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Macroeconomics > Final Exam > Flashcards

Final Exam Flashcards

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1
Q

3 key factors of macroeconomic performance

A

1) The rate of growth of real national income (GDP) year prices= quantity of final goods and services
2) The rate of inflation or deflation. A persistent increase in the general price level.
3) The rate of unemployment-jobs. Not working but looking for employment.

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2
Q

Price level

A

Weighted average price of a basket of goods and services

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3
Q

CPI

A

fixed basket

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4
Q

Unemployment rate includes

Employed includes

A

ex) university not looking for a job

employed- full time and part time

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5
Q

Natural rate of unemployment

A

Even if full employment level of output- the natural is not zero.
NAIRU ranges for 6-7% in Canada

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6
Q

National Accounts

A

A framework for aggregate demand and supply

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7
Q

Measuring GDP (3 WAYS)

A

1) Output based GDP= sum of value added by all industries
2) Income based= sum of payments
3) Expenditure= sum of expenditure on final goods and services (demand)

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8
Q

Per capita GDP

A

indicator of standard of living

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9
Q

Limitations of GDP

A

1) Pollution and other externalities
2) Unreported income and input ex) illegal drugs
3) Non-marketed goods and services ex) home cleaning
4) Composition of output affects standard of living
5) Income distribution- bill gates vs everyone else

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10
Q

Human development index (HDI)

A

Provides a broader measure of a country’s wellbeing and standard of living than per capita GDP.

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11
Q

Short Run AD/AS model

A
  • Constant factor prices
  • Fixed labour force and capital stock
  • Money supply is fixed
  • no changes in wage
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12
Q

Aggregate Demand

What are the 3 affects of change in price?

A

1) Interest rate effect- price increase=inflation increase= finance cost increase= decrease in expenditure
2) Substitution effect- increase in price Cad/ US= decrease in exports and increase in imports= decrease in expenditure
3) Wealth effect= decrease in nominal wealth/price = decrease in expenditure

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13
Q

Equilibrium output vs Potential output

A

Potential- real GDP the economy can produce on a sustained basis without generating inflationary pressure
Equilibrium output- actual real GDP.

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14
Q

Growth in potential output

A

grows as labour force grows and labour productivity increases

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15
Q

Actual output

A

increases or decreases as short run AD and AS fluctate

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16
Q

Y - Yp < 0

A

Recessionary gap

high unemployment and low inflation

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17
Q

Y - Yp > 0

A

Inflationary gap

low unemployment and inflationary pressure

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18
Q

The role of policy (2)

A

1) moderate short term transitory fluctuations to stabilize output and employment
2) change AD and AS to offset gaps pursued through policy design and policy changes

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19
Q

Monetary policy

A

Boc manages money supply in the economy. The objectives are ensuring inflation targeting and price stability, full employment and stable economic growth

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20
Q

Fiscal policy

A

-when gov adjusts its spending level and taxes
Recessionary gap = expansionary fiscal policy= decrease taxes, increase gov spending
Inflationary gap= contractionary fiscal policy= increase in taxes, decrease in gov spending.

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21
Q

Two key components of AE

A

1) induced expenditure= planned expenditure determined by current income
2) composed of- household consumption expenditure
- household expenditure on imports

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22
Q

Consumption expenditure

A

is the largest and most stable part of induced expenditure

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23
Q

Autonomous expenditure

A

this is the amount that consumers spend regardless of income. ex) food

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24
Q

Basic government budget has two components

A

1) plan for gov expenditures

2) net tax rate on income to raise revenue

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25
Balanced budget
revenues are equal to expenditures
26
Budget surplus
revenues are greater than expenditures
27
Budget deficit
revenues are less than expenditures
28
Budget balance depends on 3 things
1) net tax rate set by gov 2) gov expenditure set by the gov 3) GDP determined by AE and AD
29
Fiscal policy objectives
1) stabilize equilibrium | 2) manage budget deficits and public debt
30
Discretionary fiscal policies
offset persistent shocks
31
Automatic fiscal stabilization
net tax rate reduces the size in autonomous expenditures on equilibrium GDP
32
Barter economy without money
goods trade directly for goods
33
Unit of account
one of the functions of money. the value of something is measured in a specific currency.
34
Store of value
carry purchasing power forward in time
35
Standard of deferred payment
unit of account for future payments
36
Legal tender
money by law must be accepted as a means of payment
37
Fiat money
notes and coin the government has declared as legal tender
38
Credit money
the debt of a private business or individual convertible into legal tender
39
Bank of Canada vs Commercial banks
Bank of Canada -not profit oriented -regulates money and supports financial markets -responsible for monetary policy Commercial banks -profit oriented businesses -issues bank deposits and lend to customers -create deposits by their lending activity
40
Profit oriented banks expand lending and create new deposits when
- they have excess reserve - credit-worthy borrowers - accept banker's risk of lending and issuing deposits
41
Limits on deposit creation by banks
- higher rr - stricter criteria for loan approvals - caution over risks of lending and withdrawals of deposits
42
The money supply function depends on 3 variables
1) monetary base 2) reserve ratio 3) public's current holdings
43
To control monetary base and money supply (3)
1) reserve requirements - legally requires rr 2) open-market operations - buy gov bonds 3) bank rate setting - sets cost of borrowing monetary base
44
3 potential monetary policy targets
1) control foreign exchange 2) control the money supply 3) control the inflation rate
45
Policy rules
describes how a central bank sets it's policy instrument to achieve it's policy target
46
Quantitative easing
the introduction of new money into the money supply by a central bank.
47
AD is based on 3 relationships
- the AE function - the monetary transmission mechanism - the central bank's reactions to changes in the inflation rate
48
Current account
trade in goods and services and transfer payments
49
Capital account
trade in real and financial assets
50
official reserves account
gov holdings of foreign exchange assets
51
New endogenous growth model
- constant returns to capital/labour ratio - positive externalities - R and D education
52
The AS function is derived from which concept?
the income approach used in national accounts to measure GDP
53
What does capital consumption allowance correspond to?
- depreciation expenses - the difference between gross and net investment' - fixed capital used up in the production process
54
Investment expenditure is
- expenditure by business on currently produced buildings | - a component of autonomous aggregate expenditure
55
The multiplier is a number that predicts the size of
the increase in equilibrium real GDP caused by an increase in autonomous expenditure
56
Positive relationship between total tax revenue and real GDP
reduces the effect of a change in autonomous spending on GDP
57
In order to have economic growth, a country must have increased
real GDP
58
money multiplier is bigger if
banks' reserve ratio is smaller
59
an increase in the reserve ratio leads to
increase in interest rates
60
target overnight rate set by Canada
the Bank rate is always higher than the target overnight rate
61
the production function shows the relationship in between
the quantity of inputs employed and the quantity of output produced
62
goods market multiplier can be used for
the fall in equilibrium real GDP caused by a fall in consumer confidence
63
Open economy, equilibrium GDP is defined
planned expenditure by households and business is equal to the value of output
64
If aggregate demand exceeds potential output
an economy's ressources are over-utilized
65
When does the opportunity cost of holding money rise
when interest rates rise
66
Real interest rate if negative then
nominal interest rate is lower than the inflation rate
67
Example of discretionary policy
income tax rates are cut during economic recession
68
SRA (Sale and Repurchase Agreement)
Bank of Canada drains cash from the banking system.
69
SPRA (Special Purchase and Resale Agreement)
Bank of Canada injects cash into the economy
70
Deposit creation
Some of this money is retained by the banks to meet day-to-day withdrawals. Remainder of money is used for loans or invested
71
The speed the economy adjusts to eliminate an output gap depends on
the flexibility of wage rates and output prices in the economy
72
Zero growth theory
Steady state economy is maintained. GDP is fixed and growth in GDP could lead to instability and can be bad for the environment.
73
if interest rates go down
bad for lenders | good for borrowers since they are paying interest
74
Actual Unemployment rate < NAIRU | Actual Unemployment rate > NAIRU
1) inflationary gap | 2) recessionary gap
75
Value added
to avoid double counting
76
Investment
fixed capital ex) factories, equipment and machinery
77
GDP VS GNP
GDP measures the value of goods and services produced within a country's borders GNP measures the value of goods and services produced by a country's citizens domestically and abroad.
78
Shifts in AS- What affects
1) Wages 2) Price of oil 3) Labor productivity 4) Sales tax
79
Shifts in AD- what affects
``` Consumption Investment Government expenditure Exports Imports (all go up besides imports) ```
80
Automatic Adjustment- Recession | no gov
-Underachieving -To close: 1) Excess supply of labour 2) Long run workers are willing to work for less 3) AS shifts right Wages affect demand
81
Automatic Adjustment- Inflationary gap | no gov
1) Excess demand 2) wages rise 3) AS shifts left
82
Why is AD downward sloping?
1) wealth affect- price goes up, purchasing power goes down 2) substitution effect- price goes up, exports down, AD down, imports up 3) interest rate effect- price up, interest up and AD down
83
Adjustments towards equilibrium Y>AE Y
1) inventory up, output goes down | 2) inventory down, output up
84
Why do banks want a low reserve ratio?
- more loans | - more loans and bigger money multiplier
85
Why do people hold money?
- transactions motive- day to day transactions -precautionary motive- for emergencies -asset/speculative motive- to reduce risk of portfolio (interest rate goes up, price of bond decreases) inversely related
86
Expansionary Monetary Policy | Contractionary Monetary Policy
1) recessionary gap, decrease interest and MS increases | 2) inflationary gap, increase in interest and MS decreases
87
Bank rate
The rate Bank of Canada charges commercial banks
88
Overnight rate
The rate commercial banks charge each other. | -Lowest rate is 0.25%
89
Crowding out
recessionary gap- expansionary fiscal policy | -gov prefers weak crowding out
90
Diminishing marginal returns
when L (labour) and K (capital stock) are not growing at the same time.
91
Constant returns to scale
When labour and capital stock are growing at the same time. | good thing

Macroeconomics (1 decks)

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