Midterm Practice Flashcards
What is scarcity and why is it important in economics?
Scarcity means that resources (land, labor, capital) are limited, forcing individuals and societies to make choices about allocation. This leads to the concept of opportunity cost—what you must give up when making a decision.
What is opportunity cost? Provide an example.
Opportunity cost is the value of the next best alternative given up when making a decision.
Example: If you spend $10 on a movie ticket instead of lunch, your opportunity cost is the meal you didn’t buy.
What are the four components of GDP?
Consumption (C) – Household spending on goods/services. Investment (I) – Business spending on capital (machines, factories). Government Spending (G) – Public sector expenditures. Net Exports (NX = Exports - Imports) – Value of foreign trade.
What is the formula for GDP?
GDP = C + I + G + (X - M)
Where X = Exports and M = Imports.
What is the difference between real and nominal GDP?
Nominal GDP: Measured using current prices. Real GDP: Adjusted for inflation using a price index (GDP deflator).
How do you calculate real GDP?
Real GDP = (Nominal GDP / GDP Deflator) × 100
Why does GDP underestimate economic well-being?
GDP doesn’t count household work, black-market activity, environmental costs, and leisure time.
What are the three types of unemployment?
Frictional: Temporary job search, e.g., graduates looking for work. Structural: Job skills are outdated due to tech changes. Cyclical: Caused by economic downturns.
How do you calculate the unemployment rate?
Unemployment Rate = (Unemployed / Labour Force) × 100
What is the natural rate of unemployment?
The sum of frictional and structural unemployment when the economy is at full employment.
What happens when unemployment is above the natural rate?
The economy has a negative output gap, meaning it is producing below potential GDP.
What happens when unemployment is below the natural rate?
The economy has a positive output gap, meaning inflationary pressure may rise.
What is inflation?
The general increase in the price level of goods and services over time.
How is the inflation rate calculated?
Inflation Rate = ((CPI new - CPI old) / CPI old) × 100
What is cost-push vs. demand-pull inflation?
Cost-push inflation: Rising production costs (e.g., higher wages, oil prices). Demand-pull inflation: Excess demand in the economy.
What is the relationship between savings and investment?
Higher savings lead to more loanable funds, lowering interest rates and increasing business investment.
What happens when the savings rate increases?
Short run: Decreases consumption. Long run: Increases economic growth due to investment in capital.
How do interest rates affect investment?
Higher interest rates → Less borrowing → Lower investment. Lower interest rates → More borrowing → Higher investment.
What happens when savings decrease?
Supply of loanable funds decreases → Interest rates increase → Investment decreases.
What happens when businesses are optimistic about the future?
Demand for loanable funds increases → Interest rates rise → More investment.
What is the present value (PV) formula?
PV = FV / (1 + r)^t
What is the future value (FV) formula?
FV = PV × (1 + r)^t
How do you convert currency?
Amount in CAD = Amount in Foreign Currency × Exchange Rate
What happens when the Canadian dollar appreciates?
Exports decrease. Imports increase.
What happens when the Canadian dollar depreciates?
Exports increase. Imports decrease.
What does the Phillips Curve show?
The inverse relationship between inflation and unemployment.
What happens when inflation expectations rise?
The Phillips Curve shifts up. Higher wages → More inflation.
What does the IS curve represent?
The relationship between interest rates and output.
What happens if the IS curve shifts right?
More spending → Higher GDP.
What happens if the MP curve shifts up?
Higher real interest rates → Lower GDP.
What happens if the Phillips Curve shifts down?
Lower inflation expectations.
How does fiscal policy affect output?
Higher government spending → Higher GDP. Higher taxes → Lower GDP.
How does monetary policy affect output?
Lower interest rates → Higher GDP. Higher interest rates → Lower GDP.
What causes a recession?
Negative demand shock (e.g., less spending). Supply-side problems (e.g., high oil prices).
What is hysteresis?
Long-term unemployment causing loss of skills.
What is Okun’s Law?
A 1% increase in unemployment = 2% decrease in GDP.
