Chapter 4

Question 1

National Product, National Income, Output

Answer 1

The vale of total production of goods and services

Question 2

Does national product = National Income

Answer 2

Yes

Question 3

Nominal National income

Answer 3

Total national income calculated with current pricing/dollars.

Prices are constant to compare quantity

Question 4

Real National Income

Answer 4

National income measured in constant dollars = Base period dollars, Also called constant dollar national income

Question 5

How do you caculate REAL NATIONAL INCOME

Answer 5

1. Choose a base year EX: 2002
2. Calculate national income using that years prices
   IF national income CHANGES it must be due to QUANTITY

Question 6

How can GDP be measured

Answer 6

Can be measured in real or nominal terms

Question 7

Explain the Business Cycle

Answer 7

The order is Recession, trough, Recovery, Peak, Recession repeat

At peak the Actual GDP is higher the the potential GDP and the opposite for recovery periods

Question 8

Potential Output

Answer 8

Is the productive capacity of the economy, the real GDP that the economy would produce if all resources ( land, labour, capital ) were fully employed, No excess demand/ supply

Question 9

What is output gap and the symbols that form the equation

Answer 9

Actual output (y) - Potential Output (y*)

Question 10

Inflationary Gap

Answer 10

Where actual output exceeds potential output ( y>y*)

Question 11

Recessionary Gap

Answer 11

Economy’s resources are not fully employed ( y

Question 12

Why does national income matter

Answer 12

Long Run: Important measure of economic proformance, Real GDP per capita: standard of living

Short Run: Recessions, unemployment problem, lost output, booms: Generate inflation problems

Question 13

Unemployment

Answer 13

The number of Adult workers who are not employed but are actively searching for a job

Question 14

Labour Force

Answer 14

Employment + Unemployment

Question 15

Unemployment Rate

Answer 15

( Unemployment / labour )

Question 16

Frictional Unemployment

Answer 16

Caused by the natural turnover in the labour market , EX: The time it takes to find a job

Question 17

Structural unemployment:

Answer 17

Caused by mismatch between jobs and workers

Question 18

Full Employment

Answer 18

Occurs when the only unemployment it frictional or structual y=y*

Question 19

Cyclical Unemployment

Answer 19

Firms reduce production and lay off workers in recessions

Question 20

Why Does Unemployment Matter

Answer 20

Loss of output
loss of income
crime rates increase
mental illness

Question 21

Productivity ( long run Variable)

Answer 21

The amount of output the economy produces per unit of input ( land, labour, capital )

Question 22

Labour Productivity

Answer 22

Real GDP per unit of labour employed

Question 23

Why Productivity Matters

Answer 23

The single largest cause of rising material living standards ( real gdp per captia )

Question 24

Price Level

Answer 24

The average level of all prices in the economy expressed as an index number

Question 25

Inflation

Answer 25

A rise in the price level

Question 26

Consumer Price Index (CPI)

Answer 26

An index in the average price of a basket of goods and services commonly brought by Canadian households

Question 27

2 Things about the Price Index

Answer 27

1. No units
2. Only has a meaning when it is compared to other years

Question 28

List the 3 reasons why inflation matters

Answer 28

1. Purchasing Power of Money: The amount of Goods and services that can be purchased with a given amount of money
2. Fully Anticipated Inflation: Households and firms can adjust prices and wages to maintain real values
3. Unanticipated Inglations

Question 29

Intrest Rates

Answer 29

Price paid per dollar borrowed per period of time. Express enter a proportion as a percentage

Question 30

Nominal Vs Real intrest rate

Answer 30

Real interest rate is the return on a loan in terms of purchasing power

Question 31

What are the two reasons intrest rates matter

Answer 31

1. Changes in real intrest rates affect the standards of living of savers and borrowers
2. An important determinant of the investments by firms. Lower interest rate->

Question 32

Appreciation

Answer 32

$c are more valuables. It takes less dollars to purchase one unit of foreign currency

Question 33

Depreciation

Answer 33

C$ are less valuable. It takes more c$ to purchase one unit of foreign currency