Midterm 2 Flashcards
1
Q
If one wants to know how the material well-being of the average person has changed over time in a given country, which of the following should one look at?
A. the level of real GDP
B. the growth rate of nominal GDP
C. the growth rate of real GDP
D. the growth rate of real GDP per person
A
D
2
Q
Over the past century in Canada, by how much has average income as measured by real GDP per person grown?
A. about 3.5 percent per year, which implies a doubling about every 20 years
B. about 2 percent per year, which implies a doubling about every 35 years
C. about 4 percent per year, which implies a doubling about every 17.5 years
D. about 1 percent per year, which implies a doubling about every 70 years
A
B
3
Q
Which of the following statements best describes the relationship between the initial wealth and the growth rate of a country?
A. Countries with the highest growth rates over the last 100 years are the ones that had the highest level of real GDP 100 years ago.
B. Countries that were rich a century ago had little fluctuation around their average growth rates during the past 100 years.
C. Though the catch-up effect may suggest otherwise, the data show no strong relationship between initial conditions and growth rates.
D. Over the last 100 years, Japan had the highest real GDP growth rate, and now it has the highest real GDP per person.
A
C
4
Q
How is a nation's standard of living determined? A. by its productivity B. by its gross domestic product C. by its national income D. by how much it has relative to others
A
A
5
Q
Which of the following is a correct way to measure productivity?
A. divide the number of hours worked by output
B. divide output by the number of hours worked
C. compute output growth
D. divide the change in output by the change in number of hours worked
A
B
6
Q
Laurie works 8 hours and produces 7 units of goods per hour. Iris works 6 hours and produces 10 units of goods per hour. Which of the following can we conclude?
A. Laurie’s productivity and output are greater that Iris’s.
B. Laurie’s productivity is greater than Iris’s, but Laurie’s output is less.
C. Iris’s productivity and output are greater than Laurie’s.
D. Iris’s productivity is greater that Laurie’s, but Iris’s output is less.
A
C
7
Q
Which of the following would be considered physical capital?
A. the pizza oven at the Liquidity Preferences Tavern
B. soy beans used to make soy milk
C. the skills and knowledge of a barber
D. the number of hours people spend in the gym
A
A
8
Q
Jessica Smith is a teacher. Which of the following is a part of her human capital?
A. her work experience
B. the textbooks she uses
C. the software she uses when delivering her lectures
D. the amount of time she spends with her students
A
A
9
Q
In the country of Krypton, the price of lead increased from $20 per kilogram to $22 per kilogram during a time when the overall price level increased by 8 percent. During this period, what happened to the real price of lead?
A. It increased.
B. It decreased.
C. It stayed the same.
D. It might have increased, decreased, or stayed the same; more information is needed to be sure.
A
A
10
Q
Suppose that real GDP grew more in Country A than in Country B last year. Which of the following does this imply concerning productivity or standard of living?
A. Country A must have a higher standard of living than country B.
B. Country A’s productivity must have grown faster than country B’s.
C. Country A must have a higher real GDP than Country B.
D. Country A’s productivity must have been higher only if the population in the two countries grew at the same
A
D
11
Q
How can a government encourage growth and, in the long run, raise the country’s economic standard of living? A. by encouraging population growth B. by encouraging consumption C. by encouraging saving and investment D. by increasing government spending
A
C
12
Q
What is the effect of a higher saving rate in the long run?
A. It decreases the capital stock.
B. People must consume less in the future.
C. It increases productivity.
D. It leads to higher growth in real GDP.
A
C
13
Q
Suppose a country were to increase its saving rate. In the long run, which of the following would also increase? A. its level of income B. its growth rate of income C. its growth rate of productivity D. its growth rate in capital stock
A
A
14
Q
Suppose that there are diminishing returns to capital. Suppose also that two countries are the same except one has less capital and so less real GDP per person. Suppose that both increase their saving rate from 3 percent to 4 percent. Which of the following will happen in the long run?
A. Both countries will have permanently higher growth rates of real GDP per person, and the growth rate will be higher in the country with more capital.
B. Both countries will have permanently higher growth rates of real GDP per person, and the growth rate will be higher in the country with less capital.
C. Both countries will have higher levels of real GDP per person, and the temporary increase in growth in the level of real GDP per person will have been greater in the country with more capital.
D. Both countries will have higher levels of real GDP per person, and the temporary increase in growth in the level of real GDP per person will have been greater in the country with less capital.
A
D
15
Q
Which of the following is consistent with the catch-up effect?
A. The United States had a lower growth rate before 1900 than after.
B. Japan has a higher growth rate than Germany.
C. Although Canada has a relatively high level of output per person, its growth rate is still high compared to some poorer countries, such as Pakistan.
D. After World War II, Canada had lower growth rates than war-ravaged European countries.
A
D
16
Q
In the 1800s, Europeans purchased stock in Canadian companies, which used the funds to build railroads and factories. What type of investments did the Europeans make? A. foreign portfolio investments B. indirect domestic investments C. foreign direct investments D. foreign indirect investments
A
A
17
Q
Which of the following is generally an opportunity cost of investment in human capital?
A. future job security
B. forgone wages at present
C. increased earning potential
D. the costs of living during the years of school
A
B
18
Q
Which of the following terms refers to institutions that help to match one person's saving with another person's investment? A. the Bank of Canada B. the banking system C. the monetary system D. the financial system
A
D
19
Q
Which of the following terms refers to a certificate of indebtedness that specifies the obligations of the borrower to the holder? A. bond B. stock C. mutual fund D. savings plan
A
A
20
Q
Suppose Microsoft sells a bond. What is the company doing? A. borrowing directly from the public B. borrowing indirectly from the public C. lending directly to the public D. lending indirectly to the public
A
A
21
Q
What is the face value of a bond?
A. the market price of the bond
B. the difference between the amount owned by the issuer and the market price of the bond
C. the amount owned by the issuer
D. the interest earned by the owner of the bond
A
C
22
Q
Which of the following terms refers to the length of time until a bond matures? A. duration B. term C. maturity D. intermediation
A
B
23
Q
Which of the following is a characteristic of the bond market?
A. Some bonds have terms as short as a few months.
B. Because they are risky, bonds pay a low rate of interest.
C. Corporations buy bonds to raise funds.
D. Bonds are rarely used as financial instruments.
A
A
24
Q
Assuming that other things remain the same, what will happen to the interest on a bond as the bond’s maturity increases?
A. As maturity increases, the bond will have less interest because it has less risk.
B. As maturity increases, the bond will have less interest because it has more risk.
C. As maturity increases, the bond will have more interest because it has more risk.
D. There is no relation between term to maturity and risk.
A
C
25
```
Stephanie is interested only in the rate of interest and is willing to take a great deal of risk in exchange for a high return. Which of the following bonds she should look for?
A. federal bonds with short terms
B. provincial bonds with long terms
C. corporate bonds with short terms
D. corporate bonds with long terms
```
D
26
Papa Mario's Pizza Company sells common stock. What type of financing are they using?
A. They are using equity financing and the return shareholders earn is fixed.
B. They are using equity financing and the return shareholders earn depends on how profitable the company is.
C. They are using debt financing and the return debt holders earn is fixed.
D. They are using debt financing and the return debt holders earn depends on how profitable the company is.
B
27
If Huedepool Beer runs into financial difficulty, how are bondholders and shareholders paid?
A. Shareholders are paid before bondholders.
B. Shareholders are paid after bondholders.
C. Shareholders and bondholders are paid proportional shares of the company’s assets.
D. Shareholders receive all the company’s assets.
B
28
Which of the following people purchased the correct asset to meet their objective?
A. Michelle wanted to be a part owner of Mamma Rosa's Pizza, so she purchased a bond issued by Mamma Rosa's Pizza.
B. Tim wanted a high return, even if it meant taking some risk, so he purchased stock issued by Specific Electric instead of bonds issued by Specific Electric.
C. Jennifer wanted to buy equity in Honda, so she purchased bonds sold by Honda.
D. George wanted to lend money at a specified rate of interest to Research In Motion (RIM), so he purchased RIM stock.
B
29
```
Which of the following determines the price of stocks traded on exchanges?
A. the Corporate Stock Administration
B. the NASDAQ
C. the supply and demand for the stock
D. the Montreal Stock Exchange
```
C
30
World Wide Delivery Service Corporation develops a way to speed up its deliveries and reduce its costs. Which of the following would we expect?
A. This would raise the demand for existing shares of the stock, causing its price to rise.
B. This would decrease the demand for existing shares of the stock, causing its price to fall.
C. This would raise the supply of the existing shares of stock, causing its price to rise.
D. This would raise the supply of the existing shares of stock, causing its price to fall.
A
31
```
Which of the following expressions represents national saving in a closed economy?
A. Y – I – G – NX
B. Y – C – G
C. Y – I – C
D. G + C – Y
```
B
32
```
In a closed economy, what does (T – G) represent?
A. national saving
B. investment
C. private saving
D. public saving
```
D
33
```
Suppose that in a closed economy GDP is equal to 12,000, taxes are equal to 1500, consumption equals 6800, and government expenditures equal 2500. What is national saving?
A. 4200
B. 2700
C. 1200
D. 1000
```
B
34
```
Suppose that consumption is 7500, taxes are 1800, and government expenditures are 2200. If national savings are 1500 and the economy is closed, what is the GDP?
A. 9500
B. 10 000
C. 10 500
D. 11 200
```
D
35
The country of Hykania does not trade with any other country. Its GDP is $20 billion. Its government purchases $3 billion worth of goods and services each year, collects $3 billion in taxes, and provides $2 billion in transfer payments to households. Private saving in Hyrkania is $4 billion. What is investment in Hyrkania?
A. $4 billion
B. $3 billion
C. $2 billion
D. There is not enough information to answer the question.
C
36
Which of the following would most likely happen in the market for loanable funds if the government were to increase the tax on interest income?
A. The supply of loanable funds would shift right.
B. The demand for loanable funds would shift right.
C. The supply of loanable funds would shift left.
D. The demand for loanable funds would shift left.
C
37
What is the effect of an increase in budget deficit?
A. It changes the supply of loanable funds.
B. It changes the demand for loanable funds.
C. It changes both the supply of and demand for loanable funds.
D. It does not influence the supply of or the demand for loanable funds.
A
38
What would an increase in the budget deficit most likely do to investment spending?
A. It would make investment spending fall.
B. It would make investment spending rise.
C. It would not affect investment spending.
D. It may increase, decrease, or not affect investment spending.
A
39
Which of the following best explains how unemployment relates to business cycles?
A. Unemployment can be completely eliminated through economic policies when the economy grows at normal rates.
B. Unemployment only exists during periods of economic slowdown.
C. Cyclical unemployment is inversely related to short-run economic fluctuations.
D. Unemployment is unrelated to short-run economic fluctuations.
C
40
```
How often is data on unemployment reported?
A. weekly
B. monthly
C. quarterly
D. yearly
```
B
41
Which of the following lists includes all the categories into which Statistics Canada divides the adult population?
A. employed or unemployed
B. discouraged workers, employed, or unemployed
C. employed, unemployed, or not in the labour force
D. discouraged workers, employed, or not in the labour force
C
42
Which one of the following people would be counted as unemployed according to official statistics?
A. Shasta, who is currently not working and is waiting for her new job to start
B. Mary, who worked only 35 hours last week
C. Karen, who neither has a job nor is looking for one
D. Kevin, who is a retiree
A
43
Which of the following people would NOT be included in the labour force?
A. Jay, who is on temporary layoff
B. Mike, who has retired and is not looking for work
C. Jane, who does not have a job, but has applied for several in the last week
D. Joan, who has a job but is looking for a new one
B
44
Which of the following correctly ranks categories from smallest to largest according to recent Canadian statistics?
A. unemployed, employed, not in labour force
B. unemployed, not in labour force, employed
C. not in labour force, employed, unemployed
D. not in labour force, unemployed, employed
B
45
How is Latoya, a homemaker who works as a volunteer at the local Red Cross and is currently not looking for a job, counted?
A. as employed and in the labour force
B. as unemployed and in the labour force
C. as unemployed and not in the labour force
D. as not in the labour force
D
46
```
In 2000 in Japan, based on concepts similar to those used to compute Canadian employment statistics, the unemployment rate was about 4.8 percent, the labour force participation rate was about 62 percent, and the adult population was about 108 million. How many people were employed?
A. about 52 million
B. about 64 million
C. about 67 million
D. about 103 million
```
B
47
Tara has just finished school, but she is going to roam around the country awhile before she starts looking for work. Which of the following best characterizes the changes that occur in labour statistics?
A. The unemployment rate increases, and the labour-force participation rate increases.
B. The unemployment rate is unaffected, and the labour-force participation rate is unaffected.
C. The unemployment rate increases, and the labour-force participation rate decreases.
D. The unemployment rate increases, and the labour-force participation rate is unaffected.
B
48
Between 2006 and 2007, the country of Aquilonia reported an increase in the number of people who were employed. It also reported an increase in the unemployment rate. Which of the following would best explain the two reports?
A. There was an increase in the size of the labour force between 2006 and 2007.
B. There was a decrease in the size of the labour force between 2006 and 2007.
C. There was an increase in the size of the adult population between 2006 and 2007.
D. The two reports are contradictory and cannot be reconciled.
A
49
The table below shows the 2007 data for males and females aged 15 and over in the country of Dan. Use it to answer questions 49 - 52.
Not in the Labour Force: Men-45 million ; Women-35 million
Unemployed: Men-5 million ; Women-5 million
Employed: Men-85 million ; Women-65 million
```
What is the adult population in Dan?
A. 90 million
B. 150 million
C. 160 million
D. 240 million
```
D
50
The table below shows the 2007 data for males and females aged 15 and over in the country of Dan. Use it to answer questions 49 - 52.
Not in the Labour Force: Men-45 million ; Women-35 million
Unemployed: Men-5 million ; Women-5 million
Employed: Men-85 million ; Women-65 million
```
What is the adult labour force in Dan?
A. 90 million
B. 150 million
C. 160 million
D. 230 million
```
C
51
The table below shows the 2007 data for males and females aged 15 and over in the country of Dan. Use it to answer questions 49 - 52.
Not in the Labour Force: Men-45 million ; Women-35 million
Unemployed: Men-5 million ; Women-5 million
Employed: Men-85 million ; Women-65 million
```
What is the adult unemployment rate in Dan?
A. 4.12 percent
B. 6.25 percent
C. 11.11 percent
D. 12.50 percent
```
B
52
The table below shows the 2007 data for males and females aged 15 and over in the country of Dan. Use it to answer questions 49 - 52.
Not in the Labour Force: Men-45 million ; Women-35 million
Unemployed: Men-5 million ; Women-5 million
Employed: Men-85 million ; Women-65 million
```
What is the adult female unemployment rate in Dan?
A. 4.76 percent
B. 5.56 percent
C. 7.14 percent
D. 7.69 percent
```
C
53
```
What is a rough estimate of the natural rate of unemployment?
A. 1 to 2.5 percent
B. 3 to 5.5 percent
C. 6 to 8 percent
D. 8.5 to 11 percent
```
C
54
Suppose that some people report themselves as unemployed when, in fact, they are working in the underground economy. If these persons were counted as employed, how would the labour statistics change?
A. The unemployment rate and the labour-force participation rate would be higher.
B. The unemployment rate and the labour-force participation rate would be lower.
C. The unemployment rate would be higher and the labour-force participation rate would be lower.
D. The unemployment rate would be lower and the labour-force participation rate would be unaffected.
D
55
```
Consider two people who are currently out of work. Deb is not currently looking for work but would like a job. Although she is not currently searching for work, she has done so at some time in the recent past. Ted is not looking for work, because he doesn't think there are jobs available for which he would qualify. Who does Statistics Canada consider to be a discouraged worker?
A. both Deb and Ted
B. only Ted
C. only Deb
D. Neither Deb nor Ted
```
B
56
```
According to your text, which of the following is not a reason that actual labour markets experience unemployment?
A. unions
B. job search
C. flexible wages
D. minimum-wage legislation
```
C
57
Which of the following impacts does employment insurance have on the labour market?
A. It reduces search effort and raises unemployment.
B. It reduces search efforts and lowers unemployment.
C. It increases search effort and raises unemployment.
D. It increases search effort and decreases unemployment.
A
58
What is the effect of minimum wage laws on unemployment?
A. Minimum wage laws are the major cause of natural unemployment.
B. Minimum wage laws probably increase teenage unemployment.
C. Minimum wage laws mainly affect skilled workers.
D. Minimum wage laws have no impact on unemployment.
B
59
```
If there was no minimum wage and then the government instituted a minimum wage of $6, what would happen to employment in this market? *** see graph on assignment
A. Employment would rise by 10.
B. Employment would fall by 20.
C. Unemployment would increase by 10.
D. Unemployment would increase by 20.
```
D
60
Four employers have justified their actions as follows. Whose logic is inconsistent with the logic of efficiency wage theory?
A. Jay develops a new assembly line technology that limits the amount of shirking workers may do, so he reduces what he pays his employees so as to make it closer to the equilibrium wage.
B. Kay pays her workers less than the equilibrium wage so they won't have the time or money to look for work somewhere else.
C. Ray pays his workers in a developing country more than the going wage, hoping that they will get a better diet and so be more productive.
D. Ms. Fay pays her workers the market wages, but she hires more supervisors to make sure workers do not shirk.
B
61
Def: Financial System
- The group of institution in the economy that help to match one person’s saving with another person’s investment
- Savers supply their money to the financial system with the expectation that they will get it back with interest at a later date
- Borrowers demand money from the financial system with the knowledge that they will be required to pay it back with interest at a later date
62
What are the two categories of financial institutions?
Financial Markets and Financial Intermediaries
63
Def: Financial Markets
-Financial institutions through which savers can directly provide funds to borrowers
64
What are the two most important financial markets?
-bond market and stock market
65
Def: Bond
A certificate of indebtedness that specifies the obligations of the borrower to the holder of the bond (an IOU)
66
What is indicated on a bond?
A) date of maturity: time at which the loan will be paid
B) rate of interest that will be paid periodically until the loan matures
C) principal or face value of a bond (amount of money owed)
67
Which two characteristics are most important of a bond?
1) term: length of time until the bond matures
* perpetuity: bond that never matures, pays interest forever but principal never repaid
2) credit risk: probability that the borrower will fail to pay some of the interest or principal
* failure to pay=default by declaring bankruptcy
68
Which are riskier?
A) Long-term bonds or short-term bonds?
B) High or low default?
C) Canadian government, Provincial government or Corporate bonds?
D) Bonds vs Stocks?
E) All stocks or bonds of one company, or of multiple companies?
A) long-term bonds are riskier than short-term bonds, but long-term bonds have higher interest rates to compensate for it
B) high risk of default, means higher interest rate to compensate for the credit risk
C) Corporate bonds are riskier than Provincial which is riskier than Federal, so higher interest rate for riskier bonds=junk bond
D) Stocks are both riskier and get a higher return (more profit)
E) a diverse portfolio of stocks and bonds (mutual funds) is less risky than putting all your eggs in one basket
69
Def: Stock
A claim to partial ownership in a firm (part-owner, whereas owner of a bond is a creditor to the corporation)
70
Equity finance vs Debt finance
Equity finance: sale of stock
| Debt finance: sale of bonds
71
Bonds vs Stocks when a company:
A) is very profitable
B) is in financial difficulty
A) shareholders enjoy the benefits, bond holders only get the interest on their bonds
B) bondholders are paid what they are due before shareholders receive anything
72
How are prices at which shares trade on stock exchanges are determined?
By the supply and demand for the stock in the companies
73
Def: Stock index
- monitor the overall level of stock prices (average of stock prices)
- stock prices reflect expected profitability so closely watched
74
Def: Financial Intermediaries
- financial institutions through which savers can indirectly provide funds to borrowers
- stand between savers and borrowers
75
Which are the two most important financial intermediaries?
- banks
| - mutual funds
76
What are the roles of banks?
1) a financial intermediary that takes deposits from savers at an interest rate and use them to make loans to borrowers at a higher interest rate
* *difference between these two interest rates covers the bank’s costs and returns some profit to owners of the bank
2) facilitate purchases of goods and services by allowing people to write cheques against their deposits=a special asset called a medium of exchange
77
Def: Medium of exchange
A special asset that people can easily use to engage in transactions
78
Def: Mutual fund
- a financial intermediary
- an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds
- shareholder of the fund accepts all risk and return associated with the portfolio (value of portfolio rises=benefits, value of portfolio falls=loss)
79
What are the advantages of mutual funds?
1) allow people with small amounts of money to diversify (don’t put all your eggs in one basket) = less risky to have small stake in a diverse amount of companies
2) give ordinary people access to skills of professional money managers and should increase the return that mutual fund depositors earn on their savings
80
Def: GDP (Y)
- gross domestic product
| - total income in an economy and the total expenditure on the economy’s output of goods and services
81
equation of GDP
Y=C+I+G+NX
82
Closed vs Open Economy
Closed economy: an economy that does not interact with other economies, does not engage in international trade in goods and services or international borrowing and lending (NX of the GDP equation is 0)
Open economy: an economy that interacts with other economies around the world
83
Give the equation of GDP in a closed economy
Y=C+I+G
| *NX is 0
84
Give the equation for national saving in a closed economy. Which parts represent private saving and public saving?
```
National saving (S) = Y-C-G = I
* For the economy as a whole, saving must equal investment.
```
OR
S=(Y-T-C) + (T-G)
Private saving=Y-T-C
Public saving=T-G
85
Def: Private saving vs Public saving
Private saving: The income that households have left after paying for taxes and consumption
Public saving: the tax revenue that the government has left after paying for its spending
86
Def: Budget surplus vs Budget deficit
Budget surplus: an excess of tax revenue over government spending (T exceeds G)
Budget deficit: a shortfall of tax revenue from government spending (G exceeds T)
87
Investment vs Saving
Investment: purchase of new capital like equipment or buildings
Saving: deposit unspent income into bank or buy a bond or stock
88
Def: Market for Loanable Funds
- The market in which those who want to save supply funds and those who want to borrow to invest demand funds
* loanable funds: all income that people have chosen to save and lend out rather than use for own consumption
- has one interest rate for both return to saving and cost of borrowing
89
Saving and investment in the market for loanable funds
Saving is the source of the supply of loanable funds (upward sloping)
Investment is the source of the demand of loanable funds (downward sloping)
- an increasing interest rate=borrowing more expensive=quantity demanded of loanable funds decreases
- an increasing interest rate=saving more attractive=quantity supplied of loanable funds increases
90
What happens to supply and demand of loanable funds when the interest rate is above the equilibrium interest rate?
- creates a surplus, more loanable funds supplied than demanded
- lender compete for scarce borrowers, interest rates are then driven down up to the equilibrium interest rate
91
Nominal interest rate vs Real interest rate
Nominal: usually reported, the monetary return to saving and cost of borrowing
Real: nominal corrected for inflation, more accurately reflects the real return to saving and cost of borrowing
*Real=nominal-inflation rate
92
Name the 3 government policies that affect the economy’s saving and investment.
Policy 1: Saving Incentives
Policy 2: Investment Incentives
Policy 3: Government Budget Deficits and Surpluses
93
Policy 1: Saving Incentives examples
- if Canada can raise saving rate, growth rate of GDP would increase and Canadians would enjoy a higher standard of living
- low saving rate in Canada due to tax laws that discourage saving (on income)
- GST and sales taxes(a consumption tax), income saved is not taxed to encourage saving
- buying RRSPs reduce amount of income subject to tax, so saving encouraged
94
Policy 1: Saving Incentives, having less taxes and how it affects the curve
- tax change affects supply of loanable funds
- less taxes on savings = supply of loanable funds increases, shift to the right
* reform of tax laws encouraged greater saving, lower interest rates and greater investment
95
Policy 2: Investment Incentives, examples
-investment tax credit: gives a tax advantage to firms building new factories or buying new equipment
96
Policy 2: Investment Incentives, tax credit and how it affects the curve
- tax credit affects demand for loanable funds
- a tax credit would shift the demand curve to the right (increase demand)
* reform of tax laws encouraged greater investment, higher interest rates and greater saving
97
Policy 3: Government Budget Deficits and Surpluses, how it affects the curve
- Budget deficit: government borrows to finance the budget deficit, decreases supply of loanable funds=shifts supply curve to the left
* when Government reduces national saving by running a budget deficit, interest rates rise and investment falls
- Budget surplus: increases the supply of loanable funds, reduces the interest rate and stimulates investment
98
Def: Government Debt
The sum of all past budget deficits and surpluses
99
Def: Crowding out
A decrease in investment that results from government borrowing during a budget deficit
-crowds out private borrowers who are trig to finance investment
100
Def: Loanable Funds
- all income that people have chosen to save and lend out rather than use for own consumption
- the flow of resources available to fund private investment
101
Def: Vicious Circle
- The cycle that results when deficits reduce the supply of loanable funds, increase interest rates, discourage investment and result in slower economic growth
- Slower growth leads to lower tax revenue and higher spending on income support programs and the result can be even higher budget deficits
102
Def: Virtuous Circle
- The cycle that results when surpluses increase the supply of loanable funds, reduce interest rates, stimulate investment, and result in faster economic growth
- faster growth leads to higher tax revenue and lower spending on income support programs, and the result can be even higher budget surpluses
103
Def: Government net debt
The difference between the value of government financial liabilities and financial assets
104
Def: Natural rate of unemployment
- Amount of unemployment that the economy normally experiences
- the rate of unemployment to which the economy tends to return in the long-run (only an estimate)
- Natural does not mean desirable or is it constant over time or impervious to economic policy
- means that this unemployment does not go away on its own even in the long run
105
Def: Cyclical unemployment
- Year to year fluctuations in unemployment around its natural rate, closely associated with the short-run economic activity
- the deviation of unemployment from its natural rate
106
How often and by who is the unemployment measured?
-Statistics Canada surveys 54 000 households every month = Labour Force Survey
107
What are the three categories of households in the Labour Force Survey?
1) employed: spent some of the previous week working at a paid job
2) unemployed: on temporary layoff or looking for a job
3) not in the labour force: full-time student, homemaker or retired
*order from most to least people in each category:
Employed, Not in Labour Force, Unemployed
108
Def: Labour force
The total number of workers, including both the employed and the unemployed
109
What is the equation for the labour force? Unemployment rate? Labour-force participation rate?
Labour force=Number of employed + Number of unemployed
Unemployment rate=Number of unemployed/Labour force *100
Labour force participation rate=Labour force/adult population *100
110
Name 3 interesting facts from the statistics of Statistics Canada about labour force participation, unemployment and employment.
1) labour force participation rate of young women is similar to young men, but older women have lower rates than older men (gap is closing)
2) young of age 15-24 have higher unemployment rates than older people
3) similar aged men and women tend to have similar rates of unemployment, but mancession=more men that are unemployed
111
Why is it sometimes misleading when comparing unemployment rates with other countries?
Unemployment rate in the US (age 16+ seeking employment) is defined slightly different than in Canada (age 15+ seeking employment)
112
Def: Discouraged searchers
-Individuals who would like to work but have given up looking for a job, so are reported not in the labour force, don’t show up as unemployed
113
What kind of information can the employment rate or ratio provide?
- measures how many people of working age have found employment and are able to support their family or themselves
- insight into whether the community is able to fund social programs, quality health care system, effective policing and courts
- high employment ratio=successful economy
114
What is a short period of unemployment?
Less than 3 months
115
Name two types of unemployment that could explain unemployment in the long run?
1) frictional unemployment
| 2) structural unemployment
116
Def: Frictional unemployment
- Unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills
- explains short spells of unemployment
117
Def: structural unemployment
- unemployment that results because the number of jobs available in some labour markets is insufficient to provide a job for everyone who wants one
- explains longer spells of unemployment
118
What are four ways to explain the unemployment in the long run.
Frictional unemployment (always greater than zero)
1) job search (sectoral shifts, public policy, Employment Insurance)
Structural unemployment
2) minimum wage laws
3) Unions and Collective bargaining
4) the theory of efficiency wages
119
Def: Job search
The process by which workers find appropriate jobs given their tastes and skills
120
Def: Sectoral shifts
- changes in the composition of demand among industries or regions
- inevitable since economy is always changing (agriculture is today only a minor source of employment compared to the past where it was a major source)
- temporarily cause frictional unemployment (always greater than zero due to well-functioning economy that rewards innovation and new ideas)
121
How does public policy play a role in job search?
- Government programs try to facilitate job search by:
- government run employment agencies which provide info on job vacancies
- public training programs (Employment Insurance program), retrain by acquiring new skills in a new job in a new industry
- some say government should not be involved in job search, let the private market do it
122
Def: Employment Insurance (EI)
- a government program that partially protects workers’ incomes when they become unemployed (ease their burden when unemployed)
- may cause the unemployment rate to be higher (increase frictional unemployment
- regions with low unemployment rates need more hours of work to be eligible but EI benefits can be collected much longer
- people put in less effort into job search
- those who collect benefits tend to quit their job sooner
- employers lay off only after workers become eligible for EI
- likelihood of finding a job increases as EI recipients near the end of their benefits
- it does reduce the income uncertainty faced by those unemployed, also allows people to do a more thorough search for a higher paying job
123
How does the minimum wage laws affect the structural unemployment?
- causes a surplus of labour, more workers than there are jobs =unemployed
- not a predominant reason for unemployment due to most earning a wage higher than the minimum
- 60% of minimum wage earners are not those in poverty, but teenagers who go to school and live at home
124
Def: Union
- A worker association that bargains with employers over wages and working conditions
- Ask for better wages, better benefits and better working conditions
125
Which occupations are most and least unionized?
Most unionized=public sector like education, public administration, health care
Least unionized=food and accommodation industry
126
How do unions affect the structural unemployment?
- when a union raises the wage above equilibrium, it results in unemployment (surplus of labour)
- those who remain employed are better off, but those who who are now unemployed due to having to pay more so need to get rid of workers to cut costs
- workers in unions reap the benefit of collective bargaining while workers not in unions bear some of the cost (reduce wages in the rest of the economy)
- protects workers from being at the mercy of the firm’s owners
- help firms respond efficiently to worker’s concerns
127
Def: Collective bargaining
The process by which unions and firms agree on the terms of employment as a group
128
Def: Strike
The organized withdrawal of labour from a firm by a union if the union and the firm can’t reach an agreement on working terms
- reduces production, sales and profit so the firm is likely to agree to pay higher wages
- union workers earn 10-20% more than those workers who aren’t part of one
129
Def: Efficiency wages
Above-equilibrium wages paid by firms in order to increase worker productivity (keep wages high even in the presence of a surplus of labour)
130
How do efficiency affect the structural unemployment?
-a constraint like the minimum wage and unions put on firms is unnecessary because firms may be better off keeping wages above the equilibrium level
131
What are the four types of efficiency wage theories
1) worker health: better paid workers eat better and are therefore more productive
2) worker turnover: the more a firm pays its workers, the less often its workers are going to leave (expensive to train new workers)
3) worker effort: it costs a lot to hire supervisors to catch workers who are shirking (not working very hard), so pay higher wage so workers are more eager to keep their jobs and gives them incentive to put i best efforts
4) worker quality: a high wage attracts a better pool of workers that apply for the higher paying jobs due to their skills
132
Who is Henry Ford?
- an industrial visionary, founder of Ford Motor Company
- built car assembly lines where unskilled workers were taught to perform a simple task over and over again
- paid his workers twice the working wage to attract as many people as possible (number of workers willing to work far exceeded the number of workers Ford needed)
* improved discipline of workers, gave them more loyal interest in the institution and raised personal efficiency
* super important that no workers were absent so low worker turnover, high worker quality, high worker effort
133
What is the living wage?
- wage level that allows the earner to afford shelter, food and other necessities
- minimum wage applies to all employees in a jurisdiction (province) vs living wage that applies to workers being able to afford a decent standard of living in their municipality
- may increase worker morale=higher productivity
- makes firms pay a higher wage than what was in their own best interest
- will still create unemployment but may be a small increase
- but if goal os to battle poverty, then this may not be the better choice
134
Def: Barter
The exchange of one good or service for another to obtain the things they need
135
Def: Double coincidence of wants
In barter, it is the unlikely occurrence that two people each have a good or service that the other wants
*so money makes this easier
136
Def: Money
The set of assets in an economy that people regularly use to buy goods and services from other people
137
What are the three functions of money?
1) medium of exchange
2) unit of account
3) store of value
138
Def: Medium of exchange
An item that buyers give to sellers when they want to purchase goods or services
139
Def: Unit of account
The yardstick people use to post prices and record debts
| *we use money as the unit of account (in dollars)
140
Def: Store of value
An item that people can use to transfer purchasing power from the present to the future
*money is far from a perfect store of value since when the prices rise, the value of money falls
141
Def: Wealth
Total of all stores of value, including both money and non monetary assets
142
Def: Liquidity
The ease with which an asset can be converted into the economy’s medium of exchange
*money is most liquid asset, stocks and bonds, cars and houses are less liquid
143
Def: Commodity money
Money that takes the form of a commodity with intrinsic value (item would have value even if it were not used as money)
Ex) gold = used in industry and in making jewellery
Ex) cigarettes=prisoners of World War II used this as money
144
Def: Gold standard
An economy that uses gold as money
145
Def: Fiat money
Money without intrinsic value that is used as money because of government decree
Ex) Monopoly money can’t be used as money because the dollar has been decreed as valid money
146
Def: Money stock
The quantity of money circulating in the economy
147
What is considered money, what is in the money stock?
1) currency
| 2) demand deposits
148
Def: Currency
The paper bills and coins in the hands of the public
149
Def: Demand Deposits
Balances in bank accounts that depositors can access on demand by writing a cheque or using a debit card
150
Why aren’t credit cards a method of payment?
- it is a deferring payment, you repay the bank at a later date perhaps with interest
- you repay your debt by writing a cheque from your chequing account
- people who have credit cards hold less money on average than people who do not
151
Def: Central bank
An institution designed to regulate the quantity of money in the economy
Ex) Bank of Canada
-controlled by the government of Canada, but is independent
-hand over any profits they earn to the government
-primary responsibility is to act in the national interest
152
What are the four jobs of the central bank (Bank of Canada)?
1) issue currency (right to issue notes for circulation in Canada)
2) Act as the banker of commercial banks (enable commercial banks to make payments to each other, borrow or lend from other banks)
3) banker to the Canadian government (Canada’s foreign exchange reserves and national debt)
4) control the quantity of money made available to the economy=money supply
153
Def: Money supply
The quantity of money available in the economy
154
Def: Monetary policy
The setting of the money supply by policymakers in the central bank
155
Def: Reserves
Deposits that banks have received but have not loaned out
| *If banks hold all deposits in reserve, banks do not influence the supply of money
156
If I deposit 100$ in the bank, what is the bank’s T account? How is the money supply in the economy affected?
Assets Liabilities
Reserves $100. Deposits $100
* before the bank opens, the money supply is $100 currency (what people are holding in their pockets)
* after the bank opens, the money supply is $100 of demand deposits
* if bank holds all deposits in reserve, banks do not influence the supply of money
157
Def: Fractional-reserve banking
A banking system in which banks hold only a fraction of deposits as reserves = reserve ratio
158
Def: Reserve ratio
The fraction of deposits that banks hold as reserves
| -Determined by government regulation and bank policy
159
Def: Reserve requirement
Central banks place a minimum on the amount of reserves that banks hold
160
Def: Excess Reserves
Banks hold reserves above the legal minimum
161
If I deposit 100$ in the bank and the bank has a reserve ratio of 10% and loans out the rest to Bob, what is the bank’s T account? How is the money supply in the economy affected?
Assets Liabilities
Reserves $10. Deposits $100
Loans $90
* Money supply=$190 ($100 demand deposits and $90 currency)
* When banks hold only a fraction of deposits in reserve, banks create money BUT NOT WEALTH!!!
162
Suppose Bob takes his $90 loan from Bank 1, 10% reserve ratio and goes to deposit it in Bank 2, what is the Bank 2’s T-account?
Assets. Liabilities
Reserves $9. Deposits $90
Loans $81
*creates an additional $81 of money
163
Suppose Bob takes his $81 loan from Bank 2, 10% reserve ratio and goes to deposit it in Bank 3, what is the Bank 3’s T-account? If it were to continue until there were no excess reserves left, what would be the money supply from when we started with $100 of Reserves?
Assets. Liabilities
Reserves $8.10. Deposits $81
Loans $72.90
Money supply=$100*ratio
=100*10 = $1000 of money generated
*money multiplier is 10
164
Def: Money multiplier
The amount of money the banking system generates with each dollar of reserves. The money multiplier is the reciprocal of their reserve ratio (1/reserve ratio)
*The higher the reserve ratio, the less each deposit banks loan out, and the smaller the money multiplier.
165
What are the three main tools used by the Bank of Canada for monetary policy?
1) open-market operations (used by bank every single day at least twice a day)
2) setting a reserved ratio
3) setting bank rate (every 6 weeks) / overnight rate
2) changes in reserve requirements
3) quantitative easing (emergency tool)
166
Def: Bank rate
The interest rate charged by the Bank of Canada on loans to the commercial banks.
Bank rate - 0.5% = interest paid to commercial banks
167
Def: Overnight rate
The interest rate on very short-term loans between commercial banks
- always about one quarter of a percent below bank rate
- a higher overnight rate rate discourages banks from borrowing
- is changed 8 days a year (6 weeks apart)
- reserves from the Bank of Canada, reduces quantity of reserves in the banking system, reduces the money supply (contracts) *opposite is true
168
Def: Open-Market Operations
The purchase or sale of government of Canada bonds by the bank of Canada
- to increase money supply, Bank of Canada purchase treasury bonds (short-term government bonds) (increases money in circulation)
- to decrease money supply, the Bank of Canada sells government bonds to the public (reduces money in circulation)
169
Def: Quantitative easing
The purchase and sale by the central bank of nongovernmental securities or government securities with long term maturity terms
- used to increase bank capital
- a tool of monetary policy used by central bank only in extraordinary circumstances
170
Def: foreign exchange market operations
The purchase or sale of foreign money by the Bank of Canada
171
Def: Sterilization
The process of offsetting foreign exchange market operations with open-market operations, so that the effect on the money supply is cancelled out
172
Which problems do the Bank of Canada have with controlling the money supply in the economy?
1) does not control amount of money households choose to hold as deposits in banks (more money in deposit=more money can be created); if people lose confidence in banks and decide to withdraw all their money then the bank loses reserves and creates less money
2) does not control the amount that commercial bankers choose to lend ; bankers become more cautious about economic conditions and decide to make fewer loans and hold greater reserves =creates less money
173
What can the bank of canada do if the money supply is growing too fast or too slow
- to make the money supply grow faster, it can lower the overnight rate
- to make the money supply grow slower, it can raise the overnight rate
174
Def: Bank run
When depositors suspect the banks are about to go bankrupt and withdraw their deposits
-Because a bank holds only a fraction of its deposits in reserve, it cannot satisfy withdrawal requests from all depositors, so bank has to close its doors
