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Econ Exam Review

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Brock University
Professor Cottrel

Econ Exam Review Chapter 19  Macroeconomics – the study of the determination of economic aggregates, such as total output, total employment, the price level and the rate of economic growth  Short-run variables – output, employment and inflation  The production of output generates income  Nominal National Income- total national income measured in current dollars. Also called current-dollar national income  Real National Income (Y) – national income measured in constant (base- period) dollars. It changes only when quantities change  Business Cycle – fluctuations of national income around its trend value that follow a more or less wavelike pattern (recession  trough  recovery  Peak)  Potential Output (Y*) – the real GDP that the economy would produce if its productivity resources were employed at their normal levels of utilization. Also called potential GDP  Output Gap – actual national income minus potential national income (Y – Y*)  Recessionary Gap – a situation in which actual output is less then potential output (Y < Y*)  Inflationary Gap – situation in which actual output exceeds potential output (Y > Y*)  Recession – a downturn in the level of economic growth. Often defined as two consecutive quarters in which real GDP falls  Employment – the number of persons 15 years of age or older who have jobs  Unemployment – the number of persons 15 years of age or older who are not employed but are actively searching for a job  Labour force – the number of persons employed plus the number of persons unemployed  Unemployment Rate –  Even when the economy is at full employment, some unemployment still exists because of natural turnover in the labour market (frictional unemployment) and mismatch between jobs and workers (structural unemployment)  Inflation – a rise in the average level of prices  CPI – an index of average prices of goods and services commonly bought by households Chapter 20   Double Counting – when estimating the nation’s output by adding all sales of firms  GDP – the total value of goods and serviced produced in the economy during a given period  Consumption Expenditure (C ) – household expenditure on all goods and serviced  Investment Expenditure (I) – expenditure on the production of goods not for present consumption  Government Purchases (G) – all government expenditures on currently produced goods and services, exclusive of government transfer payments  Transfer Payment – a payment to an individual or institution not made in exchange for a good or service  Imports – the value of domestically produced goods and services purchased from firms, households, or governments in other countries  Exports – the value of all goods and services sold to firms, households, and governments in other countries  Net Exports – the value of total exports minus the value of total imports   GDP – measures the value of total output produced in Canada  GNP – measures the total amount of income received by Canadian residents, no matter where that income was generated  GDP is superior to GNP as a measure of domestic economic activity. GNP is superior to GDP as a measure of the income of domestic residents  Disposable Personal Income – the part of national income that accrues to households and is available to spend or save  GDP Deflator – an index number derived by dividing nominal GDP by real GDP. Its change measures the average change in price of all the items in the GDP  GDP does not measure illegal activity Chapter 21  ( )  Autonomous Expenditure – elements of expenditure that do not change systematically with national income  Induced Expenditure – any component of expenditure that is systematically related to national income  Consumption Function – the relationship between desired consumption expenditure and all the variables that determine it; in the simplest case, the relationship between desired consumption expenditure and disposable income  Key factors influencing desired consumption are assumed to be: o Disposable income o Wealth o Interest rates o Expectations about the future  Increase in disposable income is assumed to lead to an increase in desired consumption  MPC – the change in desired consumption divided by the change in disposable income that brought it about  MPS – the change in desired saving divided by the change in disposable income that brought it about  Increase in household wealth shifts consumption function up; decrease in wealth shifts the consumption function down  Aggregate Expenditure Function – the function that relates desired aggregate expenditure to actual national income  With no government and no international trade, desired aggregate expenditure is:  Marginal Propensity to Spend – the change in desired aggregate expenditure on domestic output divided by the change in national income that brought it about  ( ) Chapter 27  Gresham’s Law – the theory that “bad” or debased money drives “good” or undebased, money out of circulation  Gold Standard – a currency standard whereby a country’s currency is convertible into gold at a fixed rate of exchange  Fiat Money – paper money or coinage that is neither backed by nor convertible into anything else but is decreed by the government to be accepted as legal tender  Deposit Money – money held by the public in the form of deposits with commercial banks  Central bank – a bank that acts as banker to the commercial banking system and often to the government as well. Usually a government-owned institution that controls the banking system and is the sole money-issuing authority  Commercial Bank – a privately owner, profit seeking institution that provides a variety of financial services, such as accepting deposits from customers and making loans and other investments  Banks borrow (accept deposits) from households and firms that have money that they do not currently need, and they lend (provide credit) to those households and firms that need credit to achieve their objectives  Clearing House – a institution in which interbank indebtedness arising from the transfer of Cheques between banks, is computed and offset and net amounts owing are calculated  The reserves needed to ensure that depositors can withdraw their deposits on dema
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