Unit 4 - Macroeconomics) Flashcards
(63 cards)
1
Q
Inflation
A
- Decrease in purchasing power of currency
- Cause: consumers able to buy more goods than available at current price
1
Q
Demand-Pull Inflation
A
- Increase in aggregate demand outweighs aggregate supply
- Most common inflation
- Can result in increase in output of goods and services
1
Q
Demand-Pull Inflation: Increased Govt Spending
A
Acts as consumer in market, results in less goods/services
2
Q
Demand-Pull Inflation: Increased investments from firms
A
- Increases incomes of factors of production; aggregate demand increased
- Contributes least to inflation
3
Q
Demand-Pull Inflation: Increased spending from households
A
- Higher incomes
- Larger population
- Money printed
4
Q
Increased exports by country
A
- Increased exports increase size of market
- Goods and services consumed outside of the country, resulting in less supply
5
Q
Inflationary Spiral
A
As aggregate demand increases, businesses and firms hire more workers, which increases aggregate demand
6
Q
Cost-Push Inflation
A
- Aggregate supply decreases relative to aggregate demand
- More concerning, as economic output decreases
7
Q
Cost-Push Inflation: Increase in cost of raw materials
A
- Formation of monopolies, allowing higher prices for consumer capital goods
- Natural disasters affecting supply of raw materials
8
Q
Cost-Push Inflation: Increased production costs
A
- Increase in wages
- Regulations making production more expensive
- Least common as it decreases demand
9
Q
Contradictory Monetary Policy
A
- Reduce money supply in economy by increasing interest rates
- Reduces consumer and business spending
10
Q
Government Fiscal Policy
A
- Increase in taxes
- Reduces spending by removing money from economy
11
Q
Inflation: Impact on Companies
A
- Raise product prices to offset input costs, balance price hikes to avoid suppressing demand.
- Wages increase to keep pace with inflation, higher labor costs.
12
Q
Inflation: Impact on the Economy
A
- Loss of purchasing power
- Increased cost of living
- Increased Input Costs
13
Q
Price Controls - Less Effective
A
Bottom Text
14
Q
Consumer Price Index (CPI)
A
Examines average price change over time for consumer products
15
Q
Monetary Policy
A
Central bank controls money supply/interest rates to achieve macroeconomic goals
16
Q
Actions to Curb Inflation
A
- Raise interest rates
- Sell government securities (withdraw money from economy)
17
Q
Unweighted CPI
A
- Calculates simple average of price indices of baskets.
- Treats each basket equally, regardless of importance in consumer expenditure
18
Q
Monetary Policy Tools
A
- Open market operations
- Interest rates
- Adjusting reserve requirements
- Discount rate
19
Q
CPI Formula
A
CPI = (cost of basket in year)/(cost of basket in base year) x 100
20
Q
Weighted CPI
A
Each basket is assigned weight based on how much of total expenditure is spent on that category.
21
Q
Inflation Rate Calculation
A
(index base+1 - index base) x 100/ index base
22
Q
Deflation
A
Decline in prices for goods and services, increasing purchasing power
23
Causes of Deflation
- Lower production costs
- Increased aggregate supply OR decrease in aggregate demand
24
Good Deflation
Naturally occurs due to increases in economic output, increasing employment
25
Bad Deflation
Deflation from consumer side of the economy, leading to many problems
26
Effects of Deflation
- Higher unemployment
- Deferred consumption
- Falling consumer confidence
- Decreased investment
- Difficulty repaying debt
27
Unemployment Definition
Portion of workforce actively searching for work but unable to find a job.
28
Three groups of population
- People aged < 15
- Eligible to work but choose not to
- Labor Force
29
Labor Force Definition
- People ages 15+ who supply labor for production of goods and services
- Includes those currently working or looking for work
30
Frictional Unemployment
- Occurs from changing jobs voluntarily
- Results from market processes taking time
- Least problematic and short-lived
31
Cyclical Unemployment
- Results from reduction in demand for consumer products.
- Rises during recessions and falls during periods of growth
32
Cures to Cyclical Unemployment
- Implementing fiscal policies to help influence consumer spending
- Ex: Cutting taxes, increasing transfer payments
33
Structural Unemployment
- Occurs when skills or location of workers are no longer demanded in economy.
- Displaced workers can be unemployed for long periods or leave labour force.
34
Cures to Structural Unemployment
- Provide training programs or help unemployed workers pursue higher education
- Move workers to areas w/ demand
35
Calculation of Unemployment Rate
(ππππππππ¦ππ/πΏππππ’π πΉππππ) x 100
36
Full unemployment
- Forms of structural and frictional unemployment exists at all times.
- During economic growth, workers feel confident about leaving positions
37
Natural Rate of Unemployment
6-7%
38
International Trade Definition
Exchange of goods and services across international borders
39
Tariffs
Tax on good imposed by importing country
40
Import Quotas
Sets maximum amount of good imported during time frame
41
Licenses
Permits company to bring specific goods into country.
42
Voluntary Export Restraints
Cap that exporting country sets for amount of a good it is permitted to export
43
Exchange Rates
Price of one currency expressed in another currency.
44
Factors Influencing Exchange Rates
- Interest rates
- Inflation
- Economic Stability
45
Foreign Exchange Market/Forex Market
Market where currencies are traded
46
Floating Exchange Rate
Foreign exchange market determines a country's currency price depending on demand and supply
47
Advantages of Floating Exchange Rate
- Stability in balance of payments
- Domestic policy freedom
- Increased efficiency
48
Disadvantages of Floating Exchange Rate
- Exposed volatility of exchange rate
- Imported inflation.
49
Fixed Exchange Rates
Exchange rate system set firmly by monetary authority concerning foreign currency
50
Advantages of Fixed Exchange Rates
- Price stability
- Speculation protection
- Inflation control
51
Pros and Cons of Appreciation
- Cheaper imports and helps control inflation
- Hurts exports and slows down economic growth
52
Appreciation
The increase in value of a currency
53
Disadvantages of Fixed Exchange Rates
- Less flexibility
- Risk of speculation
- Reserve dependency
54
Supply-Demand of Exchange Rates
- Exchange rate (ex: price of CAD in USD) on y-axis
- Quantity (ex: of CAD) on y-axis
55
Causes of Currency Appreciation (more of factors, more appreciation)
- Interest
- Speculation expectations
- Foreign Investment from other countries
- Incomes abroad
- International competitiveness
56
Causes of Currency Depreciation
- Firms move away
- Domestic Incomes
57
Increase of Demand for Currency
Foreigners want currency and exchange local currency for it
58
Increase in Supply for Currency
Currency is exchanged for another currency
59
Pros of High Exchange Rates
- Downward pressure on inflation
- Cheaper imports
- Improved efficiency to domestic producers
60
Cons of High Exchange Rates
- Damage to export industries
- Damage to domestic industries
61
Reciprocal Exchange Rate
- 1/Current Exchange Rate
- Ex: 1 CAD = 0.73 USD, 1.37 CAD = 1 USD
