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ECON 203 Study Guide - Final Guide: Phillips Curve, Tl;Dr, Autarky

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ECON 203
Peter Tracey
Study Guide

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ECON 203
Chapter 9 – Unemployment
Labour Force – the total amount of workers, including both the employed and the unemployed
Labour Force = # of employed people + # of unemployed people
Unemployment Rate – The percentage of the labour force that is unemployed
Unemployment Rate = (# of employed people / labour force) * 100
Labour-force Participation Rate – the % of the adult population that is in the labour force
Labour-force Unemployment Rate = (labour force / adult population) * 100
LF = E + U LF/LF = E/LF + U/LF ~ LF/LF * 100 = E/LF * 100 + U/LF * 100
Example: 100 = Employment Rate + Unemployment Rate = 92.9% + 7.1%
Note – Is the unemployment measure correct/good/adequate? No, but its the best we have
currently as many people are entering and leaving the labour force. There are also individuals
who aren't looking for jobs/do not try hard.
Structural Unemployment – unemployment that results because the number of jobs available
in some labour markets is insufficient to provide for everyone who wants a job.
Natural Employment Rate – the rate of unemployment to which the economy tends to return
in the long run.
Collective Bargaining – the organized withdrawal of labour from a firm by a union.
Efficiency Wages – above-equilibrium wages paid by firms in order to increase worker
5 Causes of Unemployment
1. Minimum Wage Laws – Raising minimum wages increases unemployment (see graph)
Excess Supply = Ls – Ld = Unemployment
1. Le – Ld = # of people losing their jobs
2. Ls – Le = # of people who now want to work whereas before they
couldn't find work
2. Unionization and Collective Bargaining – unions usually push for higher wages for
work which can also lead to increases in unemployment (see both graphs), the difference
between original supply curve and new curve is the number of works who entered the
market after wage increases.
3. Efficiency Wages – an increase in wages, as stated before, increases unemployment.
4. Job Search
5. Structural Unemployment – those who are considered “structurally unemployed” are
people who don't have the appropriate skills for the jobs available.
Chapter 10 – The Monetary System
Bartering – requires double coincidence of wants from both parties which is very inefficient
and requires too many prices
Money – the set of assets in an economy that people regularly use to buy goods and services
from other people.
Note – precious metals can be used instead of bartering, this is more efficient and reduces
transaction costs. The issues with this approach though is money clipping, sweating and
debasing the value.
Note – an alternative approach is the use of paper money where for example, 1 note of paper
money can represent 5 gold bars.
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Fiat Money – money without intrinsic value that is used as money because of government
Currency – the paper bills and coins in the hands of the public.
Demand Deposits – balances in bank accounts that depositors can access n demand by writing
a cheque or using a debit card.
Money Supply – the quantity of money available in the economy.
Money Supply = MS = Currency + Demand Deposits
Functions of Money:
1. Medium of Exchange – an item that buyers give to sellers when they want to purchase
goods or services.
2. Unit of Account – the yardstick people use to post prices and record debts.
3. Store of Value – an item that people can use to transfer purchasing power from the present
to the future.
Central Bank – an institution designed to regulate the quantity of money in the economy, in
our case that's the Bank of Canada.
Reserves – deposits that banks have received but have not loaned out.
Reserve Ratio – the fraction of deposits that banks hold as reserves.
Money Multiplier – the amount of money the banking system generate with each dollar of
reserves. Money Multiplier = 1 / Reserve Ratio
Note – see table example from my notes what an initial new deposit in a bank goes through.
Note Initial New Deposit * (1/Reserve Ratio)
Bank of Canada Monetary Policies:
1. Expansionary
Increase in money supply
Increase in the rate of growth of the money supply
2. Contractionary
Decrease in money supply
Decrease in the rate of growth of the money supply
Expansionary Contractionary
1. Open Market Operations (OMO) 1. Open Market Operations (OMO)
= Bank of Canada buys bonds from the public = Bank of Canada sells bonds to the public
2. Lower the reserve ratio 2. Raise the reserve ratio
Multiplier = 1 / R
As R decreases, money multiplier increases
Multiplier = 1 / R
As R increases, money multiplier decreases
3. Lower the bank rate 3. Raise the bank rate
Bank Rate – the interest rate charged by the Bank of Canada on loans to the commercial banks
Note – bank rate isn't the same as the prime rate, i.e. banks get way better rates than we do.
Note – you don't need to know overnight rate.
Chapter 11 – Inflation
Inflation – the increase of the overall price levels in an economy
Note – inflation erodes your purchasing power within that economy.
NoteAs the value of money falls, the more money is needed (see both graphs from notes).
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