Macroeconomics 2HH3Chapter 1Introduction and Measurement Issues
Questions for Review
22.
what are four factors that determine the quantity of unemployment
sectoral shifts
governement intervention
the structure of the population
the level of aggragate economic activity
21.
how are government surpluses and the current accountsurplus connected
therefore, if the government budget deficit increases, the current accountbudget deficit automatically increases by the same amount, unless there issome offset due to changes in domestic prodcution or spending
total borrowing from abroad is equal to the current account deficit
for the given amounts of domestic production and spending, government deficits much be finance by borrowing from abroad
20.
what effect does an increase in the relative price of energy have onaggregate economic activity
such an adjustment typically reduces the level of aggregate production in the economy
when energy prices rise, producers must subsitute other factors of production for the higher priced energy
changes in realtive price of energy affecct the relative prices of inputs into the production process
19.
explain the difference between the nominal interest rateand the real interest rate
expected real interest rate is approximately equal to the nominal interestrate minus the expected rate of inflation
the real interest rate measures that amount of purchasing power thatwill be required to pay of the loan
the nominal interest rate expresses dollar interest payments as a percentageof the amount borrowed
18.
what is the cause of inflation in the long run
the cause of inflation is excessive growth in the money supply
17.
why might a decrease in taxes have no effect
such a policy change should not affect private decisions topurchase goods and services
holding government spending fixed, a cut in taxes todaymight be offset by a tax incrase in the future
16.
what is the principle effect of the productivityslow down
and increase in government spending consumes resources that mightotherwise be used by the private sector
15.
what are two possible causes of the productivity slowdown
time was required for the economy to adjust to new technology
total factor productivity continued to rise, but was imprecisely measured
14.
what are the 4 theories of the business cycle that wewill study
keynesian coordination failure theory
money suprise theory
Keynesian sticky wage model
13.
explain why a macroeconomic model should be built frommicroeconomic principles
to answer policy questions, we need to know whether a propsed policychange is likely to affect the behaviour of the individual decion maker
macroeconomics is the result of many microeconomic decisions
12.
how do we determine whether or not they are useful?
Models are useful if they reasonably and accurately explainthe phenomenon of interest
why can macroeconomic models be useful?
macroeconomic models help us answer questions about how theeconomy behaves
11.
What are the five elements that make up the basic structure of amacroeconomic model
the resources available
the technology available to firms for producing goods
consumers preferences over goods
the set of goods that consumers wish to consume
the consumers and firms that interact in the economy
10
Explain why or why not
exact descriptions of reality are too complicateto provide useful results
should a macroeconomic model be an exact descriptionof the world
no
9.
why should a macroeconmic model be simple
a model must be simple to capture the essential features of the worldthat are relevant to problems at hand
8.
explain why eperimentation is diffucult in macroeconomics
experimentation may cause significant irreparable hard to a largenumber of people
7.
what is the difference between the trend and the business cyclecomponent of an economic time series
the business cycle component is equal to teh actual series valuesminus the trend values
the trend in a series is a smooth curve fit to the data.
6.
In a graph of the natural logarithm of an economictime series, what does the slope of the graph represent
the slope represents the growth rate
5.
List six fundamental macroeconomic questions
Should governments act to smooth business cycles
Could the dramatic decrease and increase in economic growth thatoccured during the Great Depression and WWII be repeated
what causes business cycles
Could economic growth continue indefinitely,
or is there some limit to growth
What causes sustained economic growth?
4.
what are two striking business cycle events in Canadaduring the last 80 years
World War 2
The Great Depression of the 1930's
3.
How much richer was the average Canadian in 2004than in 1926
the average income for a canadian in 1926 was $6700 in 1997 dollarscompared with $35000 in 2004 based on 1997 dollars
In 2004 the average canadiant was more then five times richer thenshe was in 1926
2.
What do they have in common
as a result, interactions at the aggregate leve are theresult of decisions of individul households and firms
What makes macroeconomics different from microeconomics
microeconmists study the behaviour of individual households and firms
the economy as a whole is comprised of a large numberof households and firms
1.
What are the primary defining characteristics ofmacroeconomics
Macroeconomics is the study of the behaviour oflarge collections of economic agents
and the economic interactions among nations
the overall level of economic activity in individual contries
the aggregate behaviour of consumers, firms, and governments
Summary
Key Terms
twin deficits
the phenomenon by which a government deficit (surplus) is reflected in acurrent account deficit (surplus)
current account deficit
situation in which the current account surplus is negative
net factor payments
these are the payments recieved by domestic factors of productionfrom abroad, minus the payments to foriegn factors of production fromdomestic sources
net exports
exports of goods and services minus imports of goods and services
current account surplus
exports minus imports plus net factor payments to domesticresidents from abroad
real interest rate
approximately equal to the nominal interest rate minusthe expected rate of inflation
nominal interest rate
the interest rate in money terms
price level
the average level of prices
Ricardian equivalence theorem
theory asserting that a change in taxation by the governmenthas no effect
government deficit
the negative of government surplus
government saving
identical to the government surplus
government surplus
the difference between taxes and government spending
crowding-out
the process by which government spending reduces privatesector expentitures on investment and consumption
productivity slowdown
the period of low productivity growth occuring from the early1970's until the mid- 1980's
Phillips Curve
a positive relationship between the devation of aggregate outputfrom trend and the inflation rate
efficiency wage theory
Theory positing that workers are unemployed because ofan excess supply of labour brought about when firms payhigh wages to induce their workers not to shirk
search theory
theory that explains unemployment in terms of the costs ofsearching for job offers
Bank of Canada
The central bank of Canada
inflation
the rate of change in the average level of prices over time
Keynesian
describes macroeconomists who are folloers of J.M. Keynes andwho see an active role in government in smoothing businesscycles
Keynesian coordinationfailure theory
a modern incarnation of Keynesian business cycle theory positingthat business cycles are caused by self-fulfilling waves of optimismand pesimism, which may be countered with government policy
real business cycle theory
this theory, initiated by Finn Kydland and Edward Prescott,implies that business cycles are caused primaraly by shocksto technology and that the government should play a passiverole over the business cycle
money surprise theory
this theory, developed by Milton Friedman and RobertLucas, monetary factors are the primary cause of businesscycles, and the government should not be active in smoothingcycles
endogenous growth models
models that describe the economic mechanism determingthe rate of economic growth
Lucas critique
the idea that macroeconomic policy analysis can be donein a sensible way only if microeconomic behaviour is taken seriously
rational expectations revolution
macroeconomics movement that occured in the 1970'sintroducing more microeconomics into macroeconomics
competitive equilibrium
equilibrium in which firms and households areassumed to be pricetakers, and market pricesare such taht the quantity supplied equals thequantity supplied equals the quantity demandedin each market economy
equilibrium
the situation in an economy when the actions of allall the consumers and firms are consistent
optimize
the process by which economic agents (firms and consumers)do the best they can given the constrains they face
models
artificial devices that can replicate the behaviourof real systems
trend
the smooth growth path around which an economicvariable cycle
gross domestic product (GDP)
the quantity of goods and services producedwithin a country's borders during some specifiedperiod of time
business cycles
short-run ups and downs, or booms and recessions,in aggregate economic activity
long-run growth
the increase in a nation's productive capacity andaverage standard of living that occurs over a longperiod of time
economic model
a description of consumers and firms,their objectives and constraints, andhow they interact
Formulas
Figures
Figure 1.1
Per Capita Real GDP for Canada1926 - 2004
shows
sustained growth in per capitaread GDP
Understanding Recent andCurrent Macroeconomic Events
UNEMPLOYMENT
TRADE AND THE TWIN DEFICITS
ENERGY PRICES AND MACROECONOMICACTIVITY
INTEREST RATES
INFLATION
GOVERNMENT INCOME, GOVERNMENTOUTLAYS, AND THE GOVERNMENT DEFICIT
THE PRODUCTIVITY SLOWDOWN
What Do We Learn fromMacroeconomic Analysis?
Disagreement in Macroeconomics
Microeconomic Principles
Macroeconomic Models
Gross Domestic Product,Economic Growth, andBusiness Cycles
Growth Measurement
growth fluctuations
Most notible
World War II
Great depression
called business cycles
real gdp is optained by adjusting GDP for inflation and population growth
gross domestic product (GDP) is a measure of aggregate economic activity
What is Macroeconomics?
important issues in macroeconomics are
why is there unemployment
why are there fluctuations in aggregate economic activity
why are most canadadians so much better off than their parentsand grandparents
why are some countries rich and otherrs are so poor
microeconomics is concerned with the choices of economic agentssuch as households and firms
macroeconomics is concerned with the overal effects oneconomies of the choices that these economic agents make
it analyzes issues associated with long-run growth and businesscycles
business cycles are the short-run fluctuations in aggregateeconomic activity
long-run growth is the icnrease productivitecapacity and average standard of loving
is the study of the behaviour of large collections of economicsagents
