Economics Unit 3 Exam

Circular Flow

a model showing how money moves through society.

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Ex. money flows from producers to workers as wages and flows back to producers as payments for producers.

GDP Equation

C+I+G (X-IM)

Aggregate Demand

the sum of all goods for all goods and services in the economy at all prices for one year.

(A.D) Slopping Downwards; Wealth Effect

when prices rise people buy less stuff so they feel less wealthy.

(A.D) Slopping Downwards; Inflation Rate Effect

as price levels increase, interest rate will increase.

Ex. people spend more, thus there is less left over to loan out.

(A.D) Shift to the left

LEFT=BAD

• a reduction in demand at all price levels.

Reminder:

• any change in the GDP equation will cause a shift

(A.D) Shift to the right

RIGHT=GOOD

• an increase in demand at all price levels

Reminder:

• any change in the GDP equation will cause a shift

Aggregate Supply

is the total of all goods supplied in the economy

Short Run Aggregate Supply (SRAS)

when there is a change in quantity supplied less than 1 year

What shifts (AS)

Key resources

• oil/gas

• energy products (electricity)

• transportations

• Government intervention

  • taxes

  • laws

  • subsides

Long Run Aggregate Supply (LRAS)

represents how much an economy is capable of producing when using its resources fully. The level is also known as Quantity Full Employment (QFE)

Recession Gap

when the equilibrium of AD and SRAS is to the ==left== of LRAS the economy is in a recessionary gap.

* A recessionary gap looks like a decline in spending, employment, and production.

The Business Cycle

Growth: 7-10yrs

Peak: when economic activity reaches its highest point

Recession: (6months- 2 years)

Trough/Depression: 3 years +

Equilibrium

When AD and SRAS ==cross== at the LRAS for macroeconomics crosses at its LRAS.

* This means we are at our natural rate of output and at full employment, both good economic indicators.

Equilibrium on PPC Curve

When we are at a natural rate of output

Recessionary  Gap on the PPC Curve

We are BELOW are natural rate of output

Inflationary Gap

when AD and SRAS are on the right side of LRAS.

• we are experiencing higher inflation (beyond 3%) leading to price increases.

• very high consumer spending, and very less unemployment causing wages to rise.

Inflationary Gap on the PPC Curve

When we are ==beyond== our natural rate of output (QFE).

Fiscal Policy

the use of government taxation and spending to alter macroeconomics outcomes.

Spending (direct) affects

Government Spending (G)

Taxation (indirect) affects

Consumer Spending and Investments (C+I)

Expansionary Policy

when the economy is in a recessionary gap and we want to speed up GDP.

What happens when we use Expansionary fiscal policy?

Government Spending goes up and lower taxes.

Decrease Taxes:

• sales

• income

Increase Government Spending:

• health

• education

• Infrastructure

The prosperity Cycle

1. higher aggregate demand

2. increased production

3. greater levels of employment

4. increased income

5. increased consumption

Contractionary Fiscal Policy

when the economy is in a inflationary gap, we want to slow down GDP.

What happens when we use Contractionary Fiscal Policy?

Government Spending goes down and increases taxes.

Increase Taxes:

• sales

• income

Decrease Government Spending:

• health

• education

• Infrastructure

MPC

Marginal Propensity to Consume (express as %)

* the higher the MPC, the better for the economic growth

MPS

Marginal Propensity to Save (express as %)

Recognition Lag

hard to see the changes as GDP data is only reported monthly and quarterly.

Decision Lag

slow to create or change a fiscal policy.

Implementation Lag

slow to actually roll out the new policy, hand out the new money, ect.

Impact Lag

takes time to see if the policy you created actually worked.

The multiplier effect

an effect where a change in government spending cause a larger change in GDP.

The Bank of Canada (BOC)

Is the nation’s central bank. Its principal role is to promote the economic and financial welfare of Canada.

* The BOC provides banking services to the federal government

Easy/Loose money policy

the goal is to speed up economic growth.

• you are trying to create jobs by increasing the money supply (lower interest rates)

• shift AD right

Tight Money Policy

the goal is to slow down the economy in order to fight inflation or prevent the economy from collapsing. The BOC will reduce money supply

shift AD left

Bank Rate

rate of interest that the BOC charges charted banks and other financial institutions.

Overnight Rate

the rate at which major financial institutions borrow and lend one-day (overnight) funds to and from each other

Prime Rate

the interest rate commercial banks charge their most credit-worthy business customers

Moral Persuassion

basically asking people nice (trying to encourage and persuade them)

CPI (consumer price index)

a way to measure inflation

Role of Bank of Canada

controls the money supply:

• how much money is in the economy (useful for controlling inflation)

setting the interest rate (bank rate):

• at which it will loan funds to chartered banks and other banking institutions

currency

• issuing new bills, printing new money and destroying old money.

Money Supply

controlling how much money is in the economy

Which tool is uses to control the price of money directly?

Interest Rates