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What are the two categories of problems regarding unemployment?
- Long run problem
- Short run problem
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What does the economy's natural rate of unemployment refer to?
The amount of unemployment the economy normally experiences
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What is cyclical unemployment?
Year to year fluctuations in unemployment around the natural rate
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What data is collected for the Labour Force Survey?
- Unemployment
- Employment
- Length of workweek
- Duration of unemployment
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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.
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Looking a the labour force, describe where each of the categories falls
- Employed is highest
- Not in labour force second highest
- Unemployed is last
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What is the labour force?
- The total numbers of workers, including the employed and the unemployed
- LF = No. of employed + No. of unemployed
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How is unemployment measured?
- Unemployment rate: the percentage of the labour force that is unemployed
- U = No. of unemployed/LF x 100
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How is labour force participation rate measured?
LFPR = LF/Adult population x 100
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How can statistics on unemployment can be difficult to interpret
Lots of people move into and out of the labour force
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What is a discouraged searcher
Individuals who would like to work but have given up looking for a job
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Natural rate of unemployment
6 and 8 percent
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What are ways to explain unemployment in the long run?
- Frictional unemployment
- Structural unemployment
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What is frictional unemployment?
Unemployment that results because it takes time for workers to search for jobs that best suit their tastes and skils
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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.
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Describe job search
The process by which workers find appropriate jobs given their tastes and skills
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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
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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
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What is a union
A worker association that bargains with employers over wages and working conditions
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What is collective bargaining?
The process by which unions and firms agree on the terms of employment
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What is a strike?
The organized withdrawal of labour from a firm by a union
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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
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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
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What are possible efficiency-wage theories?
- Worker health
- Worker tunover
- Worker effort
- Worker quality
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What is money?
The set of assets in the economy that people regularly use to buy goods and services from other people
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What are the functions of money?
- Medium of exchange
- Unit of account
- Store of value
- Liquidity
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What is unit of account
The yardstick people use to post price and record debts
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Store of value
An item that people can use to transfer purchasing power from the present to the future
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What is wealth
The total of all stores of value, including both monetary and non-monetary assets
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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
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What is commodity money
Money that takes the form of a commodity with intrinsic value
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What is fiat money
Money without intrinsic value that is accepted as money because of government decree
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What is the quantity of money circulating in the economy?
The money stock
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What is currency
These are the paper bills and coins in the hands of the public
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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
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What is BoC
Bank of Canada
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Central bank
An institution designed to regulate the quantity of money in the economy
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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
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What is money supply
The quantity of money available in the economy
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What is the monetary policy
The setting of the money supply by policy makers in the central bank
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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
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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
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What fractional-reserve banking
A banking system in which bonks hold only a fraction of deposits as reserves
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What is a reserve ration
- The fraction of deposits that banks hold as reserves
- Fractional-reserve banking
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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
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Describe bank capital
The resources the bank owners put into an institution from issuing equity
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What are the three different parts that are related to the financial crisis of 2007 to 2009?
- Leverage
- Leverage ratio
- Capital requirement
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Leverage
The use of borrowed money to supplement existing funds for purposes of investments
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What is leverage ratio
The ratio of assets to bank capital
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Capital requirement
A government regulation specifying a minimum amount of bank capital
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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
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What are the BoC's tools of monetary control changing the overnight rate
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What is bank rate?
The interest rate charged by the Bank Canada on loans to the commercial banks
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What is overnight rate?
The interest rate on very short-term loans between commercial banks
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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
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What is quantitative easing?
The purchase and sale by the central bank of nongovernment securities or government serurities with long maturity terms
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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
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What are reserve requirements
Regulations on the minimum amount of reserves that banks must hold against deposits
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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
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What is inflation
Increase in overall level of prices
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What is deflation
Fall in overall level of prices
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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
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What is another term for 'demand for money'
Liquidity preference
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What is the most important variable that explains the demand for money in the economy?
The level of prices in the economy
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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
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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
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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
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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
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Which two groups can economic variables be divided into?
- Nominal variables: Variables measured in monetary units
- Real variables: Variables measured in physical units
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What is classical dichotomy?
The theoretical separation of nominal and real variables
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What is monetary neutrality?
The proposition that changes in the money supply do not affect real variables
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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
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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
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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
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What is inflation tax
The revenue the government raises by creating money
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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
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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
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What are two types of costs with inflation?
- Shoeleather costs
- Menu costs
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What are shoeleather costs
The resources wasted when inflation encourages people to reduce their money holdings
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What are menu costs
The cost of changing prices
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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
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What might be worse than inflation
Deflation
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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
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