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BEC4 - Macroeconomics


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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.
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).
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.
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.
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.
1. monetary policy
2. fiscal policy
Name three methods of monetary policy regulation.
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.
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.
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?
Name three types of hedging.
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.

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