BEC4 - Macroeconomics
Terms
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- What is macroeconomics?
- It looks at the economy as a whole.
- What is the nominal GDP?
- The price of all goods and services produced by a domestic economy for a year at current market prices.
- What is the real GDP?
- The price of all goods and services produced by an economy at price level adjusted prices.
- What is the potential GDP?
- The maximum amount of production that could take place in an economy without putting pressure on the general level of prices.
- What is the net domestic product (NDP)?
- GDP minus depreciation.
- What is the gross national product (GNP)?
- The price of all goods and services produced by labour and property supplied by the nation's residents.
- What is the unemployment rate?
- The percent of the total labor force that is unemployed at a given time.
- Name the three types of unemployment.
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1. frictional unemployment
2. structural unemployment
3. cyclical unemployment - What is frictional unemployment?
- The unemployment that occurs because individuals are forced or voluntarily change jobs.
- What is structural unemployment?
- The unemployment that occurs due to changes in demand for products or services, or technological advances that cause changes in needed skills.
- What is cyclical unemployment?
- The unemployment caused by economic conditions.
- What is inflation?
- The rate of increase in the price level of goods and services, usually measured on an annual basis.
- What is deflation?
- The rate of decrease in the price level of goods and services, usually measured on an annual basis.
- Name the three measures of price index (inflation).
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1. consumer price index
2. producer price index
3. the GDP deflator - What is the consumer price index?
- Measures price changes in products bought by urban consumers.
- What is the producer price index?
- Measures price changes at the wholesale level.
- What is the GDP deflator?
- Measures price changes for net exports, investments, government expenditures and consumer spending.
- Which measure of price index (inflation)is the most comprehensive?
- The GDP deflator.
- Name the two types of interest rates.
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1. real interest rates
2. nominal interest rates - What are real interest rates?
- The interest rate in terms of goods.
- What are nominal interest rates?
- The interest rate in terms of the nation's currency.
- What is the government budget surplus (deficit)?
- The excess (deficit) of government taxes in relation to government transfer payments and purchases.
- What does an aggregate demand curve depict?
- The demand of consumers, businesses, government, and foreign purchasers.
- What does an aggregate demand curve look like?
- Much like the demand curve for an individual product.
- What does the aggregate supply schedule depict?
- The relationship between goods and services supplied and the price level.
- What is the GDP multiplier?
- It refers to the fact that an increase in spending by consumers, businesses, or the government has a multiplied effect on equilibrium GDP.
- How is the GDP multiplier calculated?
- By dividing one by the marginal propensity to save.
- What is a business cycle?
- A fluctuation in aggregate economic output that lasts for several years.
- How are business cycles depicted?
- As a series of peaks and troughs.
- What does a peak in the business cycle depict?
- The end of a period of economic expansion and the beginning of a contraction.
- What does a trough in the business cycle depict?
- The end of a recession and the beginning of an economic recovery.
- How are business cycles predicted?
- With leading economic indicators.
- What is investment?
- It includes expenditures for residential construction, inventories, and plant and equipment.
- What is the most important determinant of business investment?
- Expectations about profits.
- What is accelerator theory?
- It states that as economic activity increases, capital investment must be made to meet the level of increased demand, and this increased capital investment in turn creates additional economic demand.
- Name the two possible causes of inflation.
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1. demand-pull inflation
2. cost-push inflation - What is demand-pull inflation?
- It occurs when aggregate spending exceeds the economy's full-employment output capacity.
- What is cost-push inflation?
- It occurs from an increase in the cost of producing goods and services.
- Name the two ways in which the government regulates the economy.
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1. monetary policy
2. fiscal policy - Name three methods of monetary policy regulation.
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1. Change in the reserve requirements.
2. Engaging in open-market operations.
3. Change in the discount rate. - What are the reserve requirements?
- The amount of cash banks must hold in reserve.
- What are open-market operations?
- The purchase and sale of government securities.
- What is the discount rate?
- The rate at which a bank may borrow money from the Federal Reserve.
- Name two methods of fiscal policy regulation.
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1. Changes in the income taxes.
2. Changes in the level of government spending. - Why does international trade exist?
- Countries have advantages with regard to the production of certain goods.
- What is absolute advantage?
- When a country can produce the products at a lower cost than other countries.
- What is comparative advantage?
- When the country has no alternative uses of its resources that would involve a higher return.
- What is the balance of payments?
- An account summary of a nation's transactions with other nations.
- What is a foreign exchange rate?
- The relationship between the values of two currencies.
- Name three factors affecting exchange rates.
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1. inflation
2. interest rates
3. balance of payments - How can firms eliminate or reduce the risk of fluctuations in exchange rates when conducting business internationally?
- Hedging.
- Name three types of hedging.
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1. forward exchange market hedges
2. money market hedges
3. currency futures market hedges - Describe forward exchange market hedges.
- Purchasing and selling currency forward exchange contracts.
- Describe money market hedges.
- Borrowing and lending funds of another country.
- Describe currency futures market hedges.
- Purchasing and selling contracts to deliver foreign currency at a specified price.
- How can a firm with international operations maximize income?
- By using transfer pricing.
- What is transfer pricing?
- The price at which services or products are bought and sold across international borders between related parties.
- How can firms minimize their overall tax burden using transfer pricing?
- By minimizing net income in jurisdictions with higher tax rates.