Macroeconomics (Unit 3)

Question 1

Define GDP

Answer 1

A measure of the value of all final goods and services produced in a period of time (usually a year)

Question 2

What is GDP

Answer 2

the most important measure of an economy as it accounts for a nation’s income.

Question 3

Does a new good or service have to be produced in order for it to count towards GDP?

Answer 3

Yes.

Question 4

Define Nomial GDP

Answer 4

gdp not adjusted for inflation

Question 5

define Real GDP

Answer 5

gdp adjusted for inflation

Question 6

equation for Real GDP

Answer 6

(current gdp ÷ price index) x 100
or
(Nominal GDP ÷ Real GDP) x 100.

Question 7

what are the 6 problems associated with gdp measurement?

Answer 7

1) effect of price increase
2) population size
3) market price
4) types of goods/services
5) illegal items
6) quality of life

Question 8

what is the issue with gdp in terms of population size?

Answer 8

some countries have more people thus, totaling a higher gdp. However, they are not better off than the countries with a lower gdp due to populations size.
GDP has to be calculated on a ‘per captia’ basis.

Question 9

what is the issue with gdp in terms of market price?

Answer 9

if a good doesn’t have a value ($$) it is not included in gdp
(ex: diy)

Question 10

what is the issue with gdp in terms of types of goods and services ?

Answer 10

gdp cannot measure the different types of goods provided (ex: military)

Question 11

what is the issue with gdp in terms of illegal items?

Answer 11

goods that are not recorded (no recipt) are not recorded in gdp

Question 12

what is the issue with gdp in terms of quality of life?

Answer 12

pollution (ex: china has a high gdp but horrible pollution) / leaisure time are not recorded in gdp.

Question 13

equation for gdp per captia

Answer 13

GDP ÷ population

Question 14

define Recession

Answer 14

when two successive quarters (6 months) all show a decrease in gdp

Question 15

define Depression

Answer 15

severe recession

Question 16

define labour force

Answer 16

people of legal working age, who are working, or are actively looking for work

Question 17

define discouraged workers

Answer 17

people who give up looking for a job. These people are not longer a part of the working force

Question 18

what is frictional unemployment

Answer 18

time between jobs, when a worker is searching for a job, a worker is in transition between jobs, or are just entering the workforce.

Question 19

what is structural unemployment

Answer 19

lack of demand for a worker’s specific type of labour (usually replaced by robots - technologically, government, or demographically driven)

Question 20

what is seasonal unemployment

Answer 20

inactivity caused by seasons (ex: fishing, construction, farming)

Question 21

why is 0% unemployment not ideal?

Answer 21

1) there will be no skilled labour to choose from meaning that people will not get fired or hired.
2) people will not have options for jobs
3) people will not be able to chase their dreams as there will be no spot openings

Question 22

what is cyclical unemployment?

Answer 22

unemployment caused by recession

Question 23

what causes a depression?

Answer 23

cyclical unemployment causes reductions in overall demand and consumer spending in economy which will in-turn deepen cyclical unemployment which will result in more reductions in demand and consumer spending, spiralling the economy downwards.

Question 24

what is the unemployment goal?

Answer 24

to have 0% cyclical unemployment and to have stable prices

Question 25

Describe Inflation

Answer 25

increase in a currency supply relative to the # of people using it = rising prices of goods + services overtime

Question 26

describe deflation

Answer 26

decrease in the price of goods + services

Question 27

what is the market basket?

Answer 27

it is a set list of commonly bought items used to track inflation (food, shealter, clothing, transportation, medical care, education)

Question 28

what is inflation measured by?

Answer 28

the change in the market basket - Consumer Price Index

Question 29

define inflation rate

Answer 29

the % increase of the MARKET BASKET overtime, causing a general decrease in the value of a currency.

Question 30

when is an economy considered to be in FULL EMPLOYMENT?

Answer 30

when there is only frictional and structural unemployment

Question 31

what is the natural rate of employment?

Answer 31

when there is only frictional and structural unemployment

Question 32

define full employment

Answer 32

unemployment is low, prices are stable, and people are happy

Question 33

what is not good for economic employment?

Answer 33

Both contraction (too slow) and inflation (too fast) is not good for the economy

Question 34

who benefits from inflation?

Answer 34

1) the debtors: people who borrow money and repay their debt with the money that has dropped in value. (ex: money invested in assets that rise quickly because of inflation) 2) producers: purchase input at current prices and sell at inflated prices will have profit increases.

Question 35

who suffers from inflation?

Answer 35

1) creditors (ex: banks): money that is repaid to creditors has lost purchasing power if inflation is rising faster than the rate of interest (cost of borrowed money). 2) fixed income earners: they must pay more for the same goods + services with the same amount of income 3) Savers/ Financial Asset Owners: store value of money is harmed (cannot purchase as much), or $ value of an asset is rising slower than rate of inflation.

Question 36

what are the 2 overall effects of inflation on the whole economy?

Answer 36

1) short term investment mentality: investors won't leave their money in assets if inflation is harming their store of value 2) intrest rate increase: gov. + banks will try to protect the economy against rising inflations by increasing intrest rates so that consumers/businesses don't spend as much (also known as demand pull)

Question 37

define store of value

Answer 37

the fiancial function of an asset that can be saved, retrieved and exchanged at a later time, and be predictably useful when retrieved (ex: gold)

Question 38

define intrest rate

Answer 38

the cost of borrowing money

Question 39

what is demand pull?

Answer 39

increases in the demand for a product results in price increases why? - factors affecting demand (income rising)

Question 40

what is cost push?

Answer 40

overall decrease in business supply will result in price increases why? - factors affecting supply (rise in cost of inputs)

Question 41

what is CPI (consumer Price Index)

Answer 41

the change in cost of the market basket or an index # that represents the measure of inflation

Question 42

equation for CPI

Answer 42

(market basket $ in the year you are looking for ÷ market basket in base year) x 100 *100 in a chart represents the base year*

Question 43

equation for inflation

Answer 43

{ [CPI (current) - CPI (base year)] ÷ CPI (base year) } x 100

Question 44

what is the 2 flaws with CPI?

Answer 44

1) not a cost of living index: not updated with respect to the typical urban consumer (ex: safe neighbourhoods, spending patterns + habits) 2) Overstating the CPI: a) Substitution Efect: CPI only measures prices of a fixed basket of goods + services. when the price of some goods in this basket rise temporarily, consumers shift to substitutes. b) Walmart Effect: discount stores have displaced many traditional retailers. As a result, consumers purchase goods at far lower prices.

Question 45

what are the 3 values of a dollar?

Answer 45

1) cost to buy a dollar - exchange rates 2) cost to borrow a dollar - intrest rates 3) cost to buy something with a dollar- inflation rates

Question 46

define purchasing power

Answer 46

the value of a currency expressed in terms of the amount of goods or services one unit of money can buy. ex: 2010: $1 can buy 1 banana 2015: $1 can buy 1/2 a banana

Question 47

what are the 3 primary functions of money?

Answer 47

1) means of exchange: without money we would have to barter. Money simplifies exchanges. 2) unit of measurement: money allows us to compare the value of goods + services 3) means of storing purchasing power: allows us to accumulate savings overtime + lend them to someone else. - Enables us to make contracts.

Question 48

what is the fiscal policy?

Answer 48

the means by which a government adjusts its spending levels and tax rates to monitor and influence the nation's economy

Question 49

define barter

Answer 49

the exchange of goods + services directly

Question 50

how does inflation effect exchange rate?

Answer 50

- high inflation is unattractive to foreign investors because 1) price of goods + services will be expensive. 2) purchasing power is dropping - the decrease in demand = drop in value in international currency market

Question 51

how does exchange rate effect inflation?

Answer 51

exchange rate drops = increase in inflation because it costs more of that country's currency to purchase imports.

Question 52

how does change in interest rates effect exchange rate?

Answer 52

high interest rates = currency is more attractive to foreign investors because 1) investors are assured that high interest rates will control inflation 2) investors purchase currency and collect high interest later on

Question 53

how does change in exchange rate effect interest rate?

Answer 53

this is a subjective decision (the central bank may choose to respond or not respond) If currency's exchange rates has dropped too far, the bank will eventually increase interest rates because high interest rates = attract foreign investment in currency

Question 54

define exchange rate

Answer 54

the currency's vale on the international market

Question 55

how does change in inflation effect interest rates?

Answer 55

high inflation = rise in interest rates because 1) money lenders have to ensure that the interest they collect on their loans is greater than rate of inflation or else the money they are paid back will not be able to buy what it could at the time they loaned it (loss of purchasing power)

Question 56

how does change in interest rates effect inflation?

Answer 56

high interest rates =drop in inflation because 1) high I.R. entices consumers to spend less + save more to collect the high I.R. 2) high I.R. discourages consumers to borrow money = spending on 'big ticket' items (cars, houses) will decrease 3) increase in I.R. = strengthen exchange rate = be able to import foreign good for less $$

Question 57

are the opposites true for the 3 values of a dollar?

Answer 57

yes

Question 58

define participation rate

Answer 58

the active portion of an economy's labor force: the number of people who are either employed or are actively looking for work.

Question 59

equation for GDP

Answer 59

GDP = Consumption + Investment +Government Expenditure + [X (exports) - M(imports)]

Question 60

define multiplier effect

Answer 60

a change in a particular input (ex: gov. spending) causes a larger change in output (ex: GDP) because the money gets multiplied as it gets transferred to others.

Question 61

equation for multiplier effect

Answer 61

1/(1-MPC) or 1/MPS

Question 62

what does MPC stand for

Answer 62

marginal propensity to consume (ex: 0.8)

Question 63

what does MPS stand for

Answer 63

Marginal propensity to save (ex: 0.2)

Question 64

what does MPC + MPS equal?

Answer 64

1 (ex: 0.8+0.2=1)

Question 65

define the marginal propensity to consume

Answer 65

a measurement of induced consumption - how much would you spend?

Question 66

what is the concept of induced consumption?

Answer 66

consumer spending occurs with an increase in disposable income (income after taxes and transfers)

Question 67

what are the 4 components that make up a country's economy?

Answer 67

1) consumer spending 2) net exports 3) business spending 4) government spending

Question 68

are the 4 components that make up a country's economy weighted equally?

Answer 68

no, it depends on the country