ECON 1P92 FINAL EXAM REVIEW

40 M/C
- recession: fall in real GDP for at least two quarters
- nominal income increase 20% over a period while real national income increases by 10%,
the price level increases by approximately 10%
- total value added in an economy: the value of all final goods and services produced
- when calculating GDP from the expenditure side, C includes the monthly rental of an
apartment
- the best measure of productivity increase: given by the change in real GDP per hour
worked
- average propensity to consume: total consumption expenditure divided by total disposable
income
- an increase in marginal propensity to spend out of national income will cause an increase
in the slope of the AE curve which rotates it upward (Z increases)

- an increase in desired investment is predicted to influence equilibrium income by causing

an upward shift of the aggregate expenditure function
- the formula for the simple multiplier is K = 1/(1-z), where z equals the marginal propensity
to spend
- in a simple macro model with an open economy it is assumed that exports and
autonomous and imports are induced
- adding imports to the macro model causes the AE curve to shift downward parallel
(become flatter)
- an increase in the value of the multiplier can be caused by an increase in the marginal
propensity to spend
- a fall in the income-tax rate causes the AE curve to rotate downward
- when the domestic price level rises, other prices become constant. Canadian goods
become more expensive relative to foreign goods
- the short-run aggregate supply curve slopes upward because unit costs rise at higher
levels of output
- a rise in an input price like the price of oil would be expected to result in a new
macroeconomic equilibrium in which the price level is higher and real GDP lower than in the
initial equilibrium
- output gap: the difference between actual GDP and potential GDP
- the short run aggregate supply curve doesnt fall easily because unemployment can persist
for quite long periods without inducing large decreases in wages and prices

- the advantage of using expansionary fiscal policy rather than relying on the self-corrective
method in recovering from a recessionary gap is that probably the recovery will be more
rapid
- the automatic stabilizers are most helpful in reducing the intensity of business cycles
- fiscal policy: the governments use of spending and taxing policies to influence aggregate
demand and aggregate supply
- the long decision lag inherent in Canadas fiscal policy undermines its performance as a
fine tuning tool
- according to the views of classical economists, if the money supply doubles, money prices
will double (ineffective)
- the functions that money serves in an economy do not include being used as the trading
instrument in money and market funds
- the difference in potential money creation when the Bank of Canada buys government
bonds from the commercial banks rather than from the public is due to the fact that excess
reserves are larger when the Bank of Canada buys government bonds from the commercial
banks
- excess reserves in the commercial banking system: any reserves (cash or deposits with the
Bank of Canada) that commercial banks hold over and above desired reserves
- suppose a student deposits a $200 cheque that she received from her parents in a local
bank. This transaction alone would increase the money supply by $1000 if the desired
reserve ratio was 20 percent
- when there is a recessionary gap, an appropriate monetary policy could include switching
government accounts from the Bank of Canada to the commercial banks
- if the economy is at potential GDP, then in the long-run, expansionary monetary policy will
move real GDP and the price level in the same direction
- if the Bank of Canada increases the money supply, then, other things equal, we can expect
the aggregate expenditure curve to shift upward and the aggregate demand to shift to the
right (MS increases, I decreases, I increases, AD increases, Y increases)
- the effectiveness of the transmission mechanism is enhanced when the MD function is
inelastic and the (ID or P) curve is elastic
- a decrease in the money supply is most likely to raise interest rates, lower investment, and
lower aggregate expenditure
- the transmission mechanism describes the process by which changes in money market
influence real GDP through the investment function
- open-market operations: the buying and selling of bonds by the Bank of Canada
- the purchase of government bonds by the Bank of Canada is predicted to increase loans
made by banks

- the bank rate: interest rate at which the Bank of Canada will lend funds to commercial
banks whose reserves are temporarily below the required level
- to increase the level of desired investment, the Bank of Canada could transfer government
accounts to the commercial banks
- overnight loans rate: the interest rate commercial banks charge each other while borrowing
and lending
- when the Bank of Canada changes the bank rate, its impact on the economy is not felt
immediately because individuals need time to adjust their demand for money to the new
market interest rates
-if investment spending is sensitive to changes in interest rate, an expansionary monetary
policy will succeed in increasing aggregate expenditures
4 T/F
1. Real GDP is the total value of all incomes in the economy, adjusted for the real
interest rate.
FALSE:

- Y = C + I + G + X IM
- Adjusted for inflation (or adjusted for the price level)
- Prices in some base period
2. Increase the reserve ratio will decrease excess reserves and increase the money
supply.
FALSE:

Reserve ratio (RR) increases = 1/v increases = Change in M

decreases (Target reserves increase)

- Excess reserves decrease; loans decrease; change in MS decreases
3. Deposit switching changes bank deposits, but not the reserves of the banking
system.
FALSE:
-

Bank of Canada to commercial banks:

o Reserves increase
o Loans increase
o Money supply (MS) increases
Commercial bank to Bank of Canada:
o Reserves decrease
o Loans decrease
o Money supply decreases

7 Problems
70% of the exam is from AE onward; all course material is on the exam