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Test 1 Study Guide.docx

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University of Toronto St. George
Masoud Anjomshoa

ECO202 Term Test 1 Explanation questions GDP  Marginal propensity to consume= extra consumption due to an extra dollar of Yd =dC/dYd  Average propensity to consume=share of consumption out of total disposable income (changes unlike MPC) =C/Yd  Capital goods-goods whose services are used for long periods of times in production of other goods (eg. Airplanes used for transportation)  Intermediate goods-used up as an input and disappear during the production of other goods (eg. Raw materials)  Value-added=value of total production/ sales-value of intermediate goods  Potential output—level of output of the economy fixed in the short-run, and resources are fully employed i.e. labor  3 major indexes to measure consumer confidence: Canada: Consumer Confidence Index, US: Consumer sentiment index, consumer confidence index GDP components  Demand-side GDP= C + I + G +X- IM + change in inventories o C includes: all goods and services o I includes: machinery, buildings o G includes: consumption & investments, but not transfers o Changes in inventories: excess supply +, excess demand -  Income-approach GDP = C +T + S  GNP= GDP – net factor payments to foreigners = GDP – foreigners income in Canada + Canadian income from abroad  Net national income =Rent + capital income + labor compensation = GNP – depreciation – indirect taxes  Personal income = NNI – retained earnings – payroll taxes + social security payments –fines  Yd = PI – income tax GDP Indices  Real GDP = sum of P1Q2  GDP deflator= $Y/Y * 100%  (Inflation rate +1) * GDP deflator t-1 = GDP deflator t  CPI = sum of P2Q1 / sum of P1Q1  Real GDP growth rate= (GDPt – GDPt-1) / GDPt-1 = (square root of g1 * g2 -1) *100 Financial market  High power money (H)-the money which is put in circulation directed by the Central Bank, equal to the value of liabilities of the Central Bank.  Bank rate--the interest rate that the Bank of Canada charges commercial banks for overnight loans.  Operating band—a 0.5% range below the Bank rate  Overnight rate—the interest rate that commercial banks charge each other for overnight loans. Money!!! Open economies  Nominal exchange rate—the price of foreign currency in terms of domestic currency  Real exchange rate—the price of foreign goods in terms of domestic goods  real appreciation—when domestic goods become more expensive relative to foreign goods  nominal appreciation—when domestic currency becomes stronger relative to foreign currency Intuitive questions  Why the IS curve is downward sloping. o If interest rate i increases then investment I decreases demand for good Z decreasesand output/ income Y decreases  Why the LM curve is upward sloping. o If income/ output Y incr
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