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Semester 2 Year 1 > Macroeconomics 3 > Flashcards

Macroeconomics 3 Flashcards

1
Q

Basic tenet

A

International trade is economically beneficial for both participants

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2
Q

Special term for a closed economy

A

Autarky

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3
Q

Trade flows in Canada as a percentage of GDP have increased a lot due to

A

NAFTA, FTA, now USMCA.
Innovations in transportation and telecommunications also a factor
Down from peak in 2000

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4
Q

International flows of goods and capital are

A

Very closely linked to each other
Definitions for trade in G & S:
Imports and exports
Next exports (NX) = trade balance
Trade surplus, trade deficit, and balanced trade

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5
Q

FDI=

A

Foreign direct investment
Canadian enterprises have operations in foreign countries

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6
Q

Foreign portfolio investments=

A

Canadians acquire financial instruments issues in foreign countries

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7
Q

NCO=

A

New capital outflow = capital outflow - capital inflow =
purchase of foreign assets by domestic residents (counterpart: imports) - purchase of domestic assets by foreigners (counterpart: exports)

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8
Q

When NCO is positive

A

Financial capital is flowing out
We are buying their securities more than they are buying ours
More securities but liquidity flowing out of Canada

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9
Q

When NCO is negative

A

They are buying more of our securities than we of there’s
They get more of our securities, but we receive liquid payments coming in to Canada for them

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10
Q

Critical accounting identity

A

The ent value of G & S sold by a country (NX) = near value of financial assets acquired
Not an equilibrium but an identity (always true)

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11
Q

NX > 0 and NCO > 0 what is happening with capital

A

Flowing out. Liquidity flowing out to buy securities

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12
Q

NX < 0 and NCO < 0 what is happening with capital

A

Capital flowing in. Selling securities and receiving liquid assets in return

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13
Q

If we integrate the foreign sector to the rest of the economy what formula is found

A

S = I + NX = I + NCO
Total savings = domestic investment and spending and net capital outflow
National savings (private savings + public savings) can be allocated to either domestic investment (closed economy) or national capital outflow (NCO)

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14
Q

If NX > 0 then

A

S > I and the excess savings leave the Canadian economy

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15
Q

If NX < 0 then

A

S < I and thus the shortage of savings has to come from outside the economy

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16
Q

Macroeconomic history

A

1961-1998 Canada ran a trade deficit thus NCO was negative
Total domestic investment was higher than total national saving due to inflow of financial capital from other countries
Borrowing from foreigners and selling them our assets
Created long term liabilities

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17
Q

1998-2008 in Canadian trade

A

Trade surplus (NX>0) and thus NCO was positive
Total domestic investment is lower than total national savings due to outflow of capital to other countries
National savings are higher
Earlier period had large government deficits but those turned into surpluses in the later ten years

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18
Q

Exchange rates

A

Prices for international trades of G & S and assets

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19
Q

Nominal exchange rate

A

Actual transaction rate
$1 CAD = $0.70 USD

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20
Q

Changes in exchange rates over time: appreciates vs depreciates

A

Appreciates means strengthening against a foreign currency
Depreciates means weakening against a foreign currency

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21
Q

A depreciation makes (all other factors constant)

A

Our imports more expensive (imports drop)
Our exports less expensive for our trading partners to obtain (exports rise)
Thus NX = X - Im go up

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22
Q

An appreciation makes (all other factors constant)

A

Our imports more expensive (imports rise)
Our exports less expensive for our trading partners to obtain (exports fall)
Thus NX = X - Im go down

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23
Q

Foreign exchange market is mostly driven by

A

Demand

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24
Q

Demand shifters

A

Demand for Canadian made goods and services (must have Canadian dollars to buy goods and services)
Interest rates in Canada relative to rest of the world
Perceived riskiness of investment in Canada

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25
Real exchange rate
Rate for which you can buy foreign goods for Canadian $ (as opposed to obtaining foreign currencies for Canadian $)
26
Real XR (exchange rate) that determines
Where the purchase will be made and what exports and imports will be
27
Formula for real XR
Real XR = nominal XR * domestic price level / foreign price level An identity
28
Real XR considers and formula
Nominal XR Overall foreign price Overall domestic price ($US / $C) * ($C/$US) should cancel our leaving a unitless real XR scaler
29
Parity
The same C$1 = US$1
30
Parity for real exchange rates is called
Purchasing power parity. Can buy the same amount of goods
31
If gas costs 1.88 euros in France and 1.47 in CAD what is the formula to find out the real rate
(1.88 euros / litre) * (CAD$1.47 / euro) = CAD$2.77 per litre in France
32
Theory of purchasing power parity
Nominal XR determined by supply and demand in FOREX markets. Unit of any given currency should be able to buy the same quantity of goods in all countries Also called the “law of one price”
33
Major implications of PPP theory
34
AD-AS model does what (aggregate demand-aggregate supply)
Determines equilibrium of real GDP and explains its fluctuations in the short and medium term
35
3 key factors regarding economic fluctuations
1. Real GDP has its ups and downs that compromise the business cycle but this cycle is not regular 2. Many macroeconomic aggregates move together, although not necessarily by the same magnitude 3. As real GDP falls even slightly, unemployment skyrockets
36
Recession
Period of contracting real GDP and rising unemployment
37
Depression
A very severe recession
38
Out of all the types of spending, which is the most volatile
Investment spending
39
AD-AS similar to ___ curve in microeconomics
supply and demand
40
Aggregate demand curve
As prices go down, more supply and goods demanded
41
Why does the AD have a negative slope?
If prices rise: real GDP remains the same real wealth goes down, consumption spending drops, so GDP = C + I + G + NX drops If prices decline: real GDP remains the same, real wealth goes up, consumption spending goes up, so GDP rises
42
What is the wealth effect
If prices (P) rise real GDP falls (consumptions falls) If P falls real GDP rises (consumption rises)
43
The real XR (exchange rate) effect
If prices rise in Canada, Canadian goods and services become less competitive (relatively more expensive), net export spending drops, GDP drops If prices fall in Canada, Canadian goods and services become more competitive (relatively cheaper), net export spending rises, GDP rises
44
Third reason is the interest rate effect
Don’t need to know what it is
45
Interpretation of AD curve
Functional relationship between price and real gdp Relationship is negative All of the points are hypothetical Tells nothing about Y (real gdp) that actually prevails
46
Shifts in the AD curve
Any factor except price which causes an increase in expenditure (I, X, G, C) will shift AD curve to the right (these are increases in injections) Any factor except price which causes a decrease in expenditure (I, X, G, C) will shift AD curve to the left (these are decreases in injections) Any factor except price which causes (negative) expenditure to decrease (Im, T (taxes), S) will shift AD to the right Any factor except price which causes (negative) expenditure to increases (Im, T (taxes), S) will shift AD to the left
47
Interpretations of the shifts of AD
If an injection increases or a withdrawal decreases: there is a higher level of expenditure than before If an injection decreases or a withdrawal increases: there is a lower level of expenditure than before
48
What to do if P changes in AD
Move along the demand curve (rising P: go up. Lowering P: go down)
49
Aggregate supply has two types
Short run (SRAS) Long run (LRAS)
50
Why does short run aggregate supply have an upward slope
The sticky wage theory Along any short run aggregate supply curve, physical productivity and input prices are held fixed If prices goes up, it’s more profitable to produce so GDP rises If prices go down, it’s less profitable to produce so GDP falls
51
Do not shift AS curve due to change in
Price
52
Shifts in SRAS curve
productivity falls, and/or input levels fall, and/or input prices rise, shift SRAS to the left (costs or hampers production process) productivity rises, and/or input levels rise, and/or input prices fall, shift SRAS to the right (lowers cost or boosts production process)
53
LRAS
Long run AS Vertical in P-GDP graph at the natural rate of output/potential GDP (change in price doesn’t change graph)
54
Why is the LRAS vertical
Equilibrium level for real GDP depends on the factor endowments of land, labour, capital, and the technology of production which have nothing to do with the price level Input prices, especially wages eventually catch up to any change in output prices, thus the aggregate output level will end up where it started
55
Shifts in LRAS curve
Natural rate of output also called potential GDP This is thought to be the long run equilibrium for real GDP Same factors cause the LRAS to shift as the SRAS, except for changes in wages or other input prices
56
Reason for expansion or contraction
LRAS will expand (contract) and the curve will shift to the right (left) if there is an increase (decrease) in any of the factors of production, or if there is an improvement (deterioration) in the technology of production which
57
LRAS expands almost every year by how much in Canada
1-2% per year
58
Equilibrium for short run
AD = SRAS, which means that the planned **bold text** expenditures of consumers, investors, etc. are consistent with the production plans of firms at the equilibrium P Intersection of the two curves
59
Equilibrium for LRAS
SRAS intersects with aggregate demand and LRAS vertical line
60
Applications if the AD-AS model:
macroeconomic shocks
61
Positive shock to AD (market or housing boom)
AD shifts up and to the right SRAS eventually shifts left to meet equilibrium (inflation) Leads to positive output gap prices rise
62
Negative shock to AD (stock market crash)
AD shifts down and to the left SRAS eventually shifts right to meet equilibrium (deflation) Leads to negative output gap prices fall
63
Negative shock to AS (energy price shock)
AS shifts left P rises Q falls stagflation Classical and neo+classical say let economy fix itself
64
Bond 3 values
Face value Coupon rate: bond always pays this much Maturity period: bond matures
65
The money supply curve always looks like what on a graph
Vertical line
66
The money supply is determined entirely by what
The bank of Canada Depends on monetary policy not interest rate
67
Demand for money is based on
The interest rate more than anything else As interest rises people will invest so they won’t hold money and vice versa Interest rate is the opportunity cost of holding money
68
Money demand curve shifts to the right if there is an increase in
P (price) or real GDP Hold more money because more money is needed to pay for purchases Shifts to the left if decrease in P or real GDP
69
Equilibrium in the money market. What happens when interest rate too high or too low
Quantity fixed by BoC Equilibrium interest rate Interest rate too high? Excess supply of money Interest rate too low? Excess demand for money DONT SHIFT THE CURVE
70
Expansionary monetary policy
Economic in recession or a negative output gap Money market: Buy bonds, expand quantity of money which circulates, MS shifts to the right, equilibrium rate falls G&S market: I and C spending increase, AD shifts right, equilibrium P and GDP increase
71
Expansionary monetary policy graph with and without AD/AS
Shifts down and to the right of money demand Shifts up ands to the right of the SRAS to the LRAS
72
Contractionary monetary policy
Inflation is a risk (economy overheating) Sell bonds Contract quantity if money which circulates MS shifts left Equilibrium rate of interest rises I and C spending decrease AD shifts left Equilibrium P and GDP decrease
73
The other instrument of monetary policy
Changing the overnight or the bank rate Raising the rate the bank rate commercial banks make to expand credit they will have less ability to borrow and vice versa
74
Expansionary monetary policy - open economy in recessionary/negative output gap
FOREX market: lower equilibrium rate of interest means that financial assets denominated in Canadian $ become less attractive NX rise due to depreciating currency AD shifts further to the right Equilibrium P and GDP increase even more
75
Contractionary monetary policy - open economy in inflationary/positive output gap
FOREX market: higher equilibrium rate if interest means that financial assets denominated in Canadian $ become more attractive NX falls due to appreciating currency AD shifts further to the left Equilibrium P and GDP decrease even more
76
Stabilization policy
Deliberate conscious effort of the government to intervene in the macroeconomy with an eye toward influencing the course of equilibrium P or Q (real GDP) Fiscal policy is carried out by finance departments and involves changing T and/or G
77
Contractionary monetary policy
If central bank deems inflation at a high risk it will implement restrictive monetary policy
78
Contractionary monetary policy graph with and without AD/AS
79
In 1954 with a price index of 14.1 person A was paid $15,000. In 2014, person B was paid $157,731 with a price index of 121.7. How much was person A’s salary in 2014 dollars
Adjusted salary = original amount x (CPI 2014/CPI 1954) Adjusted amount = 15,000 x (121.7/14.1) Adjusted amount = 129,000
80
What part of the Canadian gdp is most volatile
Investment spending
81
If a country increases its savings rate, in the long run what would also increase
Income and productivity levels
82
What does the simple circular diagram demonstrate
Expenditure generates income so that income and the value of production are equal
83
When economists talk about growth in the economy, what metric do they refer to
Percentage change in real gdp
84
If government expenditures exceed receipts, what would it do
Buy bonds directly from public
85
If reserve ratio is 20% how much money can be made out of $1000
Money multiplier formula 1/0.2 =5 1000x5 =5,000
86
Which shifts both the short term and long term aggregate supply to the right
Increasing in capital stock
87
What is an automatic stabilizer
Changes in taxes or government spending that shift aggregate demand without requiring active explicitly policies
88
What is a transfer payment
A form of government spending that is not made in exchange for a currently produced good or service

Semester 2 Year 1 (12 decks)

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