Econ 203 Final Exam

Front 1

The natural rate of unemployment refers to what?

Back 1

The amount of unemployment the country normally experiences

Front 2

How is unemployment measured?

Back 2

- Employed: Worked at a job for the past week

- Unemployed: Temporary layoff from work or looking for a job

- Not in the labour force: Fits neither of the above category e.g students, retiree

- Formula for labour participation rate: LF/adult population

Front 3

What are the causes of unemployment?

Back 3

- Minimum wage laws

- Unionized and collective bargaining

- Efficiency wages

- Search unemployment

- Structural unemployment: No skills for the job

Front 4

- What is money?

Back 4

- Anything that is generally accepted as a medium of exchange.

Front 5

- No money =?

- Supposed we have n goods, how do you compute the costs for (no money, with money)?

Back 5

- The barter system where you double the coincidence of wants

- n(n-1)/2

- n(n-1)

Front 6

What are the problems with money as coins?

What did Greshams law state?

Back 6

- 1. Clipping

2. Sweating

3. old money (10 0zs of gold)

new money (8 ozs of gold)

- Bad money drives out good money

Front 7

How did goldsmiths work?

Back 7

- When you store your gold, the goldsmiths gives you an I Own You paper

- The goldsmiths loans out some of your gold

Front 8

List the history of money

Back 8

- No money

- Money as coin

- Goldsmiths

- Cheques

- Fiat money

- Electronic money

Front 9

What are the functions of money?

Back 9

- Medium of exchange

- Store of value (Money, bonds, arts e.t.c.)

- Units of account

Front 10

How do you get the new deposits from the entire banking system?

Back 10

- By using the multiplier(initial price.1/r)

Front 11

What are the functions of the bank of Canada?

Back 11

- Issue currency

- Banker for commercial banks

- Banker for fed govt

- Conduct monetary policy

Front 12

What effect does expansionary/contractionary monetary policy have on money supply?

Back 12

-Expansionary: Increases growth rate of money supply

- Contractionary: Reduces growth rate of money supply

Front 13

Differentiate between expansionary/contractionary monetary policy

Back 13

Expansionary

- Buys bonds from public (open market)

- Lowers reserve ratio

- Lowers bank rate

Contractionary

- Sells bond to public (open market)

- Increases reserve ratio

- Increases bank

Front 14

When the price level increases the value of money _____. Other things being equal we would need, ______ to purchase things.

Back 14

- Decreases

- More money

Front 15

- Explain the classical dichotomy

- Explain this formula: MV = PY

Back 15

- A change in money which is a nominal variable would only affect other nominal variable and would not have an effect on the real ones.

- M = money (nominal variable)

V = velocity (real variable)

P = Price level (nominal variable)

Y = Real GDP (real variable)

Nominal GDP = PY

- A change in money would have an effect on price level

Front 16

- When CDN$ appreciates what happens to NX?

- When CDN$ depreciates whats happens to NX?

Back 16

- Appreciates Nx decreases

- Depreciates Nx increases

- NX = Exports - imports

Front 17

What is the formula for e (nominal exchange rate)/ (ppp) ?

What causes e to change?

Back 17

- e = p*/p

e = nominal exchange rate

p* = US price level

p = CDN price level

- If p* increases, e increases. CDN$ appreciates

- If p increases e decreases. CDN$ depreciates

Front 18

The natural rate of unemployment is?

Back 18

D. Amount of unemployment the economy normally experiences

Front 19

- If the reserve ratio is 20% and banks do not hold excess reserves, when the bank of Canada sells $40 million of bonds to the public, the bank reserves?

Back 19

- (C) Decreases by $40 million, and the money supply eventually decreases by $200 million

Front 20

Who does the ____ curve belong to in how rates are determined in the short run?

- Supply

- Demand

Back 20

- Demand:

- Foreigners

- Speculators

- Bank of Canada

- Supply:

- Canadians

- Speculators

- Bank of Canada

Front 21

Velocity is stable by how much did real GDP increase by between 2002 and 2003?

Back 21

- (B) 4.35%

Front 22

Why does the Aggregate demand slope downwards?

Back 22

- Pigous wealth effect: When p falls people feel wealthier, so they consume more

- Keynes real interest rate: When p falls people can reduce their holdings of money by lending some of it

- Real exchange rate effect: When p falls CDN depreciates and NX increases

Front 23

A decrease in the price level causes real wealth to?

Back 23

- (D) Rise, people tend to spend more, interest rates falls, and the $ depreciates.

Front 24

What causes LRAS to shift right?

Back 24

Remember Yn = AF(L,K,N,H)

- A (technology) rises

- L (labor) rises

- K (Physical capital) rises

- N (Natural resources) rises

- H (Human resources) rises

Front 25

What is the actual output formula?

Back 25

- Y = Yn + a *(P-Pe)

= natural level + a * price level - expected price level

Front 26

How do you calculate real exchange rate?

How do you ppp (purchasing power parity) ?

Back 26

(e.p)/p*

e = p*/p

Front 27

Why does SRAS slope upwards?

Explain the following theories causes firms to reduce their supplies:

- Misperception theory

- Sticky wage theory

- Sticky price theory

Back 27

- Misperception theory: A lower price level causes misperceptions about relative prices.

- Sticky wage theory: Wages do not adjust immediately to the price level, thus lower price levels makes the employment/ production less profitable

- Sticky price theory: An unexpected fall in the price level leaves firms with higher than desired prices which depresses sales.

Front 28

What causes SRAS to shift right?

Back 28

** Remember Y = A.F( L, K, H, N)

- A (technology) rises

- L (labor) rises

- K (physical capital) rises

- H (human capital) rises

- N (natural resources) rises

- Pe (expected price level) falls

Front 29

Which of the following shifts the short run aggregate supply curve to shift right?

Back 29

- (C): A decrease in the price of oil.

Front 30

According to the classical Dichotomy which of the following is influenced by monetary factors?

Back 30

- (B): Nominal interest rates

Front 31

Whats causes recession?

Back 31

- AD shifts left (sras shifts right to return to natural level)

- Adverse supply shock (sras shifts left, AD shifts right to return to natural level ) increase in price of oil would cause this.

Front 32

What cures recession?

Back 32

In a closed economy AD: y = C + I + G

If the bank of Canada conducts expansionary monetary policy it will cause MS (money supply to go up) to increase which in turn causes (I ^ and Y ^ ) AD to shift right

Front 33

***** Theory of liquidity preference *****

Back 33

*****

Front 34

What does fiscal policy entail?

Back 34

- Done by federal government, and changes:

- Taxes

- Transfer payments

- Govt spending

Front 35

According to chapter 15 what causes AD to shift right?

Back 35

- AD = Y = C + I + G + NX

- C ^

- I ^

- G ^

- Expectation improve

- Expansionary monetary policy and fiscal policy in a closed economy

Front 36

Explain the multiplier effect

Back 36

An increase in G due to the multiplier effect would cause Y to increase by an even greater amount

Front 37

In a closed economy which of the following would cause the AD curve to shift from AD to AD*( shift left)

Back 37

- (B): A fall in stock prices

Front 38

Explain how the flexible/ fixed exchange rates under monetary/ fiscal policy works to make IR in Canada = worlds

Back 38

Flexible exchange rates

- Expansionary monetary policy works, ad shifts

- Fiscal policy doesn't work, ad doesn't work

Fixed exchange rates

- Monetary policy doesn't work, ad doesn't shift

- Fiscal policy works, ad shifts

Front 39

(58). In a small open economy with perfect capital mobility, if the exchange rate is flexible, then an expansionary monetary policy ___

Back 39

- Leaves the Domestic int rate = to the world int rate

Front 40

Curve 1 is?

Back 40

- (C): LRPC

Front 41

- Inflation tax ___

a. Transfer wealth from govt to households

b. Is the measure in income due to indexation

c. Is the tax on everyone who holds money

d. All of the above

e. None

Back 41

- C

Front 42

According to Okun's law, what happens to y in the short/long run?

Back 42

- In the short run if Y goes up, unemployment goes down, and p level goes up, therefore inflation rate goes up.

- In the long run , Y would run to its natural level. unemployment would return to its original/natural level, and p goes up therefore inflation rate would also go up.

Front 43

- Define Okun's law

- State the rate formula

Back 43

- Okun's law: The change in cyclical unemployment

- rate = -1/2 ( change in real GDP(y) )

Front 44

What causes inflation?

Back 44

- Expansionary monetary policy

Front 45

According to the Phelps curve what happens in the long run?

Back 45

- In the long run there is no success in trying to reduce unemployment, cost = more inflation, and the value of money decreases

Front 46

***** Read Phelps diagram very important ****

Back 46

*** explain it *****

Front 47

If the closed economy starts at c, in the long run, the economy?

Back 47

- (C): Moves to e

Front 48

What is the sacrifice ratio?

Back 48

The number of % points of one years output lost in the process of reducing inflation by 1%.

Front 49

Reducing inflation by 1% costs ?

Back 49

Requires a sacrifice of between 1% to 2.5% points of unemployment

Front 50

Economics prefer to describe Canada as a ____

Back 50

- Small open economy that trades but has no effect on the worlds int rates/prices.

Front 51

What causes AD to shift

Back 51

** Remember AD: Y = C + I + G + NX

- If any of the above increases AD would shift right

- If they decrease it would shift left