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Macro Econ > Midterm 2 > Flashcards

Midterm 2 Flashcards

1
Q

what is money

A

money is any commodity or token that is generally accepted as a means of payment

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2
Q

what are the three other functions of money

A

medium of exchange
unit of account
store of value

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3
Q

what does money in Canada consist of

A

currency
deposits at banks and other depository institutions

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4
Q

what is the M1 measure of money

A

currency held outside banks by individuals and businesses, and checkable deposits owned by individuals and businesses

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5
Q

what is the M2 measure of money

A

M1 plus all other non checkable deposits held by individuals and businesses

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6
Q

what is a depository institution

A

a firm that takes deposits from households and firms and makes loans to other households and firms

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7
Q

what are the four assets chartered banks puts deposits into

A

reserves: notes and coins in its vaults or in its deposits at the bank of Canada
liquid assets: canadian government treasury bills and commercial bills
securities: longer dated government bonds and other bonds such as MBS
loans: commitments of fixed amounts of money for agreed upon periods of time

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8
Q

what is a central bank

A

a public authority that regulates a nations depository institutions and controls the quantity of money

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9
Q

what are the three roles of BOC

A

the banker to the banks and government
the lender of last resort
the sole issuer of bank notes

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10
Q

what is the monetary base

A

the sum of bank of Canada notes outside the bank of Canada, banks deposits at the bank of Canada, coins held by households firms and banks

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11
Q

what is open market operation

A

the purchase and sale of government of Canada securities by the BOC in the open market to control the monetary base

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12
Q

what are the bank of Canadas two main policy tools

A

open market operation
bank rate

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13
Q

what is the bank rate

A

the interest rate on the short term loans the BOC makes to depository institutions when the banking system is short of reserves

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14
Q

what limits the quantity of deposits banks can create

A

the monetary base
desired reserves
desired currency holding

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15
Q

what are a banks actual reserves

A

notes and coins in the banks vaults and deposits at the BOC

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16
Q

what is the banks desired reserve ratio

A

the ratio of the banks reserves to the total deposits it plans to hold

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17
Q

what is the banks excess reserves

A

actual reserves minus desired reserves

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18
Q

what is the currency drain

A

the leakage of reserves into currency caused by individuals and firms desired currency holding

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19
Q

what is the currency drain ratio

A

the ratio of currency to deposits

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20
Q

what are the steps in the money creation process

A

BOC increases monetary base through open market operations, banks reserves increase, excess reserves are created, banks lend more to decrease excess reserves, loans create new deposits, new deposits are used to make payments and are drained into currency, desired reserves increase

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21
Q

what is the money multiplier

A

the ratio of the change in the quantity of money to the change in monetary base

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22
Q

what are the four factors affecting how much money people plan to hold

A

the price level
the nominal interest rate
real GDP
financial innovation

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23
Q

what is the quantity theory of money

A

the proposition that in the long run an increase in the quantity of money brings an equal increase in the price level

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24
Q

what is the velocity of circulation

A

the average number of times in a year a dollar is used to purchase goos or services in GDP

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25
Q

what is the equation of exchange

A

MV = PY

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26
Q

what is the formula for the money multiplier

A

MM = (1 + C/D)/C/D + R/D)

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27
Q

what is the demand for money

A

the relationship between the nominal interest rate and the quantity of real money demanded

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28
Q

when is the money market in long run equilibrium

A

when the inflation rate equals the expected inflation rate, real GDP equals potential GDP

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29
Q

what is foreign currency

A

foreign bank notes, coins, and deposits

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30
Q

what is the foreign exchange market

A

the market in which currency of one country is exchanged for another

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31
Q

what is the quantity of Canadian dollars demanded

A

the amount of Canadian dollars traders plan to buy during a given time at a given exchange rate

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32
Q

what 4 factors affect the quantity of Canadian dollars demanded

A

the exchange rate, world demand for Canadian exports, interest rates in the US and other countries, the expected future exchange rate

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33
Q

what is the law of demand for foreign exchange

A

other things remaining the same as the exchange rate rises the quantity of CAD demanded in the foreign exchange market decreases

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34
Q

what is the exports effect

A

as the exchange rate decreases the value of canadian exports rises so the demand for those exports and therefore CAD increases

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35
Q

what is the expected profit effect(demand)

A

a lower exchange rate means it is cheaper to purchase CAD so the demand for CAD increases on the expectation that it will appreciate and create profit for those traders

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36
Q

what is the quantity of CAD supplied

A

the amount of CAD traders plan to sell in a given time period at a given exchange rate

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37
Q

what factors affect the quantity of CAD supplied

A

the exchange rate, Canadian demand for imports, interest rates in Canada and other countries, the expected future exchange rate

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38
Q

what is the law of supply of foreign exchange

A

other things remaining the same, the higher the exchange rate the greater the quantity of CAD supplied in the foreign exchange market

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39
Q

what is the imports effect

A

a higher exchange rate means Canadian imports are more valuable as the CAD has more foreign purchasing power so the quantity of CAD supplied increases

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40
Q

what is the expected profit effect(supply)

A

all else equal a lower exchange rate means greater expected profit from holding CAD so the supply of CAD is lower

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41
Q

what is the Canadian interest rate differential

A

the Canadian interest rate minus the foreign interest rate

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42
Q

what is arbitrage

A

the practice of seeking profit by buying in one market and selling in another for a higher price

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43
Q

what outcomes are created by arbitrage in the foreign exchange market

A

the law of one price
no round trip profit
interest rate parity
purchasing power parity

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44
Q

what is the law of one price

A

if an item can be traded in more than one place the price will be the same in all locations

45
Q

what is no round trip profit

A

you can’t profit from using currency A to buy B then using B to buy A

46
Q

what is interest rate parity

A

interest rate parity means you can earn the same returns from different currencies

47
Q

what is purchasing power parity

A

when two different quantities of two different currencies can purchase the same quantity of goods and services

48
Q

what is the real exchange rate

A

the relative price of Canadian produced goods and services to foreign produced goods and services

49
Q

what is the formula for the real exchange rate

A

RER = (nominal exchange rate x price level)/price level of other country

50
Q

what is a flexible exchange rate

A

an exchange rate policy that allows supply and demand to determine the rate with no intervention from the government of central bank

51
Q

what is a fixed exchange rate policy

A

an exchange rate that is pegged to a certain value and managed by direct intervention by governments and or central banks

52
Q

what is a crawling peg policy(managed float)

A

a policy that follows a path for the exchange rate set out by government and or central bank

53
Q

what are a countries balance of payments accounts

A

accounts that record a countries international trading, borrowing, and lending

54
Q

what are the three balance of payment accounts

A

current account
capital and financial account
official settlements account

55
Q

what does the current account record

A

receipts of exports, payments for imports, interest paid abroad, net transfers abroad such as foreign aid payments

56
Q

what is the formula for the current accounts balance

A

exports - imports + net interest income + net transfers

57
Q

what does the capital and financial account record

A

foreign investment in Canada minus canadian investment abroad

58
Q

what does the official settlements account record

A

the change in official canadian reserves

59
Q

what are canadian official reserves

A

Canada’s holding of foreign currency

60
Q

what is the quantity of real GDP supplied

A

the total quantity that firms plan to produce in a given period

61
Q

what is aggregate supply

A

the relationship between the quantity of real GDP supplied and the price level

62
Q

what is long run aggregate supply

A

aggregate supply when real GDP equals potential GDP

63
Q

what is short run aggregate supply

A

aggregate supply when the money wage rate, prices of other resources, and potential GDP remain constant

64
Q

what factors can shift aggregate supply

A

changes in potential GDP
changes in the money wage rate and other factor prices

65
Q

what can cause potential GDP to increase

A

full employment quantity of labour increases
quantity of capital increases
an advance in technology occurs

66
Q

what is the quantity of real GDP demanded

A

the total amount of final goods and services produced in Canada that firms, people, and governments plan to purchase in a given time period

67
Q

what is aggregate demand

A

the relationship between the quantity of real GDP demanded and the price level

68
Q

what is the wealth effect

A

a rise in the price level other things equal decreases the quantity of real wealth, people increase savings and decrease spending, the quantity of real GDP demanded decreases

69
Q

what are the substitution effects

A

intertemporal substitution effect
international substitution effect

70
Q

what is the intertemporal substitution effect

A

a rise in the price level other things equal decreases the real value of money and increases the interest rate, people borrow and spend less, quantity of real GDP demanded decreases

71
Q

what is the international substitution effect

A

a resent he price level other things equal increases the price of domestic goods relative to foreign goods, imports increase and exports decrease, the quantity of real GDP demanded decreases

72
Q

what factors can shift aggregate demand

A

expectations
fiscal policy
monetary policy
the world economy

73
Q

how do expectation effect aggregate demand

A

increase in expected future income increases aggregate demand
increased expected future inflation increases aggregate demand
increased expected future profit increases aggregate demand

74
Q

how does fiscal policy effect aggregate demand

A

an increase in disposable income increases aggregate demand
an increase in government expenditure increases aggregate demand

75
Q

how does monetary policy effect aggregate demand

A

an increase the quantity of money increases aggregate demand
a decrease in interest rates increases aggregate demand

76
Q

how does the world economy effect aggregate demand

A

a fall in the foreign exchange rate increases aggregate demand
a rise in foreign income increases aggregate demand

77
Q

what is short run macroeconomic equilibrium

A

when quantity of real GDP supplied and demanded are equal and the AD and SAS curves intersect

78
Q

what is long run macroeconomic equilibrium

A

when real GDP equals potential GDP and the AD curve intersects the LAS curve

79
Q

how does the AS-AD model show the business model

A

the SAS and AD curve fluctuate but the money wage rate does not change as fast so the intersection of the SAS and AD curve move while the long run economic equilibrium point and potential GDP stay constant

80
Q

what is stagflation

A

when there is inflation and an increase in unemployment

81
Q

what factors change the money wage rate

A

departure from full employment
inflation expectations

82
Q

what is the Keynesian model

A

a way to describe the economy is the vey short run when prices are fixed
the price level is fixed
aggregate demand determines real GDP

83
Q

what is the two way link between AE and real GDP

A

an increase in AE increases real GDP
an increase in real GDP increases AE

84
Q

what is disposable income

A

aggregate income minus net taxes
YD = Y - T

85
Q

what are the two formulas for YD

A

YD = Y -T
YD = C + S

86
Q

what is the consumption function

A

the relationship between consumption expenditure and disposable income other things equal

87
Q

what is the saving function

A

the relationship between saving and disposable income other things equal

88
Q

what is autonomous consumption

A

the consumption expenditure when disposable income is 0

89
Q

what is induced consumption

A

consumption expenditure that is in excess of autonomous consumption induced by an increase in disposable income

90
Q

what are the three factors other than disposable income that influence consumption and saving

A

wealth
the real interest rate
expected future income

91
Q

what is the marginal propensity to consume

A

MPC is the fraction of a change in disposable income spent on consumption
change in consumption expenditure / change in disposable income

92
Q

what is the marginal propensity to save

A

MPS is the fraction of a change in disposable income that is saved
change in saving / change in disposable income

93
Q

what factors can change disposable income

A

a change in real GDP
a change in net taxes

94
Q

what is the marginal propensity to import

A

the fraction of a change in real GDP spent on imports

95
Q

what is aggregate planned expenditure

A

the sum of planned consumption, planned investment, planned government spending, and planned net exports

96
Q

which parts of aggregate planned expenditure are influenced by real GDP

A

planned consumption expenditure and planned imports

97
Q

what is the aggregate expenditure curve

A

a graph of the table showing the relationship between aggregate planned expenditure and real GDP

98
Q

what is induced expenditure

A

consumption expenditure minus imports

99
Q

what is autonomous expenditure

A

the sum of investment, government spending, and exports

100
Q

why are aggregate planned expenditure and aggregate expenditure different

A

firms can have unplanned changes in inventory

101
Q

what is equilibrium expenditure

A

the level of aggregate expenditure that occurs when aggregate planned expenditure is equal to real GDP

102
Q

what is the multiplier

A

the amount by which a change in autonomous expenditure is magnified or multiplied to determine the change in equilibrium expenditure and real GDP

103
Q

why does the multiplier exist

A

an increase in any component of autonomous expenditure increases aggregate expenditure and real GDP, the increase in real GDP creates further increases in induced expenditure leading to a further increase in aggregate expenditure and real GDP, real GDP and aggregate expenditure end up increasing more than the original increase in autonomous expenditure

104
Q

how is the size of the multiplier calculated

A

the change in equilibrium expenditure / the change in autonomous expenditure

105
Q

how does the sloper of the AE curve determine the multiplier

A

multiplier = 1 / (1 - AE slope)

106
Q

what two factors reduce the size of the multiplier

A

imports and income taxes

107
Q

how does the business cycle relate to autonomous expenditure

A

when autonomous expenditure increases there is a unexpected decrease in inventories causing an expansion
when autonomous expenditure decreases there is an unexpected increase in inventories causing a recession

108
Q

what is the multiplier in the long run

A

zero

Macro Econ (3 decks)

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