GDP
the total value of the output of an economy before the effect of price increases is removed
What does Canada use to adjust GDP?
Chain FIsher Volume
Drawbacks to GDP
- population size, need to find per capita
- non market production not measured
- underground ecnonomy
- types of good produced
- leisure
- environmental degradation
- distribution of income
the unenployment rate
- precentage of labour force not working at any given time
- calculated once a month
3 categories in unemployment
- unable to work - those under 15 and institutionalized
- eligible, but don’t want to work
those who are either employed or seeking employment
unemployment rate =
number unemployed / labour force
labour force
everyone able and willing to work, does not inclue ppl who don’t want jobs/unable to work
criticisms to unemployment rate
- includes ppl partially employed and working
- doesn’t include ppl who have given looking for work
- often is understated
- includes those working below their qualifications as employed
frictional unemployment
results from people moving between jobs
strctural unemployment
occurs when skills or location of workers no longer matches demand in the economy
full employment in canada
6% to 7%
full employment
when the only unemployment is structural and frictional
cyclical unemployment
resutls from an overall reduction is consumer spending, deman for goods, fewrer workers needed
a result of the business cycle
seasonal unemployment
caused by variation in climate over the course of the year
percentage unemployment varies significantly by education
highest - those without a high school diplome
lowest - those with graduate degrees.
CPI = consumer price index
tracks inflation using a representative basket of goods and services - monitors 600 good and services accross Canada
Indexing
an adjustment made to wages and pension payments to offset year-to-year price increases (full or partial indexing)
current inflation target in Canada
2% (between 1% and 3%
Limitations of CPI
- not every household’s spending reflected in the index weights of CPI
- individual items in base basket may not reflect current spending patterns or consumer wants
- does not reflect cultural diversity??
fiscal policy
the use of taxes, government transfers, or government purchases of goods and services to shift the aggregate demand curve
discretionary fiscal policy
government takes deliberate actions through legislation to alter spending or taxation policies
expansionary fiscal policy
when the economy is in recession, the government wants to increase aggregate demand
examples of expansionary fiscal policy
- tax cut - increases consumer disposable income -> increases AD as long as consumers don’t increase savings or spendings on imports
- increase in government spending, which directly shift AD
Contractionary fiscal policy
when the economy is suffering from inflation, government wants to decrease AD
contractionary fiscal policy examples
- tax increase - decreases disposable income of consumers
- AD curve shifts left, both inflation and GDP decrease
- decrease in government spending: directly shifts the AD curve left
tools of fiscal policy
- changes in government spending
- changes in taxation
- automatic stabilizers
- fiscal policy and multipleir effect
automatic stabilizers
employment insurance - helps maintain income and thus spending progressive tax
multiplier effect
the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending (more GDP growth than dollar invested)
discretionary expansionary fiscal policies
increased government purchases of goods and services, higher government transfers or lower taxes - reduce the budget balance for that year
other things equal??
cyclically adjusted budget balance
an estimate of the budget balance if the economy were at potential output
deficit budget
government spends more than it receives in tax revenue (must borrow money to cover shortfall)
surplus budget
government collects more in taxes than it spends
balanced budget
government spends amount equal to collected tax revenue
debt
total amount owed by the government
cyclical deficit
part of deficit incurred in trying to pull an economy out of recession (spending on infrastructure, jobs, retraining, etc)
Structural deficit
part of deficit that exists even when economy is operating at full employment
full employment budget
intervene only when economy falls below its full-employment targets no structural deficits
drawbacks and limitartions of fiscal policy
- time lags
- difficulties in changing spending and taxation policies
- conflict between different levels of government
- regional variations
- size of debt can limit use of fiscal policy
- crowding out of private investment
- deficits redistribute income from all taxpayers to bondholders
- deficits impose net burden on future generations
- foreign-owned debt removes capital from economy
Money
anything that is generally acceptable in purchasing goods or settling debts
3 qualities of money
a medium of exchange - an asset that individuals acquire for the purpose of trading rather than for their own consumption
a store of value - means of holding purchasing power over time
a unit of account - a measure used to set prices and make economic calculations
Three parts of money supply
M1+
M1++
M2++
M1+
currency outside banks plus personal and non-personal chequable deposits at chartered banks plus all chequable deposits at trust and mortgage loan companies, credit unions and caisses populaires plus continuity adjustments
M1++
M1+ plus non chequable notice deposits held at chartered banks plus all non-chequable deposits at trust and mortgage loan companies, credit unions and caisses populaires less interbank non-chequable notice deposits plus continuity adjustments
M2++
M2+ plus canada savings bonds abd other retail instruments plus cumulative net contributions to mutual funds other than Canadian dollar money market mutual funds (which are already included in M2 +)
cryptocurrency
a digital currency designed to work as a medium of exchange through a computer netwrok that is not reliant on any central authority such as a government or bank to uphold or maintain it
bank run
phenomenon in which many of bank’s depositors try to withdraw their funds due to fears of a bank failure, historically were contagious
Deposit insurance
deposits are insured by the Canadian Deposit Insurance Corporation, for up to $100,000 in canada
When was bank of Canada funded?
1934
functions of bank of canada
- director of monetary policy
- regulates credit, currency and itnerest rates
- banker to chartered banks
- banker to federal government
- buys and sells government bonds
- handles foreign currency reserves
- issuer of currency
monetary policy
the process by which the government affects the economy by influencin the expansion of money and credit, carried ou in Canada by the bank of Canada
Easy money
characterized by low interest rates, availability of credit and growth of money supply
used to curb a recession
tight money
characterized by high interest rates, more difficult availablity of credit and decrease of money supply
used to restrain an economy in times of inflation
higher interesst impact value on canadian dollar
more foreign investors, more demand, higher value
Prime rate
lowest rate of interest a financial institution offers to its best customers
bank rate
rate charge by bank of canada for loans made to financial insitutions (Set at 0.25% above the obernight target rate
nomimal rate of interest
includes interest inflation premium and allowance for risk and creditworthiness
real rate of interest =
nonimal rate of interest - expeted rate of inflation
flexible exchange rate
allows an independent monetary policy suited to the needs of our own economy and acts as a “shock absorber.”
Inflation-control target
provides a precise goal against which to measure the conduct of monetary policy, increasing the Bank’s public accountability
The overnight Target Rate
- main tool of monetary policy
- the rate at which banks lend money to one another overnight
- banks can deposit money at the Bank of Canada for the depost rate and borrow money at the bank rate
- a floor system -> the target rate is at the bottom of the band
target for the overnight rate = policy interest rate
Assets on the bank of Canada’s balance sheet
government of canada bonds, foreign exchange, advances to chartered banks
liabilities on the bank of Canada’s balance sheet
currency oustanding, deposits of charteres banks, deposit of feredal government
quantitive easing
easing the markets through the quantity of money
what happens when you can’t lower the interest anymore
the Bank can try to increase supply
Bond yields are used to set long-term rates for mortgages and business lending. As yields decrease so to should interest rates on these instruments
increase in quantity of money will also tend to lower the value (exchange rate) of currency
liquidity trap
when the interest rates can’t be dropped any lower ( they reach zero bound) but the economy requires further stimulation through expansion of the money supply ( resulting in an increase in AD)
drawbacks of monetary policy
- tight money policies work better than easy money policies
- they affect the canadian dollar
- have uneven results netionwide
- affect government debt
The bank of canada does not actively manage that Candian dollar exchange rate
3 reasons for downward sloping AD
- wealth effect of a change in the aggregate price level (more expensive less spending)
- interest rate effect of a change in aggregate the price level (higher interest rates = more expensive less spending)
- exchange rate effect of a change in the aggregate price level (higher price means increases costs of exports reducing demand of canadian exports)
4 uses of consumer income
- comsumption
- taxes
- spending on imports
- savings
4 factors that influence demand
- demand for canadian produced exports
- domestic rate of inflation
- relative level of incomet o other countries
- value of canadian dollar
keynesian range
reserves of resource mean average costs can remain constant as output is increased
flat bottom
intermediate range
average costs will rise as more firms bid for scarce resources
middle curve
classical range
resources are fully utilized, even price increases cannot increase productivity
straight vertical
why LRAS mght shift
- labor
- capital
- natural resources
- tech knowledge
when is there full employment?
when LRAS and SRAS cross and inflation is low and stable
recessionary gap
when AD intersects to the left of the full employment output
- high unemployment
- low inflation
- low GDP growth
