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ECON-1007EL Study Guide - Midterm Guide: Nominal Interest Rate, Output Gap, Gross Domestic Product

Department
Economics / Science Èconomique
Course Code
ECON-1007EL
Professor
B. Eastman
Study Guide
Midterm

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Chapter 19
Q1: What is potential or full employment output?
A1: Potential output is the highest level of real gross domestic product (output) that can be
sustained over the long term. Full employment output is a term used to describe an economy that
is operating with an ideal and efficient level of employment, where economic output is at its
highest potential. When the economy is at full employment, aggregate demand is equal to
aggregate supply.
A2&3: The study of the determination of economic aggregates, such as total output, total
employment, the price level, and the rate of economic growth.
Q4: When is a worker unemployed?
A4: The number of persons 15 years of age or older who are not employed and are actively
searching for a job.
Q5: Define two output gaps.
A5: Recessionary Gap, which is A situation in which actual output is less than potential output,
Y<Y*, and Inflationary Gap, which is A situation in which actual output exceeds potential
output, Y>Y*
Q6: Given the population of country, labour force and unemployment; what is the unemployment
rate? EX: The population of Canada is 35 million. There are 20 million people in the labour force
and 1.2 million are unemployed. What is the unemployment rate?
A6:  
 
  
 
  
Q7: What is the change in nominal income using goods?
A7: The change in nominal income can be represented by a simple subtraction between the two
values.
Q8: What does national income measure?
A8: Total national income measured in current dollars. (Current-Dollar National Income)
Q9: What’s the real rate of interest?
A9: The nominal rate of interest adjusted for the change in the purchasing power of money.
Equal to the nominal interest rate minus the rate of inflation. Say the nominal interest rate is
12%, and using the following equation we have all the variables to solve for the real rate of
interest.   
 
   
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Q10: How do you read the exchange rate?
A10: To read the exchange rate you must take the definition of the exchange rate which states,
the number of units of domestic currency required to purchase one unit of foreign currency. This
means that if I wanted to buy one euro, I must pay 1.50 Canadian dollars.
Chapter 20
Q11: Why is GDP an inaccurate measure of quality of life?
A11: GDP is an inaccurate measure of quality of life because the GDP omit many intangible
things as religious and political freedom, the quality of local community life, environmental
sustainability, the distribution of income, and our ability to prevent and treat illness and disease.
A12: Value added is the value of a firm’s output minus the value of the inputs that it purchases
from other firms
Q13: Calculations in real national income.
A13:     
Q14: Price of input and output, find value added
A14:    
Chapter 21
Q15: What happens when aggregate demand is different from desired aggregate demand?
A15: The AD curve shifts in the direction that relieves the equilibrium and returns it to the
equilibrium.
Q16: Multiplier, effect on national income on change (multiply)
A16:
  

  
 
       
Q17: Changes in extending and income change, marginal propensity consumed (MPC)
A17:
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  

Q18: MP to spend calculation
A18:
  

Q19: 45 deg line diagram (consumption function) calculate equation
A19:
 
Q20: Given MPC, what is the multiplier
A20:
  

 
  

  
Q21: 45 dg line diagram, find MPC (slope)
A21:
  

Q22: Multiplier, based on spending what happens
A22: The larger the marginal propensity to spend, the steeper the AE function and this the larger
the simple multiplier.
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