Lecture 1

Question 1

What are the 3 stages of the Paradox of Thrift

Answer 1

1. Threat of economic hard times leads to cutting in spending
2. Lower level of spending depresses the economy as a wholes since consumers spend less and business react by laying off workers
3. As a result, families and businesses may end up worse off than if they hadn’t tried to act responsibly by cutting their spending

Question 2

What are business cycles

Answer 2

the short-run alternation between economic downturns, known as recessions, and economic upturns, known as expansions (troughs are low point, peaks are high point)

Question 3

How does inflation affect how people use their cash?

Answer 3

It discourages people from holding onto cash (because cash loses value if prices are rising). In extreme cases, people stop using cash altogether

Question 4

How does deflation affect how people use their cash?

Answer 4

Since cash gains value if the price level is falling, holding on to it is more attractive than investing in new factories and other productive assets. This can deepen a recession.

Question 5

What mainly influences changes in inflation in the short term?

Answer 5

In the short-run, movements in inflation are closely related to the business cycle

Question 6

What mainly influences changes inflation in the long term?

Answer 6

In the long-run, the overall level of prices is mainly determined by changes in the money supply

Question 7

What is long run economic growth?

Answer 7

Long run economic growth is the sustained upward trend in the economy’s output over time

Question 8

Why was global long run economic growth not seen until around the 1890s?

Answer 8

Long run economic growth is calculated by output/person over time, therefore LREG did not occur until families began limiting their size, which began to occur during that time period.

Question 9

What is the national accounts system?

Answer 9

National accounts or national account systems are the implementation of accounting for measuring the economic activity of a nation.

National accounts allow us to compare economies

Question 10

What are the 4 elements of the national accounts?

Answer 10

1. Consumer Spending is household spending on goods and services.
2. Government Purchases of goods and services are total expenditures on goods and services by federal, provincial, and municipal governments.
3. Investment Spending is spending on productive physical capital (such as machinery and construction of buildings) and on changes to inventories.
4. Goods and services sold to other countries are Exports. Goods and services purchased from other countries are Imports.

Question 11

What is Gross Domestic Product (or GDP)

Answer 11

GDP is the total market value of all final goods and services produced in a country during a given period of time, typically 1 year.

Question 12

In which three ways can GDP be calculated?

Answer 12

1. Add up the total value of all final goods and services produced (Value approach)
2. Add up all spending on domestically produced final goods and services (Aggregate expenditure approach)
3. Add up the total factor income earned by households from firms in the economy (Factor income approach)