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Study Guide

[EC140] - Final Exam Guide - Comprehensive Notes for the exam (111 pages long!)


Department
Economics
Course Code
EC140
Professor
Ken Jackson
Study Guide
Final

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WLU
EC140
FINAL EXAM
STUDY GUIDE

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Chapter 19 — Introduction to Macroeconomics
Macroeconomics: the study of how the economy behaves as a whole
National Income
-Value of total output produced
-Nominal national income: current output measured in current dollars — changes
when prices and/or quantities change
-Real national income: current output measured in constant (base-period) dollars (i.e.
using prices from a year in the past) — only changes when quantities change
-GDP = national income = output
Business Cycle
-Short-run fluctuations in GDP
-Actual output (Y): what the economy actually produces — can be measured
directly
-Potential output (Y*): real GDP that would be produced if all resources were fully
employed — an estimate
-Output gap: difference between Y
and Y*
-Y < Y* : recession gap — measures
the value of output that isn’t produced
because the economy isn’t fully
employing its resources
-Y > Y* : inflationary gap
measures the value of output
produced in excess of what the
economy can produce (i.e. workers
work longer hours or factories operate
longer)
Employment and Unemployment
-Employment: the number of people 15 years or older who are employed
-Unemployment: the number of people 15 years or older who are unemployed and
are actively searching for a job
-Labour force: number of people employed + number of people unemployed
(excluding students, retirees, anyone in prison, and anyone under 15)
Types of Unemployment
-When actual output = potential output, economists say there is “full employment”
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-But there are two types of unemployment present even when the economy is at
potential GDP:
-Frictional unemployment: normal turnover of labour (i.e. people quitting their jobs,
getting fired, being in-between jobs)
-Structural unemployment: mismatch between jobs and workers (i.e. skills might
not be demanded, people getting replaced by technology)
-When actual output does not equal potential output, the economy is not at full
employment — there is some cyclical unemployment
-Cyclical unemployment rises and falls with the business cycles (i.e. trough = high
cyclical unemployment, peak = low cyclical unemployment)
Productivity
-Measure of the amount of output that the economy produces per unit of input
-Labour productivity: the amount of real GDP produced per unit of labour employed
-If more output is to be produced, either more workers must be hired or existing
workers must become more productive (i.e. produce more)
Inflation and the Price Level
-Price level: the average level of all prices in the economy
-Inflation: a rise in the price level
-Inflation reduces the purchasing power of money — can buy less with a unit of
money
-Anticipated inflation (i.e. expected) — firms adjust prices and wages to maintain
their real values — smaller effect on the economy
-Unanticipated inflation (i.e. unexpected) — firms don’t adjust prices and wages in
time — greater effect on the economy
Consumer Price Index (CPI)
-Used to measure inflation
-Base year is given an index of 100
-CPI = current price of market basket ÷ price of market basked in base year
Example:
-1997 market basket: $5 movie + $15 pizza = $20 total
-2009 market basket: $8 movie + $17 pizza = $25 total
-25 ÷ 20 = 1.25
-Since index of base year (1997) = 100, then index of 2009 = 1.25(100) = 125
-This means that prices increased by 25%
Interest Rates
-The cost of borrowing money
-Prime interest rate: rate that banks charge to their best customers
-Bank rate: the interest rate that the Bank of Canada (central bank) charges to
commercial banks (i.e. RBC, BMO)
-Nominal interest rate: rate paid to borrow money
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