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ECON 1BB3 Study Guide - Midterm Guide: Reserve Requirement, Classical Dichotomy, Nominal Interest Rate


Department
Economics
Course Code
ECON 1BB3
Professor
Bridget O' Shaughnessy
Study Guide
Midterm

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Econ Test 2 Review
Chapter 7
Productivity: the quantity of goods and services produced from each hour of a
worker’s time
Determinants of Productivity
Physical Capital: the stock of equipment and structures that are used to produce
goods and services
Human Capital: the knowledge and skills that workers acquire through education,
training and experience
Natural Resources: the inputs into the production of goods and services that are
provided by nature, such as land, rivers, and mineral deposits
Technological Knowledge: society’s understanding of the best ways to produce
goods and services
Diminishing Returns: the property whereby the benefit from an extra unit of an
input declines as the quantity of the input increases
Catch-up Effect: the property whereby countries that start off poor tend to grow
more rapidly than countries that start off rich.
Investment from Abroad:
Foreign Direct investment: a capital investment that is owned and operated by a
foreign entity
Foreign Portfolio Investment: an investment that is financed with foreign money
but operated by domestic residents
Education- investment in human capital
Health and Nutrition: investment in human capital
Chapter 8
Financial System: the group of institutions in the economy that help to match one
person’s saving with another person’s investment
Financial Markets: financial institutions through which savers can directly provide
funds to borrowers
Bond: a certificate of indebtedness
Stock: a claim to partial ownership in a firm
Financial Intermediaries: financial institutions through which savers can
indirectly provide funds to borrowers
Mutual Funds: an institution that sells shares to the public and uses the proceeds
to buy a portfolio of stocks and bonds
GPD= consumption + investment + government purchases + net exports
Closed Economy: an economy that does not interact with other economies
Open Economy: an economy that interacts with others around the world
National Saving: the total income in the economy that remains after paying for the
consumption and government purchases- equation Y-C-G=saving, or investments=
national saving
Private saving: the income that households have left after paying for taxes and
consumption (Y-T-C)
Public saving: the tax revenue that the government has left after paying for it’s
spending (T-G)

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Budget surplus: an excess of tax revenue over government spending (T-G)
Budget deficit: a shortfall of tax revenue from government spending
Market for Loanable Funds: the market in which those who want to save supply
funds and those who want to borrow or invest demand funds
Government Debt: the sum of all past budget deficits and surpluses
Crowding Out: a decrease in investment that results from government borrowing
Government net debt: the difference between the value of government financial
liabilities and financial assets
Labour force: the total number of workers, including both the employed and the
unemployed
Unemployment rate: the percentage of the labour force that is unemployed
Labour-force participation rate: the percentage of the adult population that Is in
the labour force
Discouraged searchers: individuals who would like to work but have given up
looking for a job.
Natural rate of unemployment: the rate of unemployment to which the economy
tends to return in the long run
Cyclical unemployment: the deviation of unemployment from its natural rate
Frictional Unemployment: unemployment that results because it takes time for
workers to search for the jobs that best suit their tastes and skills
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
Job search: the process by which workers find appropriate jobs given their tastes
and skills
Employment Insurance: a government program that partially protects workers
incomes when they become unemployed
Union: a worker association that bargains with employers over wages and working
conditions
Collective Bargaining: the process by which unions and firms agree on the terms
of employment
Strike: the organized withdrawal of labour from a firm by a union
Efficiency Wages: above equilibrium wages paid by firms in order to increase
worker productivity
Worker Health: is related to the wage in theory a higher paid worker will be
healthier
Worker turnover: in theory the higher the wages the less worker turnover, also
worker effort, and worker quality.
Chapter 10
Medium of Exchange: an item that buyers give to sellers when they want to
purchase good or services
Unit of Account: the yardstick people use to post prices and record debts
Store of Value: an item that people can use to transfer purchasing power from the
present to the future.

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Liquidity: the ease with which an asset can be converted into the economy’s
medium of exchange
Commodity money: money that takes the form of a commodity with intrinsic value
(the commodity would have value even if it wasn’t used as money example gold)
Fiat Money: money without intrinsic value that is used as money because of
government decree
Currency: the paper bills and coins in the hands of the public
Demand deposits: balances in bank accounts that depositors can access on demand
by writing a cheque or using a debit card
Bank of Canada: Canada’s central bank
Central Bank: an institution designed to regulate the quantity of money in the
economy
Money Supply: the quality of money available in the economy
Monetary policy: the setting of the money supply by policymakers in the central
bank
Reserves: deposits that the banks have received but have not loaned out
Fractional reserve banking: a banking system in which banks hold only a fraction
of deposits as reserves
Reserve ratio: the fraction of deposits that banks hold as reserves
Example: deposit $100 and the bank has a 10% reserve ratio
Assets liabilities
Reserves $10.00
Deposits $100.00
Loans 90.00
Money multiplier: the amount of money the banking system generates with each
dollar of reserves
Example:
First national bank
Assets liabilities
Reserves $10.00
Deposits $100.00
Loans 90.00
Second national Bank
Assets liabilities
Reserves $9.00
Deposits $90.00
Loans 81.00
Third national bank
Assets liabilities
Reserves $8.10
Deposits $81.00
Loans 72.20
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