Economic Development – Final Exam Reviewer

A comprehensive set of Q&A flashcards covering 48 core terms and concepts from the Economic Development lecture notes.

What does the capital utilization rate indicate?

The percentage at which factories and machines are operating compared with their maximum sustainable capacity.

What is the purpose of the Consumer Expenditure Survey?

To collect detailed information on the spending habits of about 7,000 U.S. households.

What does the Consumer Price Index (CPI) measure?

The average level of prices of goods and services purchased for household consumption.

What is the goal of a contractionary monetary policy and how is it achieved?

To decrease the money supply and curb inflation by raising interest rates, selling government bonds, and increasing reserve requirements.

Define economic development.

Economic growth accompanied by changes in output distribution and improvements in the standard of living, transforming emerging economies into advanced ones.

Who is classified as ‘employed’?

A person currently working for pay.

How is the Expanded Value Added Tax (EVAT) characterized?

A consumption tax and an indirect tax that can be passed on to buyers; those who consume more pay more.

What is the objective of an expansionary monetary policy?

To increase the money supply by lowering interest rates, purchasing government securities, and reducing banks’ reserve requirements.

When is contractionary fiscal policy used and why?

During economic booms to slow strong growth and keep inflation in check.

What is expansionary fiscal policy?

Government policy of spending more than tax revenue, typically during recessions to offset the contraction phase of the business cycle.

How is ‘full employment’ defined in macroeconomics?

An unemployment rate above 0% with no cyclical or deficient-demand unemployment.

What is inflation?

A sustained increase in the overall price level of goods and services over time.

What is inflation targeting?

A strategy where central banks use policy tools to keep inflation around a publicly announced target rate.

Name the three main monetary tools used for inflation targeting.

Interest-rate adjustments, reserve-requirement changes, and open-market operations.

List the four types of inflation by speed.

Hyperinflation, galloping inflation, walking inflation, creeping inflation.

Differentiate the three classifications of inflation.

Demand-pull (excess demand), cost-push (higher production costs), and built-in (wage-price spiral).

Why is the Philippine income tax considered progressive?

Higher-income earners pay a larger share of their income in taxes than lower-income earners.

Define an interest rate.

The cost of borrowing or the return on lending, expressed as a percentage of the principal.

Give two models or systems used to set base interest rates.

Examples include the cost-plus loan-pricing model, price-leadership model, and credit-scoring or risk-based pricing systems.

What are the three main types of interest rates?

Nominal interest rate, effective interest rate, and real interest rate.

What is invisible underemployment?

Working in a job that does not utilize one’s skills, e.g., a trained analyst working as a waiter.

Define the labor force.

The sum of employed and unemployed persons actively participating in the labor market.

What characterizes a liquidity trap?

Zero nominal interest rates, ongoing deflation, and expectations of further deflation, making monetary policy ineffective.

What is monetary policy?

Policy actions that influence the economy through changes in banking reserves, money supply, and credit conditions.

Define money supply.

The total stock of currency and liquid instruments—cash, coins, checking and savings balances—in an economy at a given time.

What are money aggregates M1 through M4?

M1: narrow money; M2: broad money; M3: broad money plus liquidities; M4: liquidity money.

What is the title of Republic Act No. 7653 (1993)?

The New Central Bank Act.

What is nominal output?

Total goods and services produced, measured at current prices.

State Okun’s rule of thumb.

A 1-percentage-point rise in unemployment is associated with roughly a 2% fall in output relative to potential.

Who is out of the labor force?

People not in paid work and not actively seeking employment.

Define open market operations (OMO).

Central-bank purchases or sales of government securities to regulate the money supply.

Name three transaction types in OMOs.

Repurchase agreements, outright transactions, and foreign-exchange swaps.

What is potential output?

The level of output attainable at target unemployment and capacity-utilization rates.

How is privatization used to raise revenue in the Philippines?

By selling government assets to private firms or individuals.

What is quantitative easing (QE)?

A central-bank policy of creating new money to buy financial assets and stimulate the economy.

Define real output.

Aggregate goods and services produced, adjusted for price-level changes (constant prices).

When is an economy in recession?

When real GDP declines for two consecutive quarters or more.

What is rediscounting in the Philippine context?

A BSP facility that lets banks refinance loans to meet temporary liquidity needs.

Explain the reserve requirement.

The minimum proportion of deposits that commercial banks must hold as reserves, set by the central bank.

What constitutes short-term borrowing?

Debt maturing on demand or within one year of its creation.

Define unemployment.

The condition of being without work while actively seeking employment.

Who is classified as unemployed?

A person out of work but actively looking for a job.

What is underemployment?

Working fewer hours than desired or in jobs that do not match one’s skills or income needs.

Describe visible underemployment.

Employees working fewer hours than normal for their industry or occupation.

How is the Human Capital Index (HCI) computed?

The geometric mean of the Life Expectancy Index, Education Index, and Income Index.

What does the World Bank’s Human Capital Index measure annually?

How well countries mobilize citizens’ economic and professional potential and the capital lost due to deficits in education and health.

Define human capital.

The stock of skills, knowledge, education, and abilities within a nation’s workforce.

What is the core idea of the human development concept?

Resources are unequal, but targeted training and investment can bridge gaps in well-being and opportunity.

Define human development.

The process of enlarging people’s freedoms and opportunities and improving overall well-being, beyond mere economic growth.

What is human capital formation?

Enhancing labor’s productive qualities by improving education, skills, and health of the workforce.