Macroeconomics Chapter 4

What is Nominal National Income (Nominal GDP)?

The total value of goods produced and services in a country during a year, also called current dollar national income.

What is Real National Income (Real GDP)?

The total value of goods produced and services in a country during a year, adjusted for inflation; also called constant dollar national income.

Periods in which GDP falls are called…

Recessions.

What is the business cycle?

The continual ebb and flow of business activity over the long term.

What is national output?

The total production that the economy actually produces.

What is potential output (Y)?

The level of output the economy would produce if all resources were fully employed.

What is a trough?

The low point of the economy, characterized by unemployed resources and output below capacity.

Characteristics of an economic recovery?

Employment rises, income rises, consumer spending rises, expectations become favorable, firms become optimistic, people get re-employed.

What is the peak of an economy?

The top of the economic cycle, characterized by high capacity utilization, labor shortages, raw material shortages, and rising costs.

Peaks are eventually followed by…

Slowdowns in economic activity.

What defines a recession?

A fall in GDP for two successive quarters.

What is a depression?

A deep and long-lasting recession.

How much did aggregate output fall during the 1930s depression?

30 percent.

The falling half of the business cycle is called…

Slump. The rising half is called a boom.

What is the output gap?

The difference between potential output and actual output.

What is a recessionary gap?

When actual output is less than potential output.

What is an inflationary gap?

When actual output exceeds potential output.

What is associated with economic waste and human suffering?

Recessions due to underutilized resources.

What is employment?

The number of adults (15+) who have jobs, including self-employed.

What is unemployment?

The number of adults not employed but actively searching for a job.

What is the labour force?

Total number of people who are employed or unemployed.

How is the unemployment rate calculated?

Number of unemployed ÷ Labour force × 100%.

Two reasons why there will always be unemployment?

Normal turnover of individuals and changes in job opportunities.

What is frictional unemployment?

Unemployment due to normal turnover in the labour market.

What is structural unemployment?

Unemployment caused by a mismatch between labour supply and demand.

What is cyclical unemployment?

Unemployment due to seasonal or economic fluctuations.

One of the least durable economic commodities?

Human effort; unused labour in a year is wasted.

What is productivity?

The measure of output produced per unit of input.

What is labour productivity?

Amount of real GDP produced per unit of labour employed.

What is the price level (P)?

The average level of all prices in the economy.

What is inflation?

The rate at which the price level is rising.

What is the Consumer Price Index (CPI)?

Measures the average price of goods and services bought by a typical household.

What is the purchasing power of money?

The amount of goods and services that can be purchased with a given amount of money.

Inflation the purchasing power of money and reduces the ___ of fixed dollar amounts.

Reduces, real value.

Anticipated vs unanticipated inflation?

Anticipated allows adjustments to maintain real values; unanticipated causes real value distortions and affects the economy more.

What is an interest rate?

The price paid to borrow money over a period of time.

What is a nominal interest rate?

The nominal price paid to borrow money over time.

What is a real interest rate?

Nominal interest rate minus inflation; measures return in terms of purchasing power.

The burden of borrowing depends on the…

Real interest rate, not the nominal rate.

What do banks do in the economy?

Channel funds from those who have money to those who need it.

What is the foreign exchange market?

The market where currencies are traded at a price expressed by the exchange rate.

What does a rise in the exchange rate mean?

More Canadian dollars are needed to buy one unit of foreign currency (depreciation).

What does a fall in the exchange rate mean?

Fewer Canadian dollars are needed to buy one unit of foreign currency (appreciation).

What is the difference between nominal and real GDP?

Nominal is measured in current dollars; real is adjusted for inflation.

How does unanticipated inflation affect real wages?

Reduces real wages if inflation exceeds expected rates.

Why is the business cycle important to study?

Helps understand short-run fluctuations and economic planning.

What are the main characteristics of a boom?

High output, rising employment, strong demand, and inflationary pressures.

What is an output gap during a boom?

Inflationary gap—actual output exceeds potential output.

How is the unemployment rate affected in recessions?

It rises due to lower demand for labour.

Why are interest rates important for the economy?

They affect borrowing, investment, savings, and overall economic activity.