Macroecon chap.4

Question 1

National Product/Income

Answer 1

Production of output, to generate income

Question 2

Aggregation

Answer 2

Nominal national income

Question 3

Nominal national income

Answer 3

Total national income measured in current dollar

Question 4

Real national income

Answer 4

National income measured in constant (base-period) dollar
Changes only when the quantities changes

Question 5

GDP (2)

Answer 5

• Gross domestic product
• Can be measure in real or nominal income

Question 6

Business cycle (4)

Answer 6

• Trough (moment between recession and recovery)
• Recession (downward deviation from potential GDP)
• Recovery (upward trend )
• Peak (highest real GDP)

Question 7

Potential output

Answer 7

• Y*
• highest GDP that can be sustained over the long term

Question 8

Output gap (3)

Answer 8

• Difference between potential output and actual output (Y-Y*)
• Y<Y* = recessionary gap
• Y>Y* = inflationary gap

Question 9

Why national income matters (5)

Answer 9

• Important measure of economic performance
• Recession => unemployment and lost output
• Boom can bring inflation
• Determines the standard of living with the real per capita
• Economic grow doesn’t make everyone better off

Question 10

Unemployment rate formula

Answer 10

(Number of people unemployed / Number of people in the labour force) x 100

Question 11

When the economy is at full employment, why does unemployment still exist? (2)

Answer 11

• Frictional unemployment
• Structural unemployment

Question 12

What happens when the real GDP is lower than potential GDP?

Answer 12

Cyclical unemployment

Question 13

Graph stats on employment/unemployment (2)

Answer 13

• Employment grows at roughly the same rate as the labour force
• Short-term fluctuations in unemployment rate are substantial (Ex: 2019, 1982 recession and 2020 pandemic)

Question 14

Why unemployment matters (4)

Answer 14

• Enormous social significance
• Loss of income
• Loss of output
• Crime, mental illness, and general social unrest tend to be associated with long-term unemployment

Question 15

Productivity (2)

Answer 15

• Measure of the amount of output that the economy produces per unit of input (Output/Input)
• Single largest cause of rising material living standard over long period of time

Question 16

Labour productivity (2)

Answer 16

• Real GDP/ level of employment (in total hours worked)
• Increase in the last 50 years

Question 17

Price level

Answer 17

Average level of all price in the economy as an index number

Question 18

CPI

Answer 18

Consumer Price Index

Question 18

Why inflation matters (6)

Answer 18

• Money’s value comes from what we can purchase
• Purchasing power (what goods/services can be bought with a unit of money)
• Reduce purchasing power and real value of nominal terms (dollars)
• Anticipating inflation helps maintain real values
• Unanticipated inflation creates more changes in real value
• Inflation rarely full anticipated/unanticipated

Question 19

Interest rates

Answer 19

Price paid per dollar borrowed per period of time, expressed either as a proportion of as a percentage

Question 20

Prime interest rate and bank rate

Answer 20

Create interest rate change in the same direction as theirs

Question 21

Nominal/Real interest rate

Answer 21

• Nominal: increase based on original sum
• Real: increase based on current sum

Question 22

Why do interest rates matter (2)

Answer 22

• Compares effects on savers to that of borrowers
• Impact on investment plans

Question 23

Notable period of exchange rate between CAD and USD (2)

Answer 23

• Depreciation of CAD in late 1990s
• Appreciation of CAD from 2002-2012

Question 24

Exchange rates and trade flows

Answer 24

Compare the history of the relative size of exports to imports

Question 25

Net export (trade balance)

Answer 25

Difference between export and imports (Nx = x-iM)

Question 26

Trade balance situation currently

Answer 26

Fluctuated mildly over the years, but stayed relatively small

Question 27

Long-term economic growth (3)

Answer 27

• Rising average living standard
• Less attention from the media, but very important for society living standards
• Government policies have the ability to “influence” long-term economic growth

Question 28

Shot-term fluctuation

Answer 28

• Leads economist to study business cycles
• Debatable effectiveness of monetary and fiscal policy in influencing the fluctuation
• Shouldn’t “fine tune” these fluctuations