Chapter 1 Production efficiency producing g and s at lowest possible cost, at all points on PPF - every choice along the

e ppf involved a tradeoff marginal cost opp cost of producing one more unit of it when g and s are produced at lowest possible cost and provide the greatest benefit we have allocative efficiency moving down the ppf shows an increasing opp cost of x axis illustrate preferences through marginal benefit curve economic growth comes from technological change capital accumulation is the growth of capital resources comparative advantage is when u can perform at lower opportunity cost absolute advantage is when u are more productive higher price reduced the q demanded cuz of the substitution effect and income effect

change in demand factors : - prices of related goods - expected future prices - income - expected future income and credit - population - preferences change in supply factors: - the prices of factors of production - the prices of related goods produced - expected future prices - the number of suppliers - technology the state of nature

Chapter 20 Measurement of gdp: expenditure approach and income approach Expenditure approach- som of c +I + g + x-m Business investment is expenditure on capital and new homes by households Government exp on g+s is security and garbage disposal Income approach sum of incomes firms pay to households for factors of production Income is divided into 5 categories - wages ,saleries - corporate profits - interest and miscellaneous investment income - farmers income - income from non-farm unincorporated businesses statistical discrepancy gap between expenditure approach and income approach purpose of real gdp - to compare standard of living over time - compare standard of living across countries

real gdp per person is real gdp divided by the population which measures the value of g+s an avg person enjoys potential gdp per person grows at a steady pace but not constant 2 features that expand living standard are growth of potential gdp per person and fulctuations of real gdp around potential gdp PPP purchasing power parity same prices for both countries when converted and used to compare real GDP Not part of gdp: - household production - underground economics activity - health and life expectancy - leisure time - environmental quality - political freedom and social justice

Chapter 21 Unemployment problem cuz: - lost production and incomes - lost human capital 1. loss of income for unemployed worker 2. destroys human capital labour force survey every month labour force- working age and employed and unemployed employed full/part time job unemployed withjot work but makes effort, laid off and waiting for call, waiting to start a job within 4 weeks 4 labour market indicators: - unemployedment rate: unemployed/labour force - involuntary part time rate: inv parttime/ labour force - employement to population ratio: employed/working age population - labour force participation rate: labour force/working age population Purpose of unemployment rate is to measure underutilization of labour resources But it cannot do it perfectly cuz it excludes some underutilized labour and some employement is natural

2 types of underutilized labour are excluded : marginally attached worker and part timers who want full time Frictional unemployedment arises from ppl entering and reentering , creating/destruction of jobs Structural unemployedment changes in tech and changes in skills and change of location Efficiency wage above market wage Cyclical unemployment arises from business cycle such as recession Natural unemployment unemployement is frictional and structural Full employment - unemployment = natural unemployment Output gap gap between real gdp and potential gdp Prive level average level of prices and the value of money Inflation rate annual percent change of the price level Inflation is a problem cuz it redistributes income and wealth and it diverts resources from production Cpi measure of average of prices paid by consumers for a fixed basket of consumer g+s

Constructing cpi 1. select basket 2. conduct month price survey 3. calculate cpi cpi = cost of basket current year/basket last year inflation rate = cpi this year minus cpi last year divided by cpi last year main sources of bias in the cpi are: 1. new good bias typewrites 2. quality changed bias improved quality 3. commodity substitution change in relative prices 4. outlet substitution alternatives to cpi are: 1. gdp deflator= nominal gdp divided by real gdp 2. chainged price index for consumption = nominal consumption expenditure divided by real consumption expenditure core inflation rate the inflation rate excluding volatile elements the underlying inflation trend

Chapter 22 Growth rate annual percent change of real rdp Growth rate = real gdp this year minus gdp last year divided by gdp last year Real gdp per person standard of living To determinte potential gdp we use: 1. aggregate production function 2. aggregate labour market aggregate production nfunction = real gdp on y axis and labour on x axis 3. aggregate elabour market which is the real wage rate vs labour what makes potential gdp grow? 1. growth of supply of labour 2. growth of the labour productivity population grown brings a grown in suppoy of labour labour productivity the quantiy of real gdp produced by an hour of labour if labour productivity growns then real gdp per person grows

3 things that influence labour productivity pace 1. physical capital growth 2. human capital growth 3. technological advances Growth accounting measures the contribution of labour productivity from its sources Growth Theories Classical Growth Theory Growth is temporary Based upon the key assumption of a positive relationship between economic growth and population Neoclassical Growth Theory Refutes the notion of a positive relationship between population and economic growth Growth depends upon saving and capital accumulation Diminishing returns to capital leads to convergence of incomes across countries (Poor countries grow faster than the rich ones so that income levels across countries converge over time) Eventually, growth depends upon technological growth that occurs by chance New growth Theory Human Capital is n0ot subject to diminishing returns Technological growth results from choices and public policies.

Chapter 23 Supply of loanable funds come from - household savings - government budget surplus - borrowing from the rest of the world demand for loanable funds comes from - firms who want to finance investment - government that wants to finance its budget deficit - international lending key Canadian financial institutions are : banks, turst and loan companies ,credit unions and caisses populaires, pension funds, and insurance companies net worth the amount lent minus borrow illiquid repay more then it has borrowed suddenly market for loanable funds is the real interest rate verses loanable funds when expected profit changes the demand for loanable funds curve shifts factors that change the supply for loanable funds : 1. weath 2. expected future income 3. disposable income 4. default risk

supply and demand of loans increase in the long run budget surplus inceases supply and deficit increases demand if world line is below equilibrium then it has to borrow if world line is above equilibrium then it has to lend

Chapter 24 Money serves 3 purposes: 1. medium of exchange 2. unit of account 3. store of value money consists of : 1. currenct 2. deposits at the banks and other institutions deposits and currency are the only money! M1 currenct and chequable dposits Depository institutions: 1. chartered banks 2. crediot unions and caisses populaires 3. trust and loan companies chartered banks but funds it 4 assets 1. reserves make payments with 2. liquid asses- in case they need more reserves 3. securities gov of Canada bonds 4. loans benefits of depository institutions 1. creates liquidity 2. pool risk 3. lowers the cost of borroing 4. lowers the cost of monitering borrowers

The bank of Canada - banker to other banks and overnment - lender of last resort - sole issuer of bank notes BOC assets Government securities and loans to depository institutions BOC liabilities Notes and depository institutions deposits Monetary base sume of BOC notes coins and deposits CPA can payment associateion 2 types of payments are large value transfer system and automated clearing settlement system The quantity of deposits that the banking system can create is limited by 3 factors - monetary base - desired reserves - desired currency holdings reserve ration banks total deposits that are held in reserves desired sereve the quantity of reserves that a bank plans to hold excess reserves actual reserves minus desired reserves

money creation starts when the monetary base increases and there are excess reserves 1. excess reserves 2. lends excess reserves 3. quantity of money increases 4. new money used to make payments 5. some of new money remains in deposit 6. some of new money is currency drain 7. desired reserves increase cuz of increased deposits 8. excess reserves decrease but remain positive money multiplier ratio nof change in the quantity of money to the change in monetary base quantity of money ppl plan to hold depends on 1. price level 2. nominal interest rate 3. real gdp 4. financial innovation market for money is interest rate vs real money change in real gdp or financial innovation changes demand for money increase in real gdp increases demand for money quantity theory of money long run an increase in the quantity of money brings and equal precent increase in price level

Chapter 26 Aggregate supply and demand is Price level vs real gdp Long run supply wage rate changes and it is a vertical line Short run supply everything remains constant When potential gdp increase aggregate supply changes Potential gdp changer when: 1. increase in full employment 2. increase in the quantity of capital 3. advances in technology aggregate demand curve slopes down cuz of wealth effect and substitution effect main factors of change in aggregate demand are: 1. expectations 2. fiscal policy and monetary policy 3. world economy increase in expected future income increases aggregate demand fiscal policy government attempt to influence the economy by setting and changing taxes

monetary policy changes in interest rate and quantity of money in the economy world economy changes in exchange rate and foreign income aggregate demand decreases whenever anything decreases except when exchange rate increases it decreases

Chapter 27 Aggreage expenditure is c + I +g + x-m Planned agg exp . is the planned 4 components 4 factors that influence consumption expenditure and saving plans are 1. disposable income Real interest rate Wealth Expected future income Aggregate demand determines real gdp Multiplier is zero in the long run 45 degree line is disposable income Consumption function is the relationship between consumption expenditure and saving that ppl plan Saving function is the relationship between saving and disposable income MPC marginal propensity to consume is the change in disposable income that is spent on consumption MPS = consumption expenditure divided by disposable income Slope of a consumption function is the marginal propensity to consume

Equilibrium expenditure is the level of aggregate expenditures that occurs when aggregate planned expenditure equals real gdp Multiplier = change in equilibrium exp divided by change in autonomous exp

Chapter 29 Federal budget is the annual statement of the outlays and revenues of the gov of Canada Fiscal policy is the use of federal budget to achieve econ objectives Revenues come from 4 sources - personal income tax - corporate income tax - indirect iand other taxes - investment income main items in federal budget: - revenues - outlays - budget balance 3 categories of outlays 1. transfer payments 2 expenditures on g and s 3. debt interest Budget balance = revenues minus outlays If + then budget surplus Laffer curve is the relationship between the tax rate and the amount of tax revenue collected

Fiscal action initiated by an act of parliament is called discretionary fiscal policy Which is a change in a spending program or in a tax law Fiscal action that is triggered by the state of the economy is called automatic fiscal policy Government expenditure multiplier is the magnification effect of a change in government expenditure on goods and services on aggregate edemand Balanced budget multiplier is the magnification effect on aggregate demand of a simultaneous change in government expenditure and taxes that leaves the budget balance unchanged Discrentionary discal policy is affected by 3 things - recognition lag - law making lag - impact lag

Chapter 28 Inflation occurs if the quantity of money grows faster than potential gdp 2 sources of inflation are: 1. demand pull inflation 2. cost-push inflation Demand-pull inflation inflation that starts cuz aggregate demand increases and must persistently increase Cost push inflation an inflation that is started by an increase in costs 2 main sources of cost increases are 1. increase in the money wage reate 2. an increase in the money prices of raw materials