Introduction to Macroeconomics

Question 1

What is GDP?

Answer 1

Market value of all goods and services newly produced within a country in a given period of time at base year prices.

Question 2

What are omitters from GDP?

Answer 2

Hidden markets (black markets), externalities (pollution), quality of life (health or leisure time)

Question 3

Different ways to measure GDP

Answer 3

Value approach
Expenditure approach
Income approach

Question 4

What is the value-added approach?

Answer 4

Value added is the value of a firm’s goods (end product) minus the value of the intermediate goods (input) it buys from other firms.
Revenue- cost of intermediate goods

Question 5

What is the expenditure approach?

Answer 5

GDP (Y)= Consumption (C) + Investment (I) + Government expenditure (G) + Net Exports (NX)

Question 6

What is Gross National Product?

Answer 6

Total income received by Canadians regardless of the geographic source of the income. Basically GDP + foreign investments

Question 7

What is disposable income?

Answer 7

Income after tax

Question 8

What is the difference between nominal GDP and real GDP?

Answer 8

Nominal GDP is the total value of goods and services at current year prices.
Real GDP is the total value of goods and services at base year prices.

Question 9

Why do we have a base year prices?

Answer 9

Base year gives us something to compare to because of inflation.

Question 10

What makes a recession and a depression?

Answer 10

A recession is two or more quarters of downturn, and a depression is more severe recession.

Question 11

What is a recessionary gap and what is an inflationary gap?

Answer 11

A recessionary gap is when real (actual) GDP is lower than potential GDP. Whereas an inflationary gap is when actual GDP (Y) is higher than potential GDP (Y*).

Question 12

What is the difference between real GDP and potential GDP?

Answer 12

Real GDP is the value of output an economy actually produced. Potential GDP is the value of output an economy could produce if all of its resources (labor and capital) are used at full capacity. (normal utilization rate)

Question 13

What is important distinction between normal utilization rate (potential GDP) and maximum utilization rate (maximum GDP)?

Answer 13

The normal utilization rate is the rate at which is expected to be utilized (working 8 hours/day), while maximum utilization rate is the highest possible rate to be utilized at (working 24 hours/day).

Question 14

Why should people be more focused on potential GDP rather than real GDP?

Answer 14

Potential GDP is the projection, which is more stable. Real GDP is the business cycle which has constant peaks and troughs.

Question 15

What is included in the working age population?

Answer 15

Everyone aged 15 or older is in one of three categories: employed, unemployed and not in the labor force (students, elderly).

Question 16

Equation for unemployment rate

Answer 16

Total number of people unemployed/ total labor force x100

Question 17

Equation for labor force participation rate

Answer 17

labor force/ working-age population x 100

Question 17

What is inflation?

Answer 17

Inflation refers to an increase in the overall price level.

Question 18

Equation for inflation

Answer 18

New price level- old price level/ old price level

Question 19

Equation for Consumer Price Index (CPI)

Answer 19

Fixed basket at current prices/ fixed basket at base year prices x 100

Question 20

GDP deflator equation

Answer 20

nominal GDP/ real GDP x 100

Question 21

What are the different government policies and what are they?

Answer 21

Monetary policy= Changes in money supply and interest rate.
Fiscal policy= Spending and taxation decisions made by federal and provincial governments.

Question 22

What is the exchange rate, depreciation and appreciation?

Answer 22

Exchange rate is how many Canadian dollars it takes to buy one unit of foreign currency.
Depreciation= Costing more to buy foreign currency.
Appreciation= Costing less to buy foreign currency.

Question 23

How to calculate % change in nominal GDP

Answer 23

% change in real GDP + change in price level (inflation)

Question 24

How to calculate real GDP given both GDP deflator and nominal GDP

Answer 24

Real GDP= nominal/ GDP deflator x 100

Question 25

What does it mean when GDP decreases?

Answer 25

Either prices of goods and services decreased, or the economy produced fewer goods and services.

Question 26

What does fixed basket mean?

Answer 26

Multiplying the quantity of each item times its price (revenue).

Question 27

How to calculate after-tax interest rate?

Answer 27

After-tax nominal interest rate - rate of inflation

Question 28

What happens to the price of the Canadian dollar and net exports after the interest rate in Canada decreases?

Answer 28

When the interest rate in Canada decreases it means Canadian bonds are less attractive and people are exchanging Canadian dollars for foreign currency, depreciating the value of the Canadian dollar. As a result, goods and services in Canada cost less and are then more valuable to the rest of the world- exports increase. Also, because the Canadian dollar has depreciated importing from other countries is more costly and will be done less.

Question 29

Equation for real interest rate

Answer 29

Nominal interest rate - inflation rate

Question 30

What does countries standard of living reflect?

Answer 30

The goods and services individuals consume on average and is measured by real GDP per capita (per person).