Midterm 1

Question 1

Aggregate Output

Answer 1

most commonly measured as GDP, the market value of all final goods and services produced in a country during the course of a year - excludes purchases of financial assets

Question 2

Aggregate Income

Answer 2

the toal income of factors of production (land, labour, and capital) from producing goods and services in the economy during the course of the year (must be equal to aggregate output by definition)

Question 3

Aggregate Price Level

Answer 3

a measure of average prices in the economy; three such measures are the GDP deflator, PCE deflator (personal comsumption expenditures), and the CPI

Question 4

Security

Answer 4

a security is a claim on the issuer’s future income or assets

Question 5

Bond

Answer 5

a bond is a debt security that promises to make periodic payments for a specified period of time

Question 6

Interest Rate

Answer 6

an interest rate is the cost of borrowing, or the price paid for the rental of funds; because interest rates tend to move together, economists frequently lump interest rates together and refer to “the” interest rate

Question 7

Common Stock

Answer 7

typically called simply stock; a stock represents a share of ownership in a corporation; it is a security that is a claim on the earnings and assets fo the corporation - issuing stock and selling it to the public is a way for corporations to raise funds to finance their activities

Question 8

Financial Intermediaries

Answer 8

institutions that borrow funds from people who have saved and in turn make loans to people who need funds

Question 9

Banks

Answer 9

financial institutions that accept deposits and make loans (chartered banks, trust and loan companies, and credit unions)

Question 10

Financial Crises

Answer 10

major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and non-financial firms

Question 11

Money

Answer 11

anything that is generally accepted as payment for goods or services or in the repayment of debt

Question 12

Business Cycles

Answer 12

the upward and downward movement of aggregate output produced in the economy

Question 13

Recessions

Answer 13

periods of declining aggregate output

Question 14

Monetary Theory

Answer 14

the theory that relates the quantity of money and monetary policy to changes in aggregate economic actitvity and inflation

Question 15

Monetary Policy

Answer 15

the management of money and interest rates, usually conducted by a central bank

Question 16

Fiscal Policy

Answer 16

decisions about government spending and taxation

Question 17

Currency

Answer 17

coins and paper bills

Question 18

Wealth

Answer 18

total collection of pieces of property that store value - money, stocks and bonds, but also art, real estate, and cars

Question 19

Income

Answer 19

a flow of earning per unit of time

Question 20

Medium of Exchange

Answer 20

something which is used to pay for goods and services

Question 21

Commodity Money

Answer 21

money that has intrinsic value; must be (1) easily standardized, (2) widely accepted, (3) easily divisible, (4) easy to carry, and (5) must not deteriorate quickly; historical examples include wampum by first nations, and tobacco ans whiskey by early colonists

Question 22

Formula for Number of Prices in Barter Economy with (N) Goods

Answer 22

N*(N-1)/2

Question 23

Unit of Account

Answer 23

a measure of value in the economy; a unit in which the value of goods and services can be expressed - money serves this function

Question 24

Liquidity

Answer 24

the relative ease and speed with which an asset can be converted into a medium of exchange

Question 25

Store of Value

Answer 25

an asset used to transfer purchasing power into the future; money is the most liquid store of value, but other assets, such as stocks or property, can serve as stores of value and also pay a higher interest rate to the owner

Question 26

Fiat Money

Answer 26

paper currency decree by governments as legal tender; convenient to carry relative to commodity money; only useful as a medium of exchange if there is some trust in the authorities who issue it and if it is not easily counterfeit

Question 27

Cheque

Answer 27

an instruction from you to your bank to transfer money from your account to someone else’s account when he or she deposits the cheque; this reduces the need for currency but can create delays in one’s ability to use the funds received from a payment

Question 28

Electronic Payments

Answer 28

payments made via the internet; significantly reduces transaction costs - estimated cost savings when a bill is paid electronically rather than by a acheque exceed one dollar per transaction

Question 29

E-money

Answer 29

money that exists only in electronic form; the firs form of e-money was the debit card; e-cash is another type of e-money, such as when a consumer transfers cash using an online payment provider such as PayPal

Question 30

Bitcoin

Answer 30

Bitcoin is a decentralized currency, with a fixed supply of 21 million; it can function as a medium of exchange, but is less useful as a unit of account and store of value due to its volatility; it does reduce transaction costs relative to credit and debit cards

Question 31

M1+ and M1++

Answer 31

M1+ is the narrowest definition of money given by the Bank of Canada; it includes currency in circulation (not held by banks or the government), and the value of all chequable deposits; M1++ includes nonchequable deposits in addition

Question 32

M2

Answer 32

includes currency, personal deposits, non-personal demand and notice deposits and fixed term deposits.

Question 33

Stock Variable

Answer 33

a variable whose value depends on an instant rather than on a period of time

Question 34

Flow Variable

Answer 34

a flow variable is measured ov an interval of time, and is therefore measured per unit of time