Econ 102 MT 2

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  1. What are the two categories of problems regarding unemployment?
    • Long run problem
    • Short run problem
  2. What does the economy's natural rate of unemployment refer to?
    The amount of unemployment the economy normally experiences
  3. What is cyclical unemployment?
    Year to year fluctuations in unemployment around the natural rate
  4. What data is collected for the Labour Force Survey?
    • Unemployment
    • Employment
    • Length of workweek
    • Duration of unemployment
  5. How is unemployment measured?
    • From the Labour Force Survey
    • Applicable for every adult 15 and older
    • Employed: spent some time in the previous week working at a paid job
    • Unemployed: On temporary layoff or is looking for work
    • Not in the labour force: none of the above, full time student, retiree, homemaker etc.
  6. Looking a the labour force, describe where each of the categories falls
    • Employed is highest
    • Not in labour force second highest
    • Unemployed is last
  7. What is the labour force?
    • The total numbers of workers, including the employed and the unemployed
    • LF = No. of employed + No. of unemployed
  8. How is unemployment measured?
    • Unemployment rate: the percentage of the labour force that is unemployed
    • U = No. of unemployed/LF x 100
  9. How is labour force participation rate measured?
    LFPR = LF/Adult population x 100
  10. How can statistics on unemployment can be difficult to interpret
    Lots of people move into and out of the labour force
  11. What is a discouraged searcher
    Individuals who would like to work but have given up looking for a job
  12. Natural rate of unemployment
    6 and 8 percent
  13. What are ways to explain unemployment in the long run?
    • Frictional unemployment
    • Structural unemployment
  14. What is frictional unemployment?
    Unemployment that results because it takes time for workers to search for jobs that best suit their tastes and skils
  15. What is 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
    • often occurs when wages are set above the level that brings supply and demand to equilibrium.
  16. Describe job search
    The process by which workers find appropriate jobs given their tastes and skills
  17. Why is some frictional unemployment inevitable?
    • Often the result of changes in demand for labour by firms
    • Economy is always changing
    • Mismatch between available jobs and people seeking employment
  18. Describe Employment Insurance. What might be a disadvantage?
    • A government program that partially protects workers' incomes when they become unemployed
    • May reduce hardship of unemployment by influences workers' behaviour in ways that will increase the unemployment rate
  19. What is a union
    A worker association that bargains with employers over wages and working conditions
  20. What is collective bargaining?
    The process by which unions and firms agree on the terms of employment
  21. What is a strike?
    The organized withdrawal of labour from a firm by a union
  22. Describe the economics of unions and the increase of wages?
    • When the union raises the wage above the equilibrium level, it raises the quantity of labour supplied and reduced the quantity of labour demanded, resulting in unemployment
    • Workers who remain employed are better of
    • Workers who lose jobs are worse off
  23. What is the concept of efficiency wages?
    • Above-equilibrium wages paid by firms in order to increase worker productivity
    • High wages may increase the efficiency of workers
  24. What are possible efficiency-wage theories?
    • Worker health
    • Worker tunover
    • Worker effort
    • Worker quality
  25. What is money?
    The set of assets in the economy that people regularly use to buy goods and services from other people
  26. What are the functions of money?
    • Medium of exchange
    • Unit of account
    • Store of value
    • Liquidity
  27. What is unit of account
    The yardstick people use to post price and record debts
  28. Store of value
    An item that people can use to transfer purchasing power from the present to the future
  29. What is wealth
    The total of all stores of value, including both monetary and non-monetary assets
  30. What is liquidity?
    • Describes the ease with which an asset can be converted into a medium of exchange
    • Money is the most liquid of assets
  31. What is commodity money
    Money that takes the form of a commodity with intrinsic value
  32. What is fiat money
    Money without intrinsic value that is accepted as money because of government decree
  33. What is the quantity of money circulating in the economy?
    The money stock
  34. What is currency
    These are the paper bills and coins in the hands of the public
  35. Demand deposits
    These are the balances in the bank accounts that the depositors can access on demand by writing a cheque or using a debit card
  36. What is BoC
    Bank of Canada
  37. Central bank
    An institution designed to regulate the quantity of money in the economy
  38. What are the four main functions of the BoC
    • Issue currency
    • Banker to the commercial banks
    • Banker to the Canadian government
    • Control the money supply
  39. What is money supply
    The quantity of money available in the economy
  40. What is the monetary policy
    The setting of the money supply by policy makers in the central bank
  41. What are the assumptions of 100 percent-reserve banking
    • An economy with not banks
    • Currency is the only form of money
    • Initial supply of money is 100
  42. Describe the simple case of 100 percent-reserve banking
    • Suppose someone opens a bank: first national bank
    • All deposits are held as reserves: 100 percent-reserve banking
    • Reserves: deposits that banks have received but have not loaned out
    • Using a T-account to show changes in the banks assets and liabilities
  43. What fractional-reserve banking
    A banking system in which bonks hold only a fraction of deposits as reserves
  44. What is a reserve ration
    • The fraction of deposits that banks hold as reserves
    • Fractional-reserve banking
  45. What is the money multiplier
    • The amount of money the banking system generates with each dollar it receives
    • The money multiplier is the reciprocal of the reserve ratio = 1/R
  46. Describe bank capital
    The resources the bank owners put into an institution from issuing equity
  47. What are the three different parts that are related to the financial crisis of 2007 to 2009?
    • Leverage
    • Leverage ratio
    • Capital requirement
  48. Leverage
    The use of borrowed money to supplement existing funds for purposes of investments
  49. What is leverage ratio
    The ratio of assets to bank capital
  50. Capital requirement
    A government regulation specifying a minimum amount of bank capital
  51. Wat are the three main tools for monetary control
    • Open-market operations
    • Changes in reserve requirements
    • Changes in the overnight rate
    • The BoC uses changes in the overnight rate to control the money supply
  52. What are the BoC's tools of monetary control changing the overnight rate
    • bank rate
    • overnight rate
  53. What is bank rate?
    The interest rate charged by the Bank Canada on loans to the commercial banks
  54. What is overnight rate?
    The interest rate on very short-term loans between commercial banks
  55. Describe open-market operations
    • The purchase or sale of Government of Canada bonds by the bank of Canada
    • To increase the money supploy, the BoC buys bonds from the public
    • To reduce money supply the BoC sells bonds to the public
  56. What is quantitative easing?
    The purchase and sale by the central bank of nongovernment securities or government serurities with long maturity terms
  57. What is sterilization
    The process of offsetting foreign exchange market operations with open-market operations so that can effect on the money supply is cancelled
  58. What are reserve requirements
    Regulations on the minimum amount of reserves that banks must hold against deposits
  59. What are two problems in controlling the money supply?
    • The BoC does not control the amount of money households choose to hold as deposits in banks
    • The BoC does not control the amount of money banks choose to lend
  60. What is inflation
    Increase in overall level of prices
  61. What is deflation
    Fall in overall level of prices
  62. How can the economy's overall price level can be viewed in two ways?
    • As the price of a basket of goods and servies
    • As a measure of the value of money
  63. What is another term for 'demand for money'
    Liquidity preference
  64. What is the most important variable that explains the demand for money in the economy?
    The level of prices in the economy
  65. What happens to money supply, demand and equilibrium in the long run?
    The overall level of price adjusts to the level at which demand for money equals the supply
  66. What are the effects of a monetary injection into the market?
    • Lets imagine that the economy is in equilibrium and then suddenly the BoC doubles the supply of money printing dollars bills and dropping them around the county from helicopters.
    • The demand for money would decrease because the supply would increase
    • Quantity theory of money
  67. What is the Quantity theory of money?
    A theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate
  68. How does the economy adjust from an injection of money into the market, from equilibrium to equilibrium?
    • Initial equilibrium
    • Injection of money
    • Excess supply of money at prevailing price level
    • The demand for goods and services increases
    • Upward pressure on prices
    • Demand for money increases
    • Eventually a new equilibrium is reached
  69. Which two groups can economic variables be divided into?
    • Nominal variables: Variables measured in monetary units
    • Real variables: Variables measured in physical units
  70. What is classical dichotomy?
    The theoretical separation of nominal and real variables
  71. What is monetary neutrality?
    The proposition that changes in the money supply do not affect real variables
  72. What is velocity of money?
    • The rate at which money changes hands
    • V = (P x Y)/M
    • V: Velocity of money
    • Y: Real GDP
    • P: Price level
    • M: Quantity of money
  73. What is the quantity equation?
    • The equation that relates the quantity of money, the velocity of money, and the dollar value of the economy's output of goods and services
    • M x V = P x Y
  74. What are the elements for explaining the equilibrium price level
    • 1. V is stable of time (velocity of money)
    • 2. Because V is stable, when the central ank changes the quantity of money (M) it causes proportionate changes in the nominal value of output (P x Y)
    • 3. The economy's output of goods and services (Y) is primarily determined by factor supplies and technology. In particular, because money is neutral, money does not affect output
    • 4. With output (Y) determined by factors supplies and technology, when the central banks alters the money supply (M) and induces proportional changes in the nominal value of output (P x Y), these changes are reflected in changes in the price level
    • 5. Therefore, when the central bank increases the money supply rapidly, the result i high rate of inflation
  75. What is inflation tax
    The revenue the government raises by creating money
  76. What is the fisher effect?
    • The one-for-one adjustment of the nominal interest rate to the inflation
    • Real interest rate = Nominal interest rate - Inflation rate
    • Nominal interest rate = Real interest rate + inflation rate
  77. What is the inflation fallacy
    • Inflation does not in itself reduce people's real purchasing power.
    • If nominal incomes ten to keep pace with rising prices, inflation is not a problem
    • There are costs associated with inflation
  78. What are two types of costs with inflation?
    • Shoeleather costs
    • Menu costs
  79. What are shoeleather costs
    The resources wasted when inflation encourages people to reduce their money holdings
  80. What are menu costs
    The cost of changing prices
  81. Describe confusion and inconvenience
    • Money is the rule with which we measure economic transactions
    • BoC ensures the reliability of a commonly used unit of measurement
    • When the BoC increases the money supply and creates inflation, it erodes the real value of the unit of account
  82. What might be worse than inflation
  83. What are some of the signs of deflation?
    • Some of the costs mirror those of inflation
    • Menu costs
    • Relative-price variability
    • Redistribution of wealth toward creditors and away from debtors
    • A sign of broader macroeconomic difficulties
Card Set:
Econ 102 MT 2
2015-03-11 23:53:37
Econ 102 bad class

Most boring U of A class ever
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