Bring your copy of the textbook and a calculator to all classes. Bring calculator, pencil, eraser, and your student ID card to all exams. The "Problems" files below are password protected. Password is announced in class.
Draw and explain a simple circular flow diagram
Define Income, Expenditure, and explain why they must be equal
Explain the various parts of the definition of GDP
Identify the expenditure components of GDP
Identify the income components of GDP
Define and calculate nominal and real GDP
Define and calculate GDP Deflator
Calculate Real GDP when Nominal GDP and GDP Deflator are given
Identify approximatelly Canada’s real GDP and its expenditure and income components
Rank approximatelly a few countries based on their real GDP per capita (US, Canada, Mexico, China, India, Japan, Russia, Brazil)
Discuss the advantages and disadvantages of using GDP as a measure of the well-being of a nation
Calculate rates of economic growth
Define and calculate CPI
Rank the main expenditure items in Canadian CPI basket (Figure 6.1)
Discuss shortcomings of CPI
Compare CPI with GDP Deflator
Define and calculate inflation rate
Compare prices over time
Distinguish between nominal and real interest rates
Define and calculate the rate of economic growth
Indicate approximately the rate of growth in Canada
Identify and describe the four major determinants of productivity
Explain how physical capital per worker, human capital per worker, natural resources per worker, and technological knowlege influence productivity
Discuss the importance of saving/investment on growth and the tradeoff between saving and consumption
Define diminishing returns to capital and relate it to the catch-up effect
Explain investment from abroad as a factor of economic growth. Distinguish between foreign direct investment and portfolio investment
Discuss the following aspects of social life with impact on productivity and show how they influence productivity: education, health and nutrition, property rights and political stability, free trade, and research and devevlopment
Analyze the costs and benefits of the continuous increase in population from the economic growth perspective
Highlight the importance of the financial system in a market economy
List the determinants of the yield on a bond
Describe how a stock market works
Distinguish between Saving and Investment
Derive the S-I identity in a closed economy
Distinguish public vs. private saving
Describe the supply and demand model of a financial market
Use a supply and demand for loanable funds model to analyze the policies such as tax incentives for saving, investment tax credit, and budget deficit
Define natural rate of unemployment and cyclical unemployment
Define an unemployed person; define a discouraged searcher
Define and calculate unemployment rate, labour force participation rate, and employment rate
Discuss the shortcomings of the unemployment rate as a measure of unemployment
Critically assess the concept of average spell of unemployment
Identify the four possible explanations for unemployment in the long run: job search, minimum wage laws, unionism, and efficiency wages
Distinguish between frictional and structural unemployment
Explain why some frictional unemployment is inevitable
Identify pros and cons of the Employment Insurance program
Analyze the effect of a minimum wage provision on unemployment
Discuss the positive and negative effects of unions in the labour market
List the three functions of money and explain their meanings
Contrast commodity money with fiat money
Explain the concept of double concidence of wants in trade and show how money can make trade easier
Explain why most people in a country accept money in exchange for what they sell
What do M1 and M2 attempt to measure? List the items in M1 and those in M2
When was the Bank of Canada Act enacted by Parliament?
Who owns Bank of Canada?
To what extent is the Bank of Canada independent from government interference?
List the “Big 5” commercial banks in Canada
List the four functions of the Bank of Canada
Define money supply and monetary policy
Explain the money creation process under the fractional-reserve system
Define the reserve ratio and the money multiplier
Calculate money supply when the reserve ratio is known
List the tools of monetary policy
Explain the meaning of the following concepts: open-market operations, foreign exchange market operations, sterilization, and the overnight rate
Show how a central bank can use each of those tools to control money supply
Explain why controlling money supply is difficult
Define and calculate inflation/deflation rate
Identify the two measures of money discussed in Chapter 10
Define and calculate the rate of money growth
Construct a Supply and Demand for Money model to explain equilibrium price level
Distinguish between nominal and real economic variables
Explain David Hume’s classical dichotomy theory
State the long run monetary neutrality theory
Based on the “money=unit of measure” analogy, explain in plain language why the monetary neutrality theory makes sense (see page 246)
Write and explain the quantity equation and define velocity of money
Based on the assumption that velocity of money is constant and money is neutral (does not affect output), show how the quantity equation implies that inflation is only the result of an increase in money supply
Explain the meaning of the following assertion: “the inflation tax is like a tax on everyone who holds money”
Describe the Fisher effect
Discuss the following statement: “Inflation robs each person of the purchasing power of their hard-earned dollars.”
Discuss the costs of inflation: shoeleather costs, menu costs, relative price variability and the misallocation of resources, inflation-induced tax distortions, confusion and inconvenience, and arbitray redistribution of wealth.
What Bank of Canada does to maintain a normal rate of inflation? (see pages 259-260)
Define net exports and trade balance
Identify factors that might influence a country’s exports, imports, and net exports
Briefly describe the evolution of Canada’s trade balance over the past few decades
Define net capital outflow
Identify the relationship between NCO and NX and explain why that relationship must hold
Based on the GDP-expenditure identity, derive the Saving-Investment-NCO relationship
Define nominal and real exchange rate
Define purchasing power parity (PPP)
Explain the logic behind PPP
Show that, if PPP holds, then e=P*/P
Explain why PPP may not always hold
Discuss the “hamburger standard” and show how one can predict the nominal exchange rate based on the hamburger standard
Define interest rate parity and identify the conditions under which it may hold
This chapter develops a model to analyze net exports, net capital outflow, and the real and nominal exchange rate in a small open economy with perfect capital mobility. The model discussed in your textbook involves two markets, each described by a graph: 1) the market for loanable funds (a Saving-Investment diagram), and 2) the market for currency exchange, described by a demand and supply of Canadian dollars diagram. The Saving-Investment diagram determines the real interest rate, while the demand-and-supply-of-Canadian-dollars diagram determines the real exchange rate.
Describe the Saving-Investment relationship for an open economy
Draw a Saving-Investment diagram and identify Net Capital Outflow
Under which circumstances NCO is negative?
Draw a diagram to describe the market for foreign currency exchange. Make sure you correctly identify the variables on the horizontal and vertical axes
Explain why the demand for dollars in the Currency Exchange diagram is downward sloping
Using the two-market model constructed above, analyze the effect of an increase in the world interest rate on Canadian net exports and exchange rate
Analyze the consequences of various events, such as changes in government deficit, an import quota, and political instability
This is the first chapter addressing the economy in the short run. The difference between the long run and short run theories is that the former assume classical dichotomy and money neutrality, while the latter recognizes that money may influence real variables in the short run. Thus, our short run theory of economic fluctuations identifies relationships between the price level -- a nominal variable -- and output, a real variable. These relationships are described by the aggregate demand curve and the short run aggregate supply curve. Both curves are derived under the assumption that, except for the price level and output, everything else, in particular money supply, is constant. Changes in other parameters that may affect aggregate demand or supply make one of the two curves shift.
Identify the three key facts about economic fluctuations: i) economic fluctuations are unpredictable, ii) most macroeconomic variables fluctuate together, and iii) when output falls unemployment rises
Identify the major periods of economic recession in Canadian history
Identify the three possible reasons for which aggregate demand is downward sloping and explain their mechanisms
Explain why the long run aggregate supply is vertical
Explain why the short run aggregate supply curve slopes upward
What is the common feature of the theories explaining short run aggregate supply?
Draw an aggregate demand -- aggregate supply diagram and identify the stable, long run equilibrium
Use the aggregate demand-- aggregate supply diagram to analyze various economic events such as changes in consumption patterns, changes in investment behaviour, changes in government purchases, changes in net exports, changes in labour, in capital, in natural resources, and technology
Explain the effect of monetary policies on aggregate demand
This chapter continues building a model of an economy in the short run. We saw how the aggregate demand and supply model can be used, now we focus on how monetary and fiscal policies shift the aggregate demand curve. The theory emphasizing shifts in the aggregate demand is sometimes known as “demand–side,” or Keynesian economics. To study shifts in the demand curve, we try to determine how output (Y) changes when some policy – fiscal or monetary–changes, while the price level is considered unknown, but fixed. In this chapter, the key variable that is primarily affected by policies is the interest rate, which ajusts to balance the supply and demand for money in a money market. (Recall that in the long run the interest rate was determined in the market for loanable funds.) Our conclusion will depend on whether the economy is open or closed, and whether in the open economy the real exchange rate is fixed or variable.
You should be able to...
Review the methods the Bank of Canada uses to change money supply
Draw a money supply curve in an (interest rate – quantity of money) space
Explain why the demand for money curve is downward sloping
Show how the money demand shifts when either the price level or the level of GDP changes
Based on a shift in the money demand curve, show how the aggregate demand curve can be constructed
First, about monetary policy...
Explain how a change in money supply shifts the aggregate demand curve (see Figure 15.6)
Analyze the effects of a monetary expansion in an open economy
Now, we focus on fiscal policy...
Define the multiplier effect
Calculate the multiplier when MPC and MPI are known
Calculate the change in aggregate demand due to a given increase in expenditure using the multiplier
Discuss the crowding out effect on investment and on net exports in an open economy
Analyze a fiscal expansion in an open economy with flexible exchange rate (Fig. 15.10)
Analyze a fiscal expansion in an open economy with fixed exchange rate
Summarize in one sentence the effect on output of a fiscal expansion in an open economy with fixed or flexible exchange rate
Discuss why monetary and fiscal policies need to be coordinated
Argue in favor/against active stabilization policy
Define the Phillips curve
Name a few of the most prominent economists who contributed to the theory of the Phillips curve and describe their contributions
Explain how the short run Phillips curve can be derived from an aggregate demand and aggregate supply model (Figure 16.2)
How did the Nobel Prize winners Milton Friedman and Edmund Phelps challenge the inflation-unemployment tradeoff theory? Why was Friedman-Phelps’ new theory a daring undertaking? What was the basis for their theory?
Show how the long-run Phillips curve is related to the model of aggregate demand and aggregate supply (Fig. 16.4)
How does the Friedman-Phelps theory reconcile with the negative relationship between inflation and unemployment observed by Phillips and Lipsey?
Write an equation for the short run Phillips curve and show it in a graph together with the corresponding long run Phillips curve
Show in a graph how expected inflation shifts the short run Phillips curve
Use a diagram to show how an adverse supply shock can induce both high inflation and high unemployment
Define the sacrifice ratio; what is the estimated cost of reducing inflation for Canada?
In a inflation-unemployment diagram, analyze the short run and long run effects of a disinflationary monetary policy (Fig. 16.10)
What does Okun’s Law predict?
Name a few prominent economists who contributed to the theory of rational expectations
Explain how, according to the theory of rational expectations, disinflation would be possible at no or very low cost; was this theory proved true in practice?
Discuss to what extent the zero-inflation target experience of the 1990s disproves the rational expectations theory of disinflation.