Macroeconomics 2 Flashcards
(104 cards)
1
Q
Money is not a real market but an
A
Accessory to real economic activity
Exchanging money has a differing purpose than exchanging money
2
Q
The largest component of the Canadian money circulating
A
credit
3
Q
Most loanable funds go towards
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investment spending which is then directed to capital spending
4
Q
Three primary functions of banks
A
financial intermediation
Provide liquidity
Allow for diversification of risk
5
Q
Financial intermediator
A
Banks and credit unions - intermediator of people and money
6
Q
Liquidity
A
can be turned into cash quickly and cheaply
7
Q
What is a diversification of risk
A
portfolio is diversified so if there is a loss in value of one, a gain in value of another offsets it
8
Q
Opposite of a diversified risk
A
systemic risk
9
Q
What does it mean if a financial market is “deep”
A
developed
10
Q
Why are Canada’s financial markets stable
A
sound regulation
11
Q
Equity (stock ownership)
A
pay dividends
Pay capital gains (or losses)
Risky for purchaser as both payments can be extremely volatile
12
Q
Debt (fixed-income)
A
bonds (fixed-income securities)
Extremely tradable before maturation date
Pays interest
Pay capital gains or losses
13
Q
Derivatives
A
financial asset whose value is based on the value of some other assets future contracts as an example
14
Q
Y (national income) =
A
consumption spending + investment spending + government spending + net exports
15
Q
Variable S =
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national savings
16
Q
S =
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I (investments)
Or Y - C - G
17
Q
Variable T =
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total tax revenue
18
Q
Dividing private and public savings formula
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S = (Y - T - C) + (T - G)
Left is private
Right is public
19
Q
Disposable income formula
A
(Y - T)
20
Q
Public saving or government balance formula
A
T - G
21
Q
Market for loanable are what type of quantities
A
Flow quantities (always have a time frame)
22
Q
Savers ___ loanable funds
A
supply
23
Q
Investors and households ____ loanable funds
A
demand
24
Q
The price of the loanable fund is determined by
A
the interest rate
25
Demand (investment) curve and
Supply curve go where
demand goes down the farther to the right it goes (law of demand)
Supply goes up the farther to the right it goes (lose of supply)
26
interest rates in the market will ___ the market
equilibrate (find equilibrium)
27
How can policies encourage saving
Increase tax shelters for retirement savings
28
Three types of categories for labour force (LF)
employed people
Unemployed
Not in labour force (NLF)
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Who’s considered to be officially unemployed
Actively working for a job but do not have one, on layoff and expecting recall, hired but waiting to start work within a month
30
UR stands for and formula
Unemployment Rate
Unemployed/employed * 100
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People who do not count in the labour force
military members and those in prisons or other institutions
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LFPR stands for
Labour Force Participation Rate
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LFPR =
LF/working age population * 100
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Employment to population ratio =
E/working age population * 100
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Hi
Hi
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How many people are employed
21 million
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How many people are unemployed
1.5 million
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Labour force size
22.5 million
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Total adult population
34.3 million
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Why does unemployment go up
jobs were created but not enough were created to absorb the new entrants and re entrants into the labour force so unemployment rate goes up
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Umeployment can decline because
jobs are being created or people who can work are deciding not to be a part of the labour force
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Discouraged worker
Jobless workers who are not considered to be unemployed because they are not “actively” seeking work
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Type of unemployment
Frictional
Structural
Cyclical or demand deficient
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Frictional unemployment
Normal turnover (3% is desirable)
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Structural unemployment
Jobless people who’s skills cannot match any jobs that are available
Can be due to poor training or low geographic mobility
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Cyclical or demand deficient unemployment
Global shortage of jobs in general
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Natural rate of unemployment
when economy is near capacity what unemployment should be (0 cyclical unemployment) and us notional (can only be estimated)
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NAIRU
non-accelerating inflation rate of unemployment
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If unemployment rate falls below natural rate what happens
inflation will accelerate
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Left-wing view of natural unemployment
no naturally unemployment exists (all cyclical)
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right-wing view of unemployment
6%-7% most unemployment is structured
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real wage classical unemployment (minimum wage laws)
real wage is above market-clearing level (minimum wage is too high) decided by government
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Unions and collective bargaining
can create structural unemployment determined by union bargaining
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Efficiency wages
employer willingly pays more than minimum wage (super equilibrium wage)
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Three distinct functions of money
medium of exchange
Unit of account
Store of value
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Medium of exchange
the use of money and getting rid of the barter system
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Unit of account
used as a common denominator for the value and the relative value of goods and services
2 trips to Rockies = 1 trip to France
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Store of value
brings dimension of time
Investment
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Bitcoin and virtual currencies?
are not medium of exchange as not widely accepted
Are not store of value as it fluctuates
Unit of account maybe
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History of money
challenge has been to give money a relatively stable value over time (has to be supported by something)
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Commodity or metallic money
gold and silver which had intrinsic value in addition to exchange value
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All money us fiat money meaning
intrinsically worthless, cannot be converted
Valuable because government says so? No
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what is the meaning of a fiat in English
a declaration (not the car company)
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What gives fiat money value
people’s faith that it can be exchanged for goods and services
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Without confidence in the value of the currency today and in the future
chaos reigns
Hyperinflation leads to economic, social, and political catastrophe
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Fractional reserve system
money in reserve
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Money is leveraged
giving one persons money to another (multiple claims on the money)
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Loans are illiquid and
Only a small fraction of outstanding loans are convertible to cash
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Liquid assets for banks
government bonds and commercial bills (bond)
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Reserves
cash on hand (only a small fraction will be redeemed)
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Banks primary tradeoff is
maintaining confidence in financial integrity (solvency) or earning profit by making loans
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Regulations for reserves
previously there was requirements for reserves now there are targets for reserves (desired ratio of reserves to total deposits)
72
Any reserve in excess of target reserves is called
excess reserves (generally above 5%)
73
Money creation
in order for the supply of money to expand (contract) there must be a net injection (withdrawal) of funds from outside (inside) the system
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money creation example
$100,000 new dollars enter a bank, they keep a reserve and deposit the rest as a loan. The rest is deposited to a new bank and that bank keeps a reserve and deposits the rest as a loan. Etc.
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Money creation function
Change in total reserves withdrawn from circulation and withheld in the form of reserves = amount if original reserves injected into the banking system
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Multiplier formula =
1/desired reserve ratio (assuming no excess reserves or cash are held)
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Money destruction process
withdrawal of reserves from the banking system sets the process in reverse
When reserves are insufficient, banks call back loans
78
Monetary aggregate
M1plus =
Currency + DD (demand deposits) (chequing account)
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Monetary aggregate
M2=
M1plus +ND (notice deposits
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Bank run
when suddenly everyone wants their money from the bank and it runs out of reserves (goes insolvent)
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2 major actors in banking structure
central bank (bank of Canada)
Depository institution: chartered banks, trust companies, credit unions, financial co-ops, etc
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What does the central bank do
issue currency, bankers bank, banker if the federal government, regulate money supply through monetary policy
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Monetary policy
cannot influence long term interest (determined by world markets) but can influence short term interest by controlling the money supply
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Primary instruments of monetary policy
open market operations for normal times
Quantitative easing for big things
Changes in the overnight rate that is charges on loans it makes
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Open market operations
Increase/decrease money supply, central bank injects/withdraws new reserves into/from the financial system from/to outside of it
Trade bonds or foreign currency (called foreign exchange market operations FOREX)
86
What happens when the central bank buys bonds
new reserves injected into financial system
Commercial banks have excess reserves they can expand credit and loans with
Money creation process
87
What happens when the central bank sells bonds
reserves are withdrawal from the system
Commercial banks need more reserves and contract credit lending
Money destruction process
88
Quantitative easing
open market purchase of government bonds AND non-governmental securities
89
History of inflation
Canada on average ran 2%, now running 3%, went up to 8%
Inflation in the 1970s
Deflation in 1930s (caused by Great Depression)
Hyperinflation in Central Europe in 1920s
Over 1000% in Argentina
90
Three types of inflation
demand-pull/overheating inflation
Cost-push/supply chain inflation
Demand-shift inflation
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Demand-pull/overheating inflation
too many $ chasing too few goods and services pushes up the price
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Cost-push/supply chain inflation
constraints on the supply side raise the costs of production
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Demand-shift inflation
major shifts in the composition of aggregate expenditure can lead to production capacity constraining in some industries, causing shortages
94
Classical theory of inflation
analogous to demand-pull inflation
Applies in the long-run horizon only
Very orthodox (conservative) view
95
Classical theory of inflation formula
consider variable of composite price level P
Growth rate or P is the inflation rate
-(change in P/P)
Inverse relation between P and value of money (also called purchasing power)
The value of money in terms of goods and services that can be purchased = 1/P (implies money only affacts inflation)
96
quantity equation of the money supply formula
(Classical approach)
M*V=P*Y
M=nominal supply of money
P=composite price level
Y=real GDP
V=velocity of money (speed of which $1 changes hands per year)
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Implications of the quantity equation
M*V=P*Y
Hold P and V constant
% change in money supply = % change in the price level
Changes in P and M are proportionate to each other
98
The fisher effect
Real interest rate = nominal interest rate - inflation rate
Nominal interest rate = real interest rate + inflation rate
99
cost of inflation common themes
if inflation is low and stable, its effect on economic activity should be neutral
Not economically desirable for actors to be thinking about inflation as an influence on choices
Inflation distorts choices
100
Shoe-leather costs
inflation is high so money loses its store of value and people try to spend it
101
Inflation induces tax distortion
Even though you may lose money through money losing value, you are taxed on nominal, not real terms, so your money is dropped further
102
Arbitrary redistributions of wealth when inflation is unexpected
loaned long term contracts are paying their loan on deflated $ (inflation is higher) or inflated $ (inflation is lower)
103
the traditional budgetary model revolves around
spenders and guardians
