Economics Unit 3 Exam

a model showing how money moves through society.

Ex. money flows from producers to workers as wages and flows back to producers as payments for producers.

C+I+G (X-IM)

the sum of all goods for all goods and services in the economy at all prices for one year.

when prices rise people buy less stuff so they feel less wealthy.

as price levels increase, interest rate will increase.

Ex. people spend more, thus there is less left over to loan out.

LEFT=BAD

• a reduction in demand at all price levels.

Reminder:

• any change in the GDP equation will cause a shift

RIGHT=GOOD

• an increase in demand at all price levels

Reminder:

• any change in the GDP equation will cause a shift

is the total of all goods supplied in the economy

when there is a change in quantity supplied less than 1 year

Key resources

• oil/gas

• energy products (electricity)

• transportations

• Government intervention

  • taxes

  • laws

  • subsides

represents how much an economy is capable of producing when using its resources fully. The level is also known as Quantity Full Employment (QFE)

when the equilibrium of AD and SRAS is to the left of LRAS the economy is in a recessionary gap.

• A recessionary gap looks like a decline in spending, employment, and production.

Growth: 7-10yrs

Peak: when economic activity reaches its highest point

Recession: (6months- 2 years)

Trough/Depression: 3 years +

When AD and SRAS cross at the LRAS for macroeconomics crosses at its LRAS.

• This means we are at our natural rate of output and at full employment, both good economic indicators.

When we are at a natural rate of output

We are BELOW are natural rate of output

when AD and SRAS are on the right side of LRAS.

• we are experiencing higher inflation (beyond 3%) leading to price increases.

• very high consumer spending, and very less unemployment causing wages to rise.

When we are beyond our natural rate of output (QFE).

the use of government taxation and spending to alter macroeconomics outcomes.

Government Spending (G)

Consumer Spending and Investments (C+I)

when the economy is in a recessionary gap and we want to speed up GDP.

Government Spending goes up and lower taxes.

Decrease Taxes:

• sales

• income

Increase Government Spending:

• health

• education

• Infrastructure

1. higher aggregate demand

2. increased production

3. greater levels of employment

4. increased income

5. increased consumption

when the economy is in a inflationary gap, we want to slow down GDP.

Government Spending goes down and increases taxes.

Increase Taxes:

• sales

• income

Decrease Government Spending:

• health

• education

• Infrastructure

Marginal Propensity to Consume (express as %)

• the higher the MPC, the better for the economic growth

Marginal Propensity to Save (express as %)

hard to see the changes as GDP data is only reported monthly and quarterly.

slow to create or change a fiscal policy.

slow to actually roll out the new policy, hand out the new money, ect.

takes time to see if the policy you created actually worked.

an effect where a change in government spending cause a larger change in GDP.

Is the nation’s central bank. Its principal role is to promote the economic and financial welfare of Canada.

• The BOC provides banking services to the federal government

the goal is to speed up economic growth.

• you are trying to create jobs by increasing the money supply (lower interest rates)

• shift AD right

the goal is to slow down the economy in order to fight inflation or prevent the economy from collapsing. The BOC will reduce money supply

shift AD left

rate of interest that the BOC charges charted banks and other financial institutions.

the rate at which major financial institutions borrow and lend one-day (overnight) funds to and from each other

the interest rate commercial banks charge their most credit-worthy business customers

basically asking people nice (trying to encourage and persuade them)

a way to measure inflation

controls the money supply:

• how much money is in the economy (useful for controlling inflation)

setting the interest rate (bank rate):

• at which it will loan funds to chartered banks and other banking institutions

currency

• issuing new bills, printing new money and destroying old money.

controlling how much money is in the economy

Interest Rates