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102 Cards in this Set
- Front
- Back
What is the economic growth rate? |
annual percentage change of real GDP |
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How do we calculate Real GDP per person |
real GDP divided by the population |
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What are the 2 distinct reasons that Real GDP can increase? |
1) The economy might be returning to full employment in an expansion phase of the business cycle. 2) Potential GDP might be increasing |
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What is the rule of 70? |
States that the number of years it takes for the level of a variable to double is approximately 70 divided by the annual percentage growth rate of the variable. |
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Economic growth occurs when ____________ increases |
real GDP |
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What is potential GDP |
the quantity of real GDP produced when the quantity of labour employed is the full employment quantity. |
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What are the 2 Components to determine Potential GDP |
1) An aggregate production function 2) An aggregate labour market |
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What does the Aggregate Producton Function tell us? |
How real GDP changes as the quantity of labour changes (when all other influences on production remain the same) |
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Aggregate Labor Market: The demand for labour shows us the _____________________________. |
quantity of labour demanded and the real wae rate. |
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Aggregate Labour Market: How do we calculate the Real Wage Rate? |
money wage rate divided by the price level |
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Aggregate Labour Market: The supply of labour shows us the ____________________ |
quantity of labour supplied and the real wage rate |
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Aggregate Labour Market: When is the labour market in equilibrium? |
When it is at the real wage rate at which the quantity of labour demanded equals the quantity of labour supplied. |
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At the Labour Market Equilibrium, the economy is _________________. |
At full employment |
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What makes Potential GDP Grow? |
growth in the supply of labour growth in labour productivity |
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What are the Effects of Population Growth? |
-increase the supply of labour -with no change in the demand for labour, the equilibrium real wage rate falls and the aggregate hours increase - increase in aggregate hours increases potential GDP (LABOUR SUPPLY CURVE SHIFTS RIGHT) |
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What is Labour Productvity? |
the quantity of real GDP produced by an hour of labour |
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How do we calculate Labour Productivity? |
GDP divided by aggregate labour hours. |
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An increase in labour productivity shifts the production function ______________. |
upward |
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What are the effects of an increase in labour productivity? |
-increases demand for labour -with no change in the supply of labour, the real wage rate rises -aggregate hours increase |
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What does the growth of labour productivity depend on? |
-physical capital growth -human capital growth -technological adances |
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How does Physical Capital Growth change labour productivity? |
the accumulation of new capital increases capital per worker and increases labour productivity. |
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How does Human Capital Growth change labour productivity? |
Human capital acquired through education, on-the-job training, and learning-by-doing is the most fundamental source of labour productivity growth |
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How do Technological Advances change labour productivity? |
Technological advances has contributed immensely to increasing labour productivity. |
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What are the 3 Growth Theories? |
1) Classical Growth Theory 2) Neoclassical Growth Theory 3) New Growth Theory |
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Explain Classical Growth Theory |
It is the view that the growth of real GDP per person is temporary and that when it rises above the subsistence level, a population explosion eventually brings real GDP per person back to the subsistence level. |
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If someone says "If today's global population explodes upwards, we will run out of resources, real GDP per person will decline and we will return to a primitive standard of living", what are they? |
Malthusian |
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Explain Neoclassical Growth Theory |
It is the proposition that real GDP per person grows because technological change induces a level of saving and investment that makes capital per hour of labour grow. |
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What's the problem with the Neoclassical Growth Theory? |
All economies have access to the same technologies and capital is free to roam the globe, seeking the highest available real interest rate. |
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Explain New Growth Theory |
It holds that real GDP per person grows because of choices that people make in the pursuit of profit and that growth can persist indefinitely. |
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New Growth Theory: What are the 2 facts about Market Economies |
1)Discoveries result from choices 2) Discoveries bring profit and competition destroys profit. |
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Real GDP growth rate = [(Real GDP in _____- Real GDP in ______ year) divided by Real GDP in ______ ] times 100.
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current year, previous year, previous year) |
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China's real GDP per person was 13,165 yuan in 2013 and 14,088 yuan in 2014. India's real GDP per person was 49,516 rupees in 2013 and 51,521 rupees in 2014.By maintaining their current growth rates, _______.
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China will double its standard of living first |
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Which statement is incorrect: a) real GDP per person grows whenever real GDP grows. b) The standard of living depends on real GDP per person c) Real GDP per person equals real GDP divided by the population |
A |
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Economic growth is the _____.
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expansion of product possibilities |
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The growth rate is the _____ of a variable - the change in the level expressed as a percentage of the initial level.
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annual percent change |
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Real GDP per person is real GDP _____. |
divided by the population |
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The Rule of 70 is the number of years it takes for the level of any variable to double. It is approximately 70 _____ by the annual percentage _____.
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divided; growth rate of the variable |
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What is a financial capital? |
the funds that firms use to buy physical capital |
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What is Gross Investment? |
the total amount spent on purchases of a new capital and on replacing depreciated capital |
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What is depreciation? |
the decrease in the quantity of capital that results from wear and tear and obsolescence |
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What is Net Investment? |
the change in the quantity of capital |
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What is the equation for calculating Net Investment? |
net investment= gross investment - depreciation |
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What is Wealth |
the value of all the things people own |
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What is Saving? |
the amount of income that is not paid in taxes or spent on consumption goods and services. |
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What is the relationship between saving and wealth? |
Saving (the more we save) increases wealth. |
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What is Capital Gains |
-when the market value of assets rises -causes wealth to increase |
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What is Capital Losses? |
-when the market value of assets fall -causes wealth to decrease |
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Savings funds are supplied and demanded in three types of financial markets, what are they? |
1) Loan Markets 2) Bond Markets 3) Stock Markets |
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What is a Financial Institution? |
A firm that operates on both sides of the markets for financial capital. A borrower in one market, and a lender in another. |
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Name the Key Financial Institutions |
-Banks -Trust and Loan Companies -Credit Unions and Caisses Populaires -Pension Funds Insurance Companies |
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How is a financial institutions Net Worth calculated? |
it is the toal market value of what it has lent minus the market value of what it has borrowed. |
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If a Financial Institutions net worth is positive it is ___________, and can ________________. |
solvent ; remain in business |
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If a Financial Institutions net worth is negative it is _______________, and will__________________. |
insolvent ; go out of busines |
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What is the interest rate on a financial asset? |
the interest received expressed as a percentage of the price of the asset |
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What is the Market for Loanable Funds? |
it is the aggregate of all the individual financial markets. |
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What 3 sources do funds come from? |
1) Household Savins (S) 2) Government budget surplus (T-G) 3) Borrowing from the rest of the worls (M-X) |
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What is the nominal interest rate? |
it is the number of dollars that a borrower pays and a lender receives in interest in a year expressed as a percentage of the number of dollars borrowed and lent. |
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What is the real interest rate? |
it is the nominal interest rate adjusted to remove the effects of inflation on the buying power of money. -nominal interest rate-inflation rate |
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If the nominal interest rate is 5% a year and the inflation rate is 2% a year, the real interest rate is ____________. |
3% a year |
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What does the quantity of loanable funds depend on? |
1)the real interest rate 2) expected profit |
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The demand for loanable funds is the relationship between _____________________________________. |
the quantity of loanable funds demanded and the real interest rate when al other influences remain the same. |
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A rise in the real interest rate ______________ the quantity of loanable funds demanded |
decreases |
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A fall in the real interest rate _________________ the quantity of loanable funds demanded. |
increases |
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The greater the expected profit from a capital the greater is the ___________________________________. |
-amount of investment -demand for loanable funds. |
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What does the quantity of loanable funds supplied depend on? |
- the real interest rate - disposable income -expected future income - wealth - default risk |
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The supply of loanable funds is the relationship between ___________________________________. |
the quantity of loanable funds supplied and the real interest rate when all other influences remain the same. |
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A rise in the real interest rate ______________ the quantity of loanable funds supplied |
increases |
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A fall in the real interest rate __________________ the quantity of loanable funds supplied |
decreases |
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When is the loanable funds market in equilibrium? |
at the real interest rate at which the quantity of loanable funds demanded equals the quantity of loanable funds supplied. |
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Financial markets are highly _________ in the short run but remarkably ___________ in the long run. |
volatile; stable |
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A government budget surplus increases the __________ of funds. |
supply |
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A government budget deficit increases the___________ for funds |
demand |
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Define Money |
any commodity or token that is generally acceptable as a means of payment. |
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What is a means of payment? |
a method of settling dept |
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What are the other three functions of money? |
-medium of exchange -unit of account - store of value |
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Money: What is a medium of exchange? |
an object that is generally accepted in exchange for goods and services. -used sometime as a substitute for money -barter |
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Money: What is a unit of account |
an agreed measure for stating the prices of goods and services |
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Money: What is a store of value |
something that can be held for a period of time and later be exchanged for goods and services. |
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Define Currency |
the notes and coins held by individuals and businesses. |
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What are the 2 main official measures of money in Canada? |
M1 M2 |
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What does M1 consist of? |
currency held by individuals and businesses plus chequable deposits owned by individuals and businesses. |
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What does M2 consist of? |
all of M1 plus all other deposits -non-chequable deposits and fixed term deposits. |
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Are M1 and M2 really money? |
all the items included in M1are means of payment, so they are money. but not all items in M2 are means of payment. |
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What does the property of Liquidity mean? |
something that can be instantly converted into a means of payment with little loss of value. |
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Some savings deposits in M2 are not means of payments-they are called _______________. |
liquid assets. |
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Are deposits money? |
yes |
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Are cheques and credit cards considered money? |
no. |
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What is a depository institution? |
a firm that takes deposits from households and firms and makes loans to other households and firms. |
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What are the types of Depository Institutions? |
1) chartered banks 2) credit unions and caisse populaires 3) trust and mortgage loan companies |
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What is a chartered bank? |
a private firm, chartered under the Bank Act of 1991 to receive deposits and make loans. |
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What is a credit union? |
a cooperative organization that operates under the Cooperative Credit Association Act of 1991 and that receives deposits from and make loans to its members. |
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What is the goal of any bank? |
to maximize the wealth of its owners. |
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A chartered bank puts a depositors' funds int 4 types of assets, what are they? |
1) Reserves 2) Liquid Assets 3) Securities 4) Loans |
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Depository Institutions provide 4 benefits, what are they? |
1) create liquidity 2) pool risk 3) lower the cost of borrowing 4) lower the cost of monitoring borrowers |
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How do depository institutions decrease the risk of failure? |
they are required to hold levels of reserves and owners capitals equal to or more than the ratios laid down by regulation |
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What is financial innovation and its 2 influences? |
-the development of new financial products 1) economic environment 2) technology |
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What is the central bank of Canada |
The Bank of Canada |
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What is a Central Bank? |
the public authority that regulates a nations depository institutions and control the quantity of money. |
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what is the monetary base? |
the sum of Bank of Canada notes outside the Bank of Canada, banks' deposits at the Bank of Canada, and coins held by households, firms, and banks. |
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Whats an open market operation? |
the purchase or sale of government securities by the Bank of Canada from or to a chartered bank or the public |
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when the Bank of Canada _____ securities, they are paid for with reserves held by banks |
buys |
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when the Bank of Canada _________ securities, they are paid for with reserves held by banks. |
sells. |