Econ 1BB3 Final Exam Terms

microeconomics

the study of how households and firms make decisions and how they interact in markets

macroeconomics

the study of economy-wide phenomena, including inflation, unemployment, and economic growth

gross domestic product (GDP)

the market value of all final goods and services produced within a country in a given period of time

consumption

spending by households on goods and services, with the exception of purchases of new housing

investment

spending on capital equipment, inventories, and structures, including household purchases of new housing

government purchases

spending on goods and serviced by local, territorial, provincial, and federal governments

net exports

the value of a nation's exports minus the value of its imports; also called the trade balance

nominal GDP

the production of goods and services valued at current prices

real GDP

the production of goods and services valued at constant prices

GDP deflator

a measure of the price level calculated as the ratio of nominal GDP to real GDP time 100

consumer price index (CPI)

a measure of the overall cost of the goods and services bought by a typical consumer

inflation rate

the percentage change in the price index from the preceding period

core inflation

a measure of the underlying trend of inflation

indexation

the automatic correction of a dollar amount for the effects of inflation by law or contract

nominal interest rate

the interest rate as usually reported without correction for the effects of inflation

real interest rate

the interest rate corrected for the effects of inflation

productivity

the quantity of goods and services produced from each hour of a worker's time

physical capital

the stock of equipment and structures that are used to produce goods and services

human capital

the knowledge and skills that workers acquire through education, training, and experience

natural resources

the inputs into the production of goods and services that are provided by nature, such as land, rivers, and mineral deposits

technological knowledge

society's understanding of the best ways to produce goods and services

diminishing returns

the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases

catch-up effect

the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich

financial system

the group of institutions in the economy that help to match one person's saving with another person's investment

financial markets

financial institutions through which savers can directly provide funds to borrowers

bond

a certificate of indebtedness

stock

a claim to partial ownership in a firm

financial intermediaries

financial institutions through which savers can indirectly provide funds to borrowers

mutual fund

an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds

national saving (saving)

the total income in the economy that remains after paying for consumption and government purchases

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

budget surplus

an excess of tax revenue over government spending

budget deficit

a shortfall of tax revenue from government spending

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

government debt

the sum of all past budget deficits and surpluses

crowding out

a decrease in investment that results from government borrowing

vicious circle

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 defecits

virtuous circle

cycle that results when surpluses increase the supply of loanable funds, reduce interest rates, stimulate investment, and result in faster economic growth; faster growth leaders to higher tax revenue and lower spending on income-support programs, and the result can be even higher budget surpluses

government net debt

the difference between the value of government financial liabilities and financial assets

labour force

the total number or workers, including both the employed and the unemployed

unemployment rate

the percentage of the labour force that is unemployed

labour-force participation rate

the percentage of the adult population that is in the labour force

discouraged searchers

individuals who would like to work but have given up looking for a job

natural rate of unemployment

the rate of unemployment to which the economy tends to return in the long run

cyclical unemployment

the deviation of unemployment from its natural rate

frictional unemployment

unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills

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

job search

the process by which workers find appropriate jobs given their tastes and skills

employment insurance (EI)

a government program that partially protects workers' incomes when they become unemployed

collective bargaining

the process by which unions and firms agree on the terms of employment

strike

the organized withdrawal of labour from a firm by a union

efficiency wages

above-equilibrium wages paid by firms in order to increase worker productivity

money

the set of assets in an economy that people regularly use to buy goods and services from other people

medium of exchange

an item that buyers give to sellers when they want to purchase goods or services

unit of account

the yardstick people use to post prices and record debts

store of value

an item that people can use to transfer purchasing power from the present to the future

liquidity

the ease with which an asset can be converted into the economy's medium of exchange

commodity money

money that takes the form of a commodity with intrinsic value

fiat money

money without intrinsic value that is used as money because of government decree

currency

the paper bills and coins in the hands of the public

demand deposits

balances in bank accounts that depositors can access on demand by writing a cheque or using a debit card

Bank of Canada

the central bank of Canada

central bank

an institution designed to regulate the quantity of money in the economy

money supply

the quantity of money available in the economy

monetary policy

the setting of the money supply by policy-makers in the central bank

reserves

deposits that banks have received but have not loaned out

fractional-reserve banking

a banking system in which banks hold only a fraction of deposits as reserves

reserve ration

the fraction of deposits that banks hold as reserves

money multiplier

the amount of money the banking system generates with each dollar of reserves

bank capital

the resources a bank's owners have put into the institution

leverage

the use of borrowed money to supplement existing funds for purposes of investment

leverage ratio

the ratio of assets to bank capital

capital requirement

a government regulation specifying a minimum amount of bank capital

bank rate

the interest rate charged by the Bank of Canada on loans to the commercial banks

overnight rate

the interest rate on very short-term loans between commercial bank

open-market operations

the purchase or sale of Government of Canada bonds by the Bank of Canada

quantitative easing

the purchase and sale by the central bank of non-government securities or government securities with long maturity terms

foreign exchange market operations

the purchase or sale of foreign money by the Bank of Canada

sterilization

the process of offsetting foreign exchange market operations with open-market operations, so that the effect on the money supply is cancelled out

reserve requirements

regulations on the minimum amount of reserves that banks must hold against deposits

quantity theory of money

a theory asserting that the quantity of money available determines the price level and the growth rate in the quantity of money available determines the inflation rate

nominal variables

variables measure in monetary units

real variables

variables measure in physical units

classical dichotomy

the theoretical separation of nominal and real variables

monetary neutrality

the proposition that changes in the money supply do not affect real variables

velocity of money

the rate at which money changes hands

quantity equation

the equation MV = PY, which relates the quantity of money, the velocity of money, and the dollar value of the economy's output of goods and services

inflation tax

the revenue the government raises by creating money

Fisher effect

the one-for-one adjustment of the nominal interest rate to the inflation rate

shoeleather costs

the resources wasted when inflation encourages people to reduce their money holdings

menu costs

the costs of changing prices

closed economy

an economy that does not interact with other economies in the world

open economy

an economy that interacts freely within other economies around the world

exports

goods and services that are produced domestically and sold abroad

imports

goods and services that are produced abroad and sold domestically

trade balance

the value of a nation's exports minus the value of its imports; also called net exports

trade surplus

an excess of exports over imports

trade deficit

an excess of imports over exports

balanced trade

a situation in which exports equal imports