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AP Economics > Macro > Flashcards

Macro Flashcards

1
Q

Macroeconimics Definition

A

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)

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2
Q

the three macroeconmic goals

A
  • GDP growth (expanding economy)
  • full employment / low unemployment
  • stable prices / low inflation
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3
Q

4 sectors of the economy

A

households, firms, government, and the rest of the world

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4
Q

three types of markets

A
  • the factor markets
  • the markets for goods and services
  • the financial market
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5
Q

How do funds flow from firms to households?

A

through wages, profit, interest, and rent through factor markets

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6
Q

What happens through the financial markets?

A

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.

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7
Q

product market

A

anywhere things are sold or bought

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8
Q

resource market

A

the households sell thing to businesses

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9
Q

factor payments = types of income

A

land -> rent
labor -> wages
capital -> interest
enterpreneurship -> profit

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10
Q

the public sector

A

the part of the economy run by the government

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11
Q

the business cycle

A

the short-run alternatiation between econimic downturns and economic upturns

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12
Q

depression definition

A

a very deep and prolonged downturn

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13
Q

recession definition

A

periods of economic downturns when output and employment are falling (for 2 quarters/6 months)

  • aggregate output falls
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14
Q

expansions (aka recoveries)

A

periods of economic upturns when output and employment are rising

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15
Q

business cycle peak

A

the point at which the economy turns from expansion to recession

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16
Q

business cycle trough

A

the point at which the economy turns from recession to expansion

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17
Q

long run economic growth

A

sustained upward trend in the economy’s output ovvver time

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18
Q

bubble definition

A

an economic cycle that is characterized by the rapid escalation of market value, particularly in the price of assets

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19
Q

crash or bubble burst

A

fast inflation followed by a quick decrease in value (or contraction

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20
Q

economic bubbles characteristics

A
  • 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
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21
Q

inflation

A

a rising aggregate price level

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22
Q

deflation

A

the falling aggregate price level

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23
Q

Inflation and deflation are fluctuations in the value of currency over time

A
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24
Q

inflation rate

A

the annual percent change in the aggregate price level

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25
Q

price stability

A

when the aggregate price level is change only slowly

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26
Q

stagflation

A

when there is high inflation and low or no GDP growth

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27
Q

hyperinflation

A

a rapid spike in extreme inflation, usually at a rate of at least 50% per month

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28
Q

cost push inflation

A

when prices rise due to the rising costs of factors of production and raw materials

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29
Q

demand pull inflation

A

when prices rise due to increases in demand for goods and services that outpace the growth in supply of goods and services

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30
Q

open economy

A

an economy that trades goods and services with other countries

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31
Q

trade defiticit

A

when the value of goods and services bouth from foreigners is more than the value of goods and services it sells to them

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32
Q

trade surplus

A

when the value of goods and services bought from foreigners is less than the value of the goods and services it sells to them

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33
Q

productivity

A

the amount of goods and services produced for each hour of a worker’s time

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34
Q

when is long-run economic growth sustainable

A

if it can continue in the face of the limited supply of natural resources and the impact of growth on the environment

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35
Q

The financial system

A
  • 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
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36
Q

Three tasks of a financial system

A
  • reducing transaction costs
  • reducing financial risk
  • providing liquid assets
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37
Q

transaction costs

A

the cost of making a deal

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38
Q

financial risk

A

the uncertainty about future outcomes that involves financial gains and losses

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39
Q

liquid assets

A

assets that can be quickly converted into cash

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40
Q

Gross Domestic Product (GDP)

A

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

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41
Q

The 3 ways GDP can be calculated

A
  • 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.
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42
Q

Y equation

A

Y = C + I + G + (M - X)

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43
Q

I

A

business investment
- inventory
- most volatile

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44
Q

C

A

consumption spending
- rent
- clothes
- largest portion

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45
Q

G

A

government spending
- middle part of circular demand

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46
Q

X

A

exports

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47
Q

M

A

imports

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48
Q

Real GDP

A

GDP adjusted for inflation

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49
Q

nominal GDP

A

the total value of the output of an economy before the effect of price increases is removed

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50
Q

What does Canada use to adjust GDP?

A

Chain FIsher Volume

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51
Q

Drawbacks to GDP

A
  • population size, need to find per capita
  • non market production not measured
  • underground ecnonomy
  • types of good produced
  • leisure
  • environmental degradation
  • distribution of income
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52
Q

the unenployment rate

A
  • precentage of labour force not working at any given time
  • calculated once a month
53
Q

3 categories in unemployment

A
  • unable to work - those under 15 and institutionalized
  • eligible, but don’t want to work
    those who are either employed or seeking employment
54
Q

unemployment rate =

A

number unemployed / labour force

55
Q

labour force

A

everyone able and willing to work, does not inclue ppl who don’t want jobs/unable to work

56
Q

criticisms to unemployment rate

A
  • 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
57
Q

frictional unemployment

A

results from people moving between jobs

58
Q

strctural unemployment

A

occurs when skills or location of workers no longer matches demand in the economy

59
Q

full employment in canada

A

6% to 7%

60
Q

full employment

A

when the only unemployment is structural and frictional

61
Q

cyclical unemployment

A

resutls from an overall reduction is consumer spending, deman for goods, fewrer workers needed

a result of the business cycle

62
Q

seasonal unemployment

A

caused by variation in climate over the course of the year

63
Q

percentage unemployment varies significantly by education

highest - those without a high school diplome

lowest - those with graduate degrees.

A
64
Q

CPI = consumer price index

A

tracks inflation using a representative basket of goods and services - monitors 600 good and services accross Canada

65
Q

Indexing

A

an adjustment made to wages and pension payments to offset year-to-year price increases (full or partial indexing)

66
Q

current inflation target in Canada

A

2% (between 1% and 3%

67
Q

Limitations of CPI

A
  • 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??
68
Q

fiscal policy

A

the use of taxes, government transfers, or government purchases of goods and services to shift the aggregate demand curve

69
Q

discretionary fiscal policy

A

government takes deliberate actions through legislation to alter spending or taxation policies

70
Q

expansionary fiscal policy

A

when the economy is in recession, the government wants to increase aggregate demand

71
Q

examples of expansionary fiscal policy

A
  • 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
72
Q

Contractionary fiscal policy

A

when the economy is suffering from inflation, government wants to decrease AD

73
Q

contractionary fiscal policy examples

A
  • 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
74
Q

tools of fiscal policy

A
  • changes in government spending
  • changes in taxation
  • automatic stabilizers
  • fiscal policy and multipleir effect
75
Q

automatic stabilizers

A

employment insurance - helps maintain income and thus spending progressive tax

76
Q

multiplier effect

A

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)

77
Q

discretionary expansionary fiscal policies

A

increased government purchases of goods and services, higher government transfers or lower taxes - reduce the budget balance for that year

other things equal??

78
Q

cyclically adjusted budget balance

A

an estimate of the budget balance if the economy were at potential output

79
Q

deficit budget

A

government spends more than it receives in tax revenue (must borrow money to cover shortfall)

80
Q

surplus budget

A

government collects more in taxes than it spends

81
Q

balanced budget

A

government spends amount equal to collected tax revenue

82
Q

debt

A

total amount owed by the government

83
Q

cyclical deficit

A

part of deficit incurred in trying to pull an economy out of recession (spending on infrastructure, jobs, retraining, etc)

84
Q

Structural deficit

A

part of deficit that exists even when economy is operating at full employment

85
Q

full employment budget

A

intervene only when economy falls below its full-employment targets no structural deficits

86
Q

drawbacks and limitartions of fiscal policy

A
  • 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
87
Q

Money

A

anything that is generally acceptable in purchasing goods or settling debts

88
Q

3 qualities of money

A

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

89
Q

Three parts of money supply

A

M1+
M1++
M2++

90
Q

M1+

A

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

91
Q

M1++

A

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

92
Q

M2++

A

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 +)

93
Q

cryptocurrency

A

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

94
Q

bank run

A

phenomenon in which many of bank’s depositors try to withdraw their funds due to fears of a bank failure, historically were contagious

95
Q

Deposit insurance

A

deposits are insured by the Canadian Deposit Insurance Corporation, for up to $100,000 in canada

96
Q

When was bank of Canada funded?

A

1934

97
Q

functions of bank of canada

A
  • 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
98
Q

monetary policy

A

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

99
Q

Easy money

A

characterized by low interest rates, availability of credit and growth of money supply

used to curb a recession

100
Q

tight money

A

characterized by high interest rates, more difficult availablity of credit and decrease of money supply

used to restrain an economy in times of inflation

101
Q

higher interesst impact value on canadian dollar

A

more foreign investors, more demand, higher value

102
Q

Prime rate

A

lowest rate of interest a financial institution offers to its best customers

103
Q

bank rate

A

rate charge by bank of canada for loans made to financial insitutions (Set at 0.25% above the obernight target rate

104
Q

nomimal rate of interest

A

includes interest inflation premium and allowance for risk and creditworthiness

105
Q

real rate of interest =

A

nonimal rate of interest - expeted rate of inflation

106
Q

flexible exchange rate

A

allows an independent monetary policy suited to the needs of our own economy and acts as a “shock absorber.”

107
Q

Inflation-control target

A

provides a precise goal against which to measure the conduct of monetary policy, increasing the Bank’s public accountability

108
Q

The overnight Target Rate

A
  • 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
109
Q

target for the overnight rate = policy interest rate

A
110
Q

Assets on the bank of Canada’s balance sheet

A

government of canada bonds, foreign exchange, advances to chartered banks

111
Q

liabilities on the bank of Canada’s balance sheet

A

currency oustanding, deposits of charteres banks, deposit of feredal government

112
Q

quantitive easing

A

easing the markets through the quantity of money

113
Q

what happens when you can’t lower the interest anymore

A

the Bank can try to increase supply

114
Q

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

A
115
Q

increase in quantity of money will also tend to lower the value (exchange rate) of currency

A
116
Q

liquidity trap

A

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)

117
Q

drawbacks of monetary policy

A
  • tight money policies work better than easy money policies
  • they affect the canadian dollar
  • have uneven results netionwide
  • affect government debt
118
Q

The bank of canada does not actively manage that Candian dollar exchange rate

A
119
Q

3 reasons for downward sloping AD

A
  • 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)
120
Q

4 uses of consumer income

A
  • comsumption
  • taxes
  • spending on imports
  • savings
121
Q

4 factors that influence demand

A
  • demand for canadian produced exports
  • domestic rate of inflation
  • relative level of incomet o other countries
  • value of canadian dollar
122
Q

keynesian range

A

reserves of resource mean average costs can remain constant as output is increased

flat bottom

123
Q

intermediate range

A

average costs will rise as more firms bid for scarce resources

middle curve

124
Q

classical range

A

resources are fully utilized, even price increases cannot increase productivity

straight vertical

125
Q

why LRAS mght shift

A
  • labor
  • capital
  • natural resources
  • tech knowledge
126
Q

when is there full employment?

A

when LRAS and SRAS cross and inflation is low and stable

127
Q

recessionary gap

A

when AD intersects to the left of the full employment output

  • high unemployment
  • low inflation
  • low GDP growth
128
Q
A

AP Economics (4 decks)

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