Midterm pratice 2 Flashcards
What is scarcity and why is it important?
Scarcity means that resources (land, labor, capital) are limited compared to human wants. It forces individuals and societies to make choices about how to allocate resources.
What is opportunity cost? Give an example.
Opportunity cost is the value of the next best alternative foregone.
Example: If you spend $50 on a concert ticket instead of groceries, your opportunity cost is the groceries you didn’t buy.
What are the four components of GDP?
Consumption (C) – Household spending.
Investment (I) – Business spending on capital.
Government Spending (G) – Public sector expenditures.
Net Exports (NX) – Exports minus imports.
What is the difference between real and nominal GDP?
Nominal GDP is measured using current prices. Real GDP is adjusted for inflation to reflect true growth.
How do you calculate real GDP?
Real GDP = (Nominal GDP / GDP Deflator) × 100
What are the three types of unemployment?
Frictional – Temporary job searching (e.g., new graduates).
Structural – Mismatch between job skills and available jobs.
Cyclical – Job loss due to economic downturns.
How do you calculate the unemployment rate?
Unemployment Rate = (Unemployed / Labour Force) × 100
What is inflation?
Inflation is the increase in the general price level of goods and services over time.
How do you calculate the inflation rate using the Consumer Price Index (CPI)?
Inflation Rate = ((CPI new - CPI old) / CPI old) × 100
What is the relationship between savings and investment?
Higher savings lead to more loanable funds, which lowers interest rates and increases investment.
What happens when interest rates rise?
Investment decreases because borrowing is expensive. Savings increase because people earn more on deposits.
What happens if savings decrease?
Less supply of loanable funds → Higher interest rates → Less investment.
How does business optimism affect the loanable funds market?
If businesses expect future profits, investment demand increases, pushing interest rates up.
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 using an exchange rate?
Amount in CAD = Amount in Foreign Currency × (1 / Exchange Rate)
What happens if the Canadian dollar appreciates?
Exports decrease (more expensive for foreigners). Imports increase (cheaper for Canadians).
What does the Phillips Curve show?
The inverse relationship between inflation and unemployment.
What happens if inflation expectations rise?
The Phillips Curve shifts up, leading to higher wages and prices.
What does the IS curve represent?
The relationship between interest rates and output (GDP).
What happens if the MP curve shifts up?
Higher real interest rates → Less investment and spending → Lower GDP.
How does fiscal policy affect GDP?
Higher government spending → Higher GDP. Higher taxes → Lower GDP.
How does monetary policy affect GDP?
Lower interest rates → Higher GDP. Higher interest rates → Lower GDP.
What happens if Canadian interest rates rise?
Demand for Canadian dollars rises. Supply of Canadian dollars falls. The dollar appreciates.
What is the Solow Growth Model?
Economic growth depends on: Capital accumulation, Labour force growth, Technological progress.
What happens if savings increase?
More investment → Higher long-term economic growth.
What causes a recession?
Negative demand shocks (e.g., lower consumer spending). Supply-side problems (e.g., rising oil prices).
What is hysteresis?
Long-term unemployment causes skill loss. Makes it harder for the economy to recover.
How do you calculate the real interest rate?
Real Interest Rate = Nominal Interest Rate - Inflation Rate
What happens if inflation rises unexpectedly?
Borrowers benefit (real debt value falls). Lenders lose (money repaid is worth less).
