EC250: Key Terms to Study
Chapter 12: Too-big-to-fail Policy
A policy in which the government does not allow large financial firms to fail for fear of damaging the financial system
Chapter 7: Increasing Returns to Scale
A property of a production function such that if all input increase by the same percentage, z, real GDP increases by a greater percentage
Chapter 7: Diminishing Returns to Scale
A property of a production function such that if all input increase by the same percentage, z, real GDP increases by a smaller percentage
Chapter 7: Constant Returns to Scale
A property of a production function such that if all input increase by the same percentage, z, real GDP increases by the same percentage
Chapter 5: Balance of Payments
A record of a country's trade with other countries in goods, services, and assets
Chapter 9: Multiplier effect
A series of induced increases (or decreases) in consumption spending that result from an initial increase (or decrease) in autonomous expenditure; this effect amplifies the effect of economic shocks on real GDP
Chapter 7: Research and Development
A set of activities intended to identify new ideas that have the potential to result in new goods and services
Chapter 1: Macroeconomic Model
A simplified, conceptual description of the economy that provides a logical and consistent framework for understanding how the economy works.
Chapter 3: Bank Run
A situation in which depositors who have lost confidence in a bank simultaneously withdraw their money
Chapter 3: Bank Panic
A situation in which many banks simultaneously experience rapid deposit withdrawals
Chapter 3: Adverse Selection
A situation in which one party to a transaction takes advantage of knowing more than the other party, before the transaction
Chapter 3: Asymmetric Information
A situation in which one party to an economic transaction has better information than does the other party
Balanced Growth
A situation in which the capital-labour ratio and real GDP per worker grow at the same constant rate
Chapter 1: Moral Hazard
A situation when, after entering into a transaction, one party takes actions that make the other party to the transaction worse off
Chapter 3: Moral Hazard
A situation when, after entering into a transaction, one party takes actions that make the other party to the transaction worse off
Chapter 9: Okun's law
A statistical relationship between the cyclical unemployment rate and the output gap
Chapter 10: Negative Demand Shocks
A sudden event that decreases demand for goods or services temporarily. A negative demand shock decreases aggregate demand (AD)
Chapter 10: Positive Demand Shocks
A sudden event that increases demand for goods or services temporarily increasing aggregate demand (AD)
Chapter 5: Fixed Exchange Rate Regimes
A system in which exchange rates are set at levels determined and maintained by government or central bank
Chapter 5: Fixed Exchange Rate System
A system in which private buyers and sellers in the foreign exchange market determine the value of currencies most of the time, with occasional central bank intervention
Chapter 5: Managed Exchange Rate Regimes
A system in which private buyers and sellers in the foreign exchange market determine the value of currencies most of the time, with occasional central bank intervention
Chapter 5: Managed Floating Exchange Rate System
A system in which private buyers and sellers in the foreign exchange market determine the value of currencies most of the time, with occasional central bank intervention
Chapter 5: Floating Exchange Rate Regimes
A system in which the foreign exchange value of currency is determined in the foreign exchange market
Chapter 4: Quantity Theory of Money
A theory about the connection between money and prices that assumes that the velocity of money is constant
Endogenous Growth Theory
A theory of economic growth that tries to explain the growth rate of technological change
Chapter 1: Positive Analysis
Analysis concerned with what is
Chapter 1: Normative Analysis
Analysis concerned with what ought to be
Chapter 4: Legal Tender
Any kind of money that a creditor must by law accept in payment for debts Coins or banknotes that must be accepted if offered in payment of a debt. Money that by law must be accepted for payment of public and private debts
Chapter 15: Net Federal Debt
The dollar value of gross federal debt minus government financial assets
Chapter 4: Liquidity of an asset
The ease of using the asset as payment in a transaction
Chapter 5: Forward Exchange Rate
The exchange rate used to exchange currencies in the future
Chapter 7: Marginal Product of Capital (MPK)
The extra output a firm receives from adding one more unit of capital, holding all other inputs and efficiency constant
Chapter 7: Marginal Product of Labour (MPL)
The extra output a firm receives from adding one more unit of labour, holding all other inputs and efficiency constant
Chapter 6: Marginal Product of Labour
The extra output a firm receives from adding one more unit of labour, holding everything else constant
Chapter 14: Rational Expectations
Hypothesis that people make forecasts of future values of a variable using all the available information and do not make systematic errors
Romer's Two Sector Growth Model
Model where capital has diminishing returns; economy has two sectors: 1) manufacturing firms 2) idea production firms (E)
Chapter 12: Unconventional Monetary Policy
Monetary policy tools coined after 2008
Chapter 4: Fiat Money
Money such as paper currency, that has no value apart from its use as money
Chapter 11: Net Capital Outflows
Net flow of funds being invested abroad by a country during a certain period of time.
Chapter 3: Financial System
Network of banks, stock and bond markets and other financial markets and institutions that make it possible for funds to flow from lenders to borrowers
Chapter 9: Potential GDP
The level of real GDP attained when firms are producing at capacity and labour is fully employed
Chapter 4: Inflation Tax
The loss of purchasing power of money due to inflation
Chapter 9: Expansions
The period of a business cycle during which real GDP and employment are increasing
Chapter 12: Impact Lag
The period of time between a policy change that the intended effect of threat policy change takes place
Chapter 12: Recognition Lag
The period of time between when a shock occurs and when policymakers recognize that the shock has affected the economy
Chapter 12: Implementation Lag
The period of time between when policy makers recognize that a shock has occurred and when they adjust policy to the shock
Chapter 9: (New) Classical Economics
The perspective that business cycles can be explained using equilibrium analysis
Chapter 9: Keynesian Economics
The perspective that business cycles represent disequilibrium or non-market clearing behaviour
Chapter 5: Nominal Exchange Rates
The price of one country's currency in terms of another country's currency
Chapter 7: Outputs
the goods, services, and ideas that result from the conversion of inputs
Chapter 3: Liquidity
Ease with which an asset can be exchanged for cash
Chapter 2: Employment Rates
The percentage of the labour force that is employed
Chapter 2: Unemployment Rates
The percentage of the labour force that is unemployed
Chapter 9: Output Gap Equation
((actual aggregate output - potential output)/potential output) X 100
Chapter 4: Functions of Money
1. medium of exchange 2. unit of account 3. store of value
Chapter 14: The Great Moderation
26 year-run of macroeconomic stability in Canada and the United States from 1983-2008 of long expansions with few recessions and low inflation
Chapter 14: The Phillips curve
= Aggregate Supply Curve (inflation and output gap)
Chapter 12: Systemically Important Financial Institution
A bank investment bank, insurance company, or another financial institution whose failure may lead to a financial crisis
Chapter 4: M2+
A broad measure of the money supply. M2+ = M1+ + non chequable term deposits + personal term deposits at chartered banks and other financial institutions
Chapter 12: Quantitative Easing
A central bank policy that attempts to stimulate the economy by buying long-term securities
Chapter 14: Monetary Rule
A commitment by the central bank to follow specific and publicly announced guidelines for monetary policy
Stability
A condition in which national output is growing steadily, with low inflation and full employment of resources.
Chapter 10: MP Curve (Money Policy Curve)
A curve in the IS-MP model that represents the Bank of Canada monetary policy
Chapter 10: IS Curve (Investment Saving Curve)
A curve in the IS-MP model that shows all combinations of the real interest rate and output such that the goods market is in equilibrium
Chapter 10: MD Curve (Money Demand Curve)
A curve showing the relationship between the quantity of money demanded and the interest rate; the money demand curve is downward sloping
Chapter 10: Phillips Curve
A curve that represents the short-run relationship between the output gap for the unemployment rate and the inflation rate
Chapter 3: The Yield Curve
A curve that shows interest rate on bonds of different maturities that are otherwise similar
Chapter 10: LM Curve (Liquidity Money Curve)
A curve that shows the combinations of the real interest rate and output that result in equilibrium in the money market. Shows all combinations of real interest rate and output for which demand for money (demand for liquidity L) = (supply of money M)
Chapter 1: Long Run Aggregate Supply
A curve that shows the relationship between the aggregate price level and the quantity of real GDP that firms produce in the long run when prices and wages are flexible
Chapter 9: Long-run aggregate supply (LRAS) curve
A curve that shows the relationship between the aggregate price level and the quantity of real GDP that firms produce in the long run when prices and wages are flexible
Chapter 1: Short Run Aggregate Supply
A curve that shows the relationship between the aggregate price level and the quantity of real GDP that firms would like to produce when the aggregate price level and wages are constant
Chapter 9: Short-run aggregate supply (SRAS) curve
A curve that shows the relationship between the aggregate price level and the quantity of real GDP that firms would like to produce when the aggregate price level and wages are constant
Chapter 9: Aggregate demand curves
A curve that shows the relationship between the aggregate price level and the total amount of expenditure on domestically produced goods and services
Chapter 14: AS curve
A curve that shows the total quantity of output or real GDP, that firms are willing and able to supply at a given inflation rate
Chapter 5: Currency Devaluation
A decrease in the market value of one country's currency relative to another country's currency when the exchange rate is fixed
Chapter 5: Currency Depreciation
A decrease in the market value of one country's currency relative to another country's currency when the exchange rate is flexible
Chapter 3: Financial Assets
A financial claim on someone to pay you money
Chapter 3: Bonds
A financial security issued by a corporation or government that represents a promise or make payments to the holder of the bond in the future
Chapter 3: Stocks
A financial security that represents a legal claim to a share in the profits and assets of a firm
Chapter 3: Financial Intermediaries
A firm, such as commercial bank, that borrows funds from savers and lends them to borrowers
Chapter 3: Coupon
A form of interest received as a constant dollar amount paid each year after the purchase of a bond
Chapter 11: Expected Inflation
A future rate of inflation that consumers and firms build into current decision making
Chapter 4: Commodity Money
A good used as money that has value independent of its use as money
Chapter 6: Employment Insurance
A government program that allows workers to receive benefits for a period of time when they are unemployed
Chapter 6: Efficiency Wages
A higher-than-market wage that a firm pays to motivate workers to be more productive and to increase profits
Chapter 6: Minimum Wage Laws
A legal minimum hourly wage rate that employers are required to pay employees
Steady-state Equilibrium
A long-run equilibrium in the Solow growth model
Steady-state Growth Rates
A long-run equilibrium in the growth rate in the Solow growth model
Chapter 10: IS-MP Model (Investment Saving and Money Policy Model)
A macroeconomic model consisting of an IS curve, which represents equilibrium in the goods market; an MP curve, which represents monetary policy, and Phillips curve, which presents the short-run relationship between the output gap and the inflation rate
Chapter 7: Perfect Competition
A market structure in which a large number of firms all produce the same product
Chapter 2: Core Inflation
A measure of consumer price inflation used by the Bank of Canada which excludes the most volatile CPI components
Chapter 3: Leverage
A measure of how much debt an investor takes on making an investment Total assets/ capital (net worth) Net worth = Reserves
Chapter 1: Leverage
A measure of how much debt an investor takes on when making an investment
Chapter 1: Short Run Economic Growth
A model that explains how the long-run growth rate of the economy depends on saving, population growth and technological change
Solow Growth Model
A model that explains how the long-run growth rate of the economy depends on saving, population growth, and technological change
Chapter 14: Taylor Rule
A monetary policy guidelines developed by economist John Taylor for determining the target for the short-term nominal policy rate
Chapter 1: Adjustable Rates Mortgages
A mortgage in which the initial interest rate (called the teaser rate) is low. Few years later, the rate is increased upward to a higher level
Chapter 4: M1+
A narrow measure of the money supply. M1+= Currency outside banks + Chequable Deposits at chartered banks and other financial institutions
Chapter 4: Money Multiplier
A number that indicates how much the money supply increases when the monetary base increases by $1
Chapter 1: Short Run Period
A period of a few years
Chapter 1: Long Run Period
A period of decades or more
Chapter 3: Financial Markets
A place or channel for buying or selling stocks, bonds or other financial securities
Efficiency of Labor
A variable in the Solow growth model that measures the health, education, skills, and knowledge of the labor force.
Chapter 1: Endogenous Variable
A variable that is explained by an economic model
Chapter 1: Exogenous Variable
A variable that is taken as a given and is not explained by an economic model
Chapter 4: Hyperinflation
A very rapid rise in the price level; an extremely high rate of inflation.
Chapter 2: Factor Payments
A wage, interest, rent and profit payment for the services of scarce resources, or the factors of production (labor, capital, land, and entrepreneurship), in return for productive services *Income of foreign factors in Canada - income of Canadian factors abroad
Chapter 4: Unit of Account
A way of measuring value in an economy in terms of money; a function of money
Chapter 7: Cobb-Douglas Production Function
A widely used macroeconomic production function that takes the form Y= AK^aL^(1-a)
Chapter 5: Currency Appreciation
An increase in the market value of one country's currency relative to another country's currency when the exchange rate is flexible
Chapter 5: Multilateral Exchange Rate
An index in which the value of the currency is measured against the average of the country's main trading partners
Chapter 7: Total Factor Productivity (TFP)
An index of of the overall level of efficiency of transforming capital and labour into real GDP
Chapter 2: Total Factor Productivity
An index of the overall level of efficiency
Chapter 14: Discretionary Policy
Policy conducted in whatever way is believed at the moment is the best way to achieve goals
Chapter 5: Currency Revaluation
An increase in the market value of one country's currency relative to another country's currency when the exchange rate is fixed
Chapter 6: Job-finding Rate
The percentage of unemployed workers who find a job in a given period
Spillover Benefits
Additional benefits to society not captured by the market demand curve from the production of a good, result in a price that is too high and a market quantity that is too low. Resources are under allocated to the production of this good
Chapter 14: Inflation Targeting
Adopting inflation targets within a specified range
Chapter 3: Risk Sharing
Allowing savers to spread their money among many financial investments
Chapter 1: Business Cycle
Alternating periods of economic expansion and economic recession Not uniform: each period of expansion or recession is not the same length
Chapter 5: Exchange Rate System
An arrangement among countries about ow exchange rates should be determined
Chapter 2: Consumer Price Index (CPI)
An average of the prices of the goods and services purchases
Chapter 9: Countercyclical variables
An economic variable that moves in the opposite direction to real GDP; decreasing during expansions and increasing during recessions
Chapter 9: Procyclical variables
An economic variable that moves in the same direction as real GDP; increasing during expansions and decreasing during recessions
Chapter 5: Closed Economy
An economy in which households, firms and governments do not borrow, lend or trade internationally
Chapter 5: Open Economy
An economy in which households, firms, and governments borrow, lend and trade internationally
Chapter 7: Aggregate Production Function
An equation that shows the relationship between the inputs employed by firms and the maximum output firms can produce with those inputs
Chapter 9: Macroeconomic shocks
An exogenous, positive or negative event that has a significant effect on an important sector of the economy or on the economy as a whole
Chapter 4: Quantity Equation
An identity that states that the money supply multiplied by the velocity of money equals the price level multiplied by real GDP The equation M x V = P x Y, which relates the quantity of money, the velocity of money, and the dollar value of the economy's output of goods and services
Population Growth
An increase in population over a period of time.
Chapter 9: Recessions
The period of a business cycle during which real GDP and employment are decreasing
Chapter 12: Repo Transactions
Bank of Canada buys government bonds and the seller agrees to repurchase the bonds the next day (or at some predetermined date)
Chapter 12: Reverse Repo Transactions
Bank of Canada sells bonds and agrees to repurchase them from the buyer the next day
Chapter 4: Monetary aggregates
Broad measures combining , on the basis of liquidity, assets that can be used in exchange
Chapter 13: Indirect Taxation
Collected for the government by an intermediary; usually the seller (indirect tax is a consumption tax, imposed at the time of purchase) Wedge between the price paid by the buyer and kept by the seller Ex: Sales taxes, value-added taxes and excise taxes
Chapter 11: Natural Rate of Unemployment
Combination of frictional and structural unemployment that persists in an efficient, expanding economy when labor and resource markets are in equilibrium
Chapter 14: Money Growth Rule
Central bank follow a policy rule such that nominal money supply would grow at a constant rate, regardless of economic conditions
Chapter 14: Fixed Exchange Rule
Central bank maintains a specific value for the exchange rate of the domestic currency in terms of another country's currency or a basket of currencies from various countries
Chapter 12: Bank of Canada
Central banking system of Canada focusing on the goal of price stability
Chapter 12: US Fed Reserve
Central banking system of the US
Chapter 6: Technological change
Change in the capabilities of technology improving productivity
Chapter 1: Fiscal Policy
Changes in government taxes and purchases that are intended to achieve macroeconomic policy objectives
Chapter 14: Permanent Shifts in AD
Changes in the inflation target (changes to the reaction function permanently shift the AD curve)
Chapter 14: Temporary Shifts in AD
Changes to the IS curve (things that may increase expenditure)
Chapter 11: Stagflation
Condition of slow economic growth and relatively high unemployment, or economic stagnation, accompanied by rising prices or inflation Also be defined as inflation and a decline in gross domestic product (GDP)
Chapter 15: Government Budget Constraint
Constraint in a household's budget imposed by the fact that the total amount that household spends cannot exceed income plus the amount it can borrow
Chapter 9: Autonomous expenditure multiplier
The change in equilibrium GDP divided by the change in autonomous expenditure
Chapter 3: Securitization
Creating secondary markets for already existing financial securities which previously could not be bought and sold and so were not considered financial securities Bundles bank loans into securities that are then resold to investors ex: mortgages
Chapter 10: MS Curve (Money Supply Curve)
Curve showing the quantity of assets available to households and firms to conduct transactions
Chapter 13: Forward Looking Households
Households and firms are forward looking in the sense that they care about the future when they make decisions about how much to consume and invest
Chapter 6: Duration of Unemployment
How long the typical worker remains unemployed
Chapter 6: Nominal wages (W)
How much workers are paid in dollars
Capital Accumulation
The change in the capital stock over time
Chapter 14: Adaptive Expectations
Hypothesis that people make forecasts of future values based solely on past values of the economic variable
Chapter 4: Barter
Direct exchange of one good or service for another
Chapter 2: Disposable Income
Disposable Income = National income + transfer payments - personal tax payments
Chapter 3: Diversification
Dividing your investment funds among different assets
Chapter 13: Economic Uncertainty
Economic models not providing exact estimates of how real GDP, employment and inflation will respond to changes in policy; makes fiscal policy challenging Uncertainty about the future state of the economy; leads to reduced investment by firms and individuals
Chapter 6: Substitution effects
Effect of changing a relative price
Chapter 6: Income effects
Effect of the change in income on demand for goods
Dilution
Effect of the labour force increasing, decreasing the amount of capital stock per worker (Dilution = nk) where n is the labour force growth rate and k is the capital-labour ratio
Chapter 10: Term Structure Effect (TSE)
Effects on the IS-MP model with the relationship between interest rates or bond yields and different terms or maturities
Permanent Effects on Growth
Everlasting effects on growth such as a permanent change in the steady state
Chapter 10: Unplanned Inventory Accumulation
Excess of inventories, which result when aggregate expenditures < aggregate output.
Chapter 12: Expansionary Monetary Policy
Expansionary monetary policy is when a central bank uses its tools to stimulate the economy. That increases the money supply, lowers interest rates, and increases aggregate demand.
Chapter 7: Price Taking Behaviour
Face a perfectly elastic supply of labour (all quantity of labour are the same price)
Chapter 2: Production
Factors of production Capital, labour and land used to produce goods and services Aggregate production function an equation that shows the relationship between the inputs employed by firms and the maximum output firms can produce with those inputs
Chapter 9: Leading indicators
Fairly reliable variables that indicate a future recession or expansion ex: average work week hours, manufacturing, house index, money supply
Chapter 1: Bond
Financial Security that represents a promise to repay a fixed amount of funds
Chapter 1: Stock
Financial security which represents part ownership in a firm
Chapter 13: Moral Hazard
Fiscal policy, like monetary policy, creates a moral hazard by insulating households and firms from the consequences of poor decisions; making them more likely One party takes actions in a transaction that makes the other party worse off
Chapter 11: Official Foreign Exchange Reserves
Foreign exchange reserves are assets held on reserve by a central bank in foreign currencies, which can include bonds, treasury bills and other government securities.
Chapter 2: GDP Deflator vs CPI as Measures of Inflation
GDP Deflator A measure of the price level, calculated by dividing nominal GDP by real GDP, then multiply by 100 CPI An average of the prices of the goods and services purchased by consumers
Chapter 13: Discretionary Fiscal Policy
Government policy that involves deliberate changes in taxes, transfer payments or government purchases to achieve macroeconomic policy objectives
Chapter 15: Primary Budget Deficit
Government purchases of goods and services plus transfer payments minus tax revenue
Chapter 13: GST
Goods and Service Tax; type of indirect tax Part of the composition of Value Added Tax
Chapter 2: Final Goods and Services
Goods and services that are produced for purchase by the ultimate user and not used as input for the production of other goods
Chapter 2: Government Spending
Government expenditures: The sum of government purchases, transfer payments, and interest payments on government debt Government purchases: Spending by federal, provincial and local governments on newly produced goods and services
Chapter 7: GDP per capita
Gross domestic product divided by the number of people in the population.
Chapter 13: HST
Harmonized Sales Tax; type of indirect tax Part of the composition of Value Added Tax
Labour-augmenting Technological Change
Improvements in economic efficiency that increase the productivity of labour but that do not directly make capital goods more efficient
Chapter 3: Risk
The change that the value of a financial security will change relative to what you expect
Chapter 13: Expansionary Fiscal Policy
Intended to increase real GDP and employment by increasing aggregate expenditure ex: increase in government purchases, reduction in taxes, increases in transfer payments
Chapter 2: Multilateral Exchange Rate
Index in which the value of the currency is measured against the average of the country's main trading partners
Chapter 13: Contractionary Fiscal Policy
Intended to decrease real GDP and employment by decreasing aggregate expenditure ex: decreases in government purchases, increases in taxes and reductions in transfer payments
Chapter 5: Foreign Direct Investment
Investment into production or firms by foreigners, either by setting up or expanding firms or by purchasing companies
Chapter 7: Foreign Direct Investment
Investment into production or firms by foreigners, either by setting up or expanding firms, or by purchasing companies
Chapter 1: Subprime Mortgages
Is a type of loan granted to individuals with poor credit scores, who, as a result of their deficient credit histories, would not be able to qualify for conventional mortgages.
Chapter 10: Unplanned Inventory Reduction
Lack of inventories, which result when aggregate expenditures > aggregate output
Chapter 5: Large Open Economy
Large countries whose shifts in demand and supply of loanable funds are sufficiently large that they affect the world real interest rate
Chapter 10: 45°-line Diagram (aka Keynesian Cross)
Line that is constructed by connecting all points where desired consumption = disposable income
Chapter 2: Capital Goods
Machines, machine tools, factories and office buildings that are used to produce other goods and services
Chapter 7: Capital (K)
Machines, machine tools, factories, and office buildings that are used to produce other goods and services
Chapter 12: Zero Lower Bound
Macroeconomic problem that occurs when the short-term nominal interest rate is at or near zero, causing a liquidity trap and limiting the capacity that the central bank has to stimulate economic growth.
Chapter 3: Primary Market
Market in which stocks, bonds and other securities are sold for the first time
Chapter 3: Secondary Market
Market where investors buy and sell already existing securities
Chapter 11: Speculative Attacks
Massive and sudden selling of a nation's currency, and can be carried out by both domestic and foreign investors.
Chapter 12: Credit Channels
Mechanism of monetary policy describing the theory that a central bank's policy change affects the amount of credit that banks issue to firms and consumers for purchases, which in turn affects the real economy.
Temporary Growth
Non-permanent effects on growth such as during the transition between steady states when the capital labour ratio and output per person temporarily both increase
Chapter 12: Directive
Official announcement of the conflict which is followed by the resignation of the Governor of the Bank of Canada
Chapter 6: Opportunity Cost of Leisure
Opportunity cost of "purchasing" leisure
Chapter 7: Capital's Share of Income
Part of national income, or the income of a particular economic sector, allocated to capital
Chapter 7: Labour's Share of Income
Part of national income, or the income of a particular economic sector, allocated to wages (labor)
Chapter 13: Paul Martin and Gordon Thiessen
Paul Martin (Finance Minister) and Gordon Thiessen (Governor of the Bank of Canada) spearheaded the Program Review program in 1993 to eliminate the budget deficits
Chapter 13: Transfer Payments
Payments made by the government to individuals for which the individuals do not provide a good or service in return (i.e: employment insurance)
Chapter 11: Okun's Law
Pertains to the relationship between the US economy's unemployment rate and its gross national product It states that when unemployment falls by 1%, GNP rises by 3% However, the law only holds true for the US economy and only applies when the unemployment rate is between 3% and 7.5%
Chapter 10: Planned Investment Expenditure
Planned spending by firms to acquire capital goods and inventories
Chapter 1: Austerity Plan
Political-economic term referring to policies that aim to reduce government budget deficits through spending cuts, tax increases, or a combination of both. Austerity measures are used by governments that find it difficult to pay their debts.
Chapter 12: Price Stability
Price stability implies that the central bank pursues a goal of low and stable inflation which means that prices rise, but at a slow and stable rate
Rule of law
Principle that the law applies to everyone, even those who govern
Chapter 3: Securitization
Process of converting financial assets with no secondary market (ex: savings accounts, mortgages, student loans, car loans) into securities
Chapter 15: Seigniorage
Profit made by a government by issuing currency, especially the difference between the face value of coins and their production costs.
Chapter 12: Operation Twist
Program of quantitative easing used by the Federal Reserve. The so-called "twist" in the operation occurs whenever the Fed uses the proceeds of its sales from short-term Treasury bills to buy long-term Treasury notes
Chapter 2: Recession
Pronounced, pervasive and persistent decline in aggregate economic activity
Chapter 13: Government Purchases
Purchases by the federal government of goods (computers, aircraft carriers) and services (RCMP or ambassadors)
Chapter 6: Real wages (w)
Purchasing power of the nominal wage by taking account of the price level (P) such that w = W/P
Chapter 5: Small Open Economy
Quantity of loanable funds supplied or demanded is too small to affect the world real interest rate Small open economy domestic real interest rate = World real interest rate as determined in the international capital market
Growth Rate of the Economy
Rate of change of GDP for a specific time period.
Chapter 13: Debt-to-GDP Ratio
Ratio between a country's government debt and its gross domestic product (GDP) Low debt-to-GDP = Produces and sells goods and services sufficient to pay back debts without incurring further debt High debt-to-GDP = Does not produce and sell goods and services sufficient to pay back debts without incurring further debt
Chapter 15: Debt to GDP Ratio
Ratio between a country's government debt and its gross domestic product (GDP) Low debt-to-GDP = Produces and sells goods and services sufficient to pay back debts without incurring further debt High debt-to-GDP = Does not produce and sell goods and services sufficient to pay back debts without incurring further debt
Chapter 13: Policy Lags
Recognition (recognize need for action), response (responding to the situation), impact (waiting for the policy to take effect) Fiscal recognition and impact are around the same as monetary Fiscal response (implementation) is longer than monetary
Chapter 15: Fiscal Dividend
Reduction in interest paid on debt as a result of surpluses
Chapter 13: Crowding Out
Reduction in private investment caused by government budget deficits increases the ability of households and firms to borrow due to rising interest rates
Chapter 15: Crowding Out
Reduction in private investment caused by government budget deficits increases the ability of households and firms to borrow due to rising interest rates
Chapter 12: Reserve Requirements
Regulations that require banks to hold a fraction of deposits as vault cash or deposits with the central bank
Chapter 3: Principal-agent Problems
Separation of ownership of the firm from control of the firm where the agents- the firm's top management- pursue their own interests rather than the interests of the principals - the shareholders of the corporation- to whom they are ultimately responsible
Chapter 9: Wage/Price Rigidity/Stickiness
Short run nominal prices and nominal wages are "sticky" while in the long run, nominal prices and nominal wages are flexible Sticky means that prices and wages do not fully adjust in the short run to changes in demand or supply, but adjust fully in the long run Key difference between the short run and the long run
Chapter 14: Central Bank Reaction Function
Shows how the central bank adjusts the real interest rate in response to changes in the inflation rate (slopes upward indicating that the central bank increases the real interest rate as the inflation rate rises and decreases the real interest rate as the inflation rate falls) r = r1 + b (π - π target)
Chapter 14: AD curve
Shows the relationship between aggregate expenditure and the rate of inflation
Chapter 11: Modern Phillips curve
Shows the relationship between the rate of inflation (rate of increase in price) to the unemployment rate
Chapter 11: Traditional Phillips Curve
Shows the short term relationship between the unemployment rate and inflation
Chapter 1: Financial Crisis
Significant disruption in the flow of funds from lenders to borrowers
Chapter 12: Liquidity Trap
Situation in which interest rates are low and savings rates are high, rendering monetary policy ineffective. Consumers choose to avoid bonds and keep their funds in savings because of the prevailing belief that interest rates will soon rise (which would push bond prices down).
Chapter 15: Sustainable Fiscal Policy
Situation in which the debt-to-GDP ratio is constant or decreasing
Chapter 15: Unsustainable Fiscal Policy
Situation in which the debt-to-GDP ratio is increasing
Chapter 5: Currency Overvaluation
Situation in which, at the current exchange rate, the real exchange rate is higher than one
Chapter 5: Currency Undervaluation
Situation in which, at, the current exchange rate, the real exchange rate is lower than one
Chapter 1: Economic Variable
Something measurable that can have different values, such as the rate of inflation in a particular year
Chapter 4: Medium of Exchange
Something that generally is accepted as payment for goods and services; a function of money
Chapter 2: Investment
Spending by firms on new factories, office buildings, machinery and net additions to inventories, plus spending by households and firms on new houses
Investment Function
Spending by firms on new factories, office buildings, machinery, and net additions to inventories, plus spending by households and firms on new houses
Chapter 9: Autonomous expenditure
Spending that is independent of income
Chapter 12: Financial Market Stability
Stable financial system is one in which financial intermediaries, markets and market infrastructure facilitate the smooth flow of funds between savers and investors and, by doing so, help promote growth in economic activity
Chapter 9: Short Run in Macroeconomics
State of the economy where economists assume that: Nominal wages and prices are NOT flexible, so capital and labour are not fully employed Real GDP ≠ Potential GDP All firms are NOT producing at capacity and labour is NOT fully employed
Chapter 9: Long Run in Macroeconomics
State of the economy where economists assume: Nominal wages and prices are flexible, so capital and labour are fully employed Real GDP = Potential GDP All firms are producing at capacity and labour is fully employed
Chapter 7: Labour (L)
Sum of employed and unemployed workers in the economy
Chapter 13: Tax Wedge
The difference between the before-tax and after-tax return to an economic activity
Chapter 2: Value Added
The difference between the value of production and costs of supplies
Chapter 5: Arbitrage
Taking advantage of price difference across markets by buying a product in one market and reselling it in another market at a higher price
Chapter 13: Direct Taxation
Taxes imposed on factors of production; labour, capital, and land Ex: Personal and corporate income tax, payroll tax, taxes paid by unincorporated businesses
Chapter 13: Automatic Stabilizers
Taxes, transfer payments, or government expenditures that automatically increase or decrease along with the business cycle
Chapter 7: Human Capital
The accumulated knowledge and skills that workers acquire from education and training or from life experiences
Human Capital
The accumulated knowledge and skills that workers acquire from education and training or from life experiences
Chapter 4: Store of Value
The accumulation of wealth by holding dollars or other assets that can be used to buy goods and services in the future; a function of money
Chapter 1: Monetary Policy
The actions that central banks take to manage the money supply and interest rates that are intended to achieve macroeconomic policy objectives
Chapter 3: Term Premium
The additional interest investors require in order to be willing to buy a long-term bond rather than a comparable sequence of short-term bonds
Chapter 10: Marginal Propensity to Consume (MPC)
The amount by which consumption spending changes when disposable income changes
Chapter 10: Expenditure Multiplier
The amount by which equilibrium real GDP changes when autonomous expenditure changes by $1 is equal to 1/ (1 - z)
Chapter 7: Technology
The application of scientific knowledge for practical purposes of making workers more productive
Chapter 4: The Fisher Effect
The assertion by Irving Fisher that the nominal interest rate rises or falls point-for-point with changes in the expected inflation rate
Chapter 4: The Classical Dichotomy
The assertion that in the long run, nominal variables (such as the money supply or the price level), do not affect real variables (such as the levels of employment or real GDP)
Chapter 11: Rational Expectations
The assumption that people make forecasts of future values of a variable using all the available information and their expectations equal optimal forecasts, given all available information
Chapter 11: Adaptive Expectations
The assumption that people make forecasts of future values of a variable using past values of the variable
Chapter 4: Velocity of Money
The average number of times that each dollar in the money supply is used to purchase goods or services in a given period
Chapter 4: Money Neutrality
The belief that real variables (real GDP and velocity) are not affected by monetary variables (money supply and prices) The proposition that changes in the money supply do not affect real variables Changes in the money supply do not affect real variables
Chapter 12: Forward Guidance
The central bank's commitment about future behaviour of the policy rate, an unconventional monetary policy
Chapter 4: Open-Market Operations (OMOs)
The central bank's purchases and sales of securities, usually short-term government bonds, in financial markets
Chapter 11: Full Employment
The condition in which virtually all who are able and willing to work are employed
Chapter 4: Transaction costs
The costs in time or other resources of making a trade or an exchange
Chapter 4: Shoe-leather costs
The costs of inflation to households and firms from holding less money and making more frequent trips to the bank; costs related to expected inflation
Chapter 4: Menu costs
The costs to firms of changing prices due to reprinting price lists, informing customers, and angering customers; costs related to expected inflation
Chapter 5: Spot Exchange Rate
The current price of one country's currency for another currency, for immediate exchange
Chapter 13: Cyclically adjusted Budget Deficit
The deficit in the federal government's budget if real GDP = potential GDP (full employment budget deficit) Used to focus on the part of the budget deficit due to discretionary fiscal policy and not automatic stabilizers
Chapter 14: Central Bank Credibility
The degree to which households and firms believe the central bank's announcements about future policy
Chapter 10: Default Risk Premium (DP)
The difference between a debt instrument interest rate and the risk-free rate which exists to compensate investors for an entity's likelihood of defaulting on their debt.
Chapter 12: Liquidity Problems
The inability to borrow to achieve the desired level of consumption
Chapter 12: Governing Council
The governing board of the Bank of Canada, consisting of the governor, senior deputy governor, and four deputy governors
Chapter 12: Policy Trilemma
The hypothesis that it is impossible for a country to have exchange rate stability, monetary policy independence, and free capital flows at the same time
Absolute Convergence
The idea that developing countries, regardless of their particular characteristics, will eventually catch up with the developed countries and match them in per capita output.
Chapter 13: Ricardian Equivalence
The idea that households save a large portion of a tax cut; reducing the multiplier effect of increases in government spending or cuts in taxes to 0
Chapter 15: Ricardian Equivalence
The idea that households save a large portion of a tax cut; reducing the multiplier effect of increases in government spending or cuts in taxes to 0
Chapter 12: Lender of Last Resort
The institution in a financial system that acts as a provider of liquidity to a financial institution which finds itself unable to obtain sufficient liquidity in the interbank lending market and other facilities or sources have been exhausted
Chapter 2: Real Interest Rates
The interest rate in terms of goods and services; the nominal interest rate adjusted for the effects of inflation
Chapter 2: Nominal Interest Rates
The interest rate in terms of money
Chapter 4: Quantitative Easing
The introduction of new money into the money supply by a central bank When the Fed buys longer-term government bonds or other securities The targeted use of open market operations in which the central bank buys securities specifically targeted in certain markets.
Break-even Investment
The level of investment necessary to keep the capital-labor ratio constant. Two factors determine the break-even level of investment: depreciation and dilution
Chapter 12: Target for the Overnight Rate
The main policy tool of the Bank of Canada; the interest rate the Bank of Canada would like to see in the overnight market
Chapter 2: Gross Domestic Product (GDP)
The market value of all final goods and services produced in a country during a period of time, usually a year Gross Depreciation of capital is included (if Net, depreciation is excluded) Domestic Produced in Canada (National means produced by Canadians anywhere) Product Measuring production
Chapter 10: Government Purchases Multiplier
The multiplier on changes in government purchases = 1/(1 - MPC)
Chapter 10: Tax Multiplier
The multiplier on changes in taxes = MPC/(1 - MPC)
Chapter 6: Natural Rate of Unemployment
The normal rate of unemployment consisting of frictional unemployment + structural unemployment
Chapter 5: Law of One Price
The notion that identical products should sell for the same price everywhere, including in different countries, as long as they are freely tradeable
Chapter 5: Current Account
The part of the balance of payments that records a country's net exports, net factor payments, and net transfers
Chapter 5: Financial Account
The part of the balance of payments that records purchases of assets a country has made abroad and foreign purchases of assets in the countries
Chapter 9: Output gap
The percentage deviation of real GDP from potential GDP
Chapter 6: Job-separation Rate
The percentage of employed workers who separate from a job (lose it or quit) in a given period
Chapter 1: Long Run Economic Growth
The process by which increasing productivity raises the average standard of living
Chapter 1: Securitization
The process of converting loans and other financial assets that are not tradeable, into securities
Production of Knowledge
The process of producing human knowledge used for advancements for productivity in industries
Chapter 3: Contagion
The process of spreading the financial panic affecting a small number of institutions to other financial institutions and to the entire financial system
Effective Workers
The product of the number of workers multiplied by the efficiency of labour (EL)
Chapter 4: Seniorage
The profit from issuing money
Chapter 5: Interest Parity Condition
The proposition that differences in interest rates on similar bonds in different countries reflect investors' expectations of future changes in exchange rates
Chapter 5: Foreign Portfolio Investment
The purchase of financial assets, such as stocks or bonds, by foreigners
Chapter 2: Consumption
The purchase of new goods and services by households
Chapter 4: Money supply
The quantity of assets available to households and firms to conduct transactions
Chapter 1: Labour Productivity
The quantity of goods and services that can be produced by one worker or by one hour of work
Chapter 12: Overnight rate
The rate at which banks lend and borrow from each other at the end of each day; the basis for other interest rates
Chapter 5: Real Exchange Rate
The rate at which goods and services in one country can be exchanged for goods and services in another country
Depreciation Rate
The rate at which the capital stock declines due to either capital goods becoming worn out by use or becoming obsolete
Chapter 5: Crowding Out
The reduction in private investment that results from an increase in government purchases
Chapter 3: The Risk Structure
The relationship among interest rates on bonds that have DIFFERENT CHARACTERISTICS but the SAME MATURITY
Chapter 3: Term Structure of Interest Rates
The relationship among the interest rates bonds of different maturities that are otherwise similar
Chapter 4: Desired Reserves
The reserves a bank would like to hold
Property Rights
The rights of an individual to own, use, rent, invest in, buy, and sell property.
Chapter 13: Budget Deficit
The situation in which the government's expenditure is greater than its tax revenue
Chapter 13: Budget Surplus
The situation in which the government's expenditure is less than its tax revenue
Chapter 3: Insolvency
The situation in which the value of a bank's or another firm's assets declines to less than the value of its liabilities, leaving it with negative net worth
Chapter 1: Microeconomics
The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices
Chapter 1: Macroeconomics
The study of the economy as a whole, including topics such as inflation, unemployment and economic growth
Chapter 4: Monetary Base
The sum of currency in circulation and bank reserves
Chapter 10: Aggregate Expenditure
The sum of their desired expenditures on domestically produced output (AE) by domestic households, firms, governments & foreign purchases of domestically produced commodities AE = C + I + G + (X - M)
Chapter 13: Cyclically adjusted Budget Surplus
The surplus in the federal government's budget if real GDP = potential GDP (full employment budget deficit) Used to focus on the part of the budget deficit due to discretionary fiscal policy and not automatic stabilizers
Chapter 14: Time Inconsistency Problem
The tendency of policymakers to announce one policy in advance in order to change the expectations of households and firms, and then to follow another policy after households and firms have made economic decisions based on the announced policy
Conditional Convergence
The tendency—among countries with similar steady-state levels of output—for poorer countries to grow faster than richer countries and thus for poor and rich countries to converge in income.
Chapter 5: Purchasing Power Parity
The theory that, in the long run, nominal exchange rates adjust to equalize the purchasing power of different currencies
Chapter 13: Gross Federal Debt
The total dollar value of government bonds outstanding plus superannuation (pensions) owed by the federal government as an employer to its employees plus accounts and interest payable
Chapter 2: Net Exports
The value of all exports minus the value of all imports
Chapter 2: Real GDP
The value of final goods and service produced during one year, adjusted for changes in the price level
Chapter 2: Nominal GDP
The value of final goods and services calculated using current-year prices
Chapter 2: Gross National Product (GNP)
The value of final goods and services produced by residents of a country, even if the production takes place outside that country
Chapter 3: Present Value
The value today of funds that will be received in the future
Chapter 3: Time Value of Money
The way the value of a payment changes depending on when the payment is received
Chapter 14: Policy Ineffectiveness Proposition
There is no trade-off between inflation and unemployment, even in the short run, when expectations are rational and policy changes anticipated
Chapter 6: Frictional Unemployment
Time it takes workers to search for a job
Chapter 5: The Big Mac Index
Tool for calculating purchasing power parity that compares prices of a Big Mac throughout the world.
Chapter 10: Actual Investment Expenditure
Total amount of investment expenditures undertaken by a business sector during a period of time, including both planned and unplanned outlays of capital.
Chapter 13: National Debt
Total value of federal government bonds outstanding
Chapter 3: Financial Securities
Tradeable financial assets that can be bought and sold
Chapter 2: Income
Transitory income income that households do not expect to receive each year Disposable income = national income + transfer payments - personal tax payments Permanent income Income that households normally expect to receive each year
Chapter 13: Income taxes
Type of direct tax, typically paid on the income of the individual or institution on which the tax is imposed
Chapter 13: Payroll taxes
Type of direct tax, typically paid on the payroll of the institution on which the tax is imposed
Chapter 11: Fixed Exchange Rates
Type of exchange rate regime in which a currency's value is fixed against either the value of another single currency, a basket of other currencies, or another measure of value, such as gold.
Chapter 11: Flexible Exchange Rates
Type of exchange-rate regime in which a currency's value is allowed to fluctuate in response to foreign-exchange market events.
Chapter 13: Excise Taxes
Type of special tax; indirect tax; on certain goods (ex: gasoline)
Chapter 13: Import Tariffs
Type of special tax; indirect tax; on imported goods
Chapter 6: Cyclical Unemployment
Unemployment caused by the business cycle Measured as the difference between the actual rate of unemployment and the natural rate of unemployment
Chapter 11: Structural Unemployment
Unemployment resulting from industrial reorganization, typically due to technological change, rather than fluctuations in supply or demand
Chapter 6: Structural Unemployment
Unemployment rising from wage stability
Chapter 15: Monetization of Debt
Unexpected increase in money printing causing an increase in the growth of money supply causes inflation rate to increase and reduces the debt-to-GDP ratio
Chapter 6: Labour Unions
Unionized group of workers in an industry who ban together for better working conditions and better pay
AK Growth Model
Using the production function where the marginal product of capital is always equal to the constant A rather than declining as K increases so capital is NOT subject to diminishing returns
Chapter 4: Velocity of Money Equation
V = (P x Y) / M
Chapter 13: VAT
Value Added Tax; type of indirect tax Composed of GST and HST on posted price of a good or service
Chapter 15: Stock Variables
Variables measured at a moment of time (value of debt; i.e amount of water in tub)
Chapter 4: Real Variables
Variables measured in terms of goods and services
Chapter 4: Nominal Variables
Variables measured in terms of money
Chapter 15: Flow Variables
Variables measured per unit of time (government expenditure and revenue; i.e flow in & out of tub)
Chapter 10: Autonomous Variables
Variables which are independent of the model
Chapter 12: Contractionary Monetary Policy
When a central bank uses its monetary policy tools to fight inflation. Since inflation is a sign of an overheated economy, the bank must slow economic growth. It will raise interest rates to make lending more expensive. It is also called restrictive monetary policy.
Chapter 12: Open Market Purchases
When the central bank purchases securities, usually short-term government bonds (T-bills) in financial markets
Chapter 12: Open Market Sales
When the central bank sells securities, usually short-term government bonds (T-bills) in financial markets
Chapter 4: The Fisher Equation
interest nom = interest real expected + inflation real expected OR Inflation Real Expect = Interest Nom - Interest Real Expect
Chapter 7: Inputs
the resources—such as labor, money, materials, and energy—that are converted into outputs