Economics Notes

Factors of Production
September-08-08
6:06 PM
Human resources-labour->wages
Natural resources-land -> rent
Entrepreneurship-> profit
Technology-capital-> interest
Brief Review
1. Basic economic problem faced by both society and individuals is that the human wants are
unlimited.
2. Economic resources can be categorized as natural, human, capital.
3. Micro concentrates on ways consumers, and businesses act on certain markets, while macro
concentrates on the broader whole.
4. Economic models contain casual relationships between variables and simplifying instructions
Unit 1 Page 1
September-09-08
8:40 AM
Unit 1 Page 2
Unit 1 Page 3
Unit 1 Page 4
What is an Economy?
September-15-08
8:34 AM
An economy can be best be described as a self-sustaining system in which many independent
transactions (often triggered by self-interest) create flows of money and products.
AN ECONOMY...
• Is a very complex or intricate system

• Is dynamic of subject to movements and exchanges
• Consists of interdependent people, groups, and institutions, each performing specialized roles
• Involves a series of independent transactions motivated by economic goals
• Involves numerous transactions that create 2 circulars flows ( money moves in one direction while goods
and services more in opposite direction.
The 3 Basic Economic Questions
What to produce?
• What goods and services should our society produce, and in what quantities?
• What is worth producing and what is not?
• What are we giving up in order to produce these goods and services
How to produce?
• By whom, with what resources, and in what way should these goods be produced?
• How can out limited resources be used most efficiently?
• Should products be made in small, privately owned factories or in large, state owned corporations?
• How much automation should be used? How much manual labour?
For whom to produce for?

• How will total output be shared among the different members of society?
• Who will get which goods and services? Will products be shared equally?
• On what basis should decisions concerning distribution be made?
Although every economy attempts to answer these questions effectively, the way each question is
answered will help identify the type of economic question.
Economists define the economic system as the set of laws, institutions, and common practises that help
a nation determine how to use scarce resources to satisfy as many of its people's needs and wants as
possible.
The 3 ECONOMIC SYSTEMS THAT HAVE EMERGED ARE:
1. TRADIONAL
2. COMMAND
3. MARKET
Unit 1 Page 5
Economic Systems
September-09-08
9:11 AM
1. What are the possible advantages for the society of the market system?
Some of the advantages for market system include:

- The consumer and business decide on what to produce, how to produce, and who to sell to, not the
government
- Reduce unemployment due to higher volume of sales, and restrictions; more money enters the
entrepreneurs pockets.
- More competition with no protection for smaller industries
2. What are the possible disadvantages for the society of the market system?
Some of the disadvantages for the market system include:

- Unequal distribution of wealth; rich get richer, poor get poorer
- Business control the market, the government has very little say
- Less consumer protection
- Less worker protection, regulation
3. What are the possible advantages for the society of the command system?
Some of the advantages for the command system include:

- Regulation of workers and wages; no unfair treatment
- Everyone is equal, no rich or poor
4. What are the possible disadvantages for the society of the command system?
Some of the disadvantages for the command system include:

- Government can't allocate resources quickly due to having not enough knowledge on how much people
need to survive
- Wages are not in-line with the amount of work or expertise required; a farm worker making as much as
a doctor
- Limits personal freedom
- You don't own any possessions, land, or anything, the government owns it all.
Unit 1 Page 6
Modern Mixed Economy
September-17-08
8:55 AM
Modern Mixed Economy

MARKET COMMAND
USA Canada Sweden Korea
Traditional Mixed Economies
Mongolia India Myanmar
TRADITIONAL
Modern Mixed Economy: is one that combines both the use of markets and significant government
presence in economic decision-making.
- Includes a private sector. Economic activity dominated by markets.
Traditional Mixed Economies: Where, market driven industries, such as mining, co-exist with a
traditional sector. Public + traditional sector.
Canada: A Mixed Market Economy

September-17-08
9:02 AM
• The Canadian economy contains elements of traditional and command economies.

• The Canadian economy is classified as a mixed economy
• Our country's economy includes both private enterprise and state-owned enterprise.
• The Canadian system tries to integrate the best features of all 3 economic types, E.g. Land ownership-
Canada allows for state-owned or CROWN LAND - features of command economy. It also permits
private ownership if land - feature of market economy
Conflicting Goals
September-17-08
9:21 AM
Strategies to keep prices stable often have an adverse effect on employment rates + national
production. Governments can promote price stability by raising interest rates in order to control the
amount of money in circulation as it becomes more expensive to borrow money for investment:
Businesses hire fewer workers + production levels either remain constant or begin to decline.
Increases in employment +production as the opportunity cost of stable prices.
Tangible Resources-
1. Land
a. Natural resources
Unit 1 Page 7
a. Natural resources
b. Water
c. soils
2. Labour
a. Skilled workers
3. Capital
a. Facilities
b. Equipment
c. Machines
d. money
Intangible Resources-
1. Knowledge
a. Science
b. Technology
c. experience
2. Entrepreneurship
a. Management
b. Direction
c. Risk taking
3. Environment
a. Work ethic
b. Politic stability
c. Economic stability
Unit 1 Page 8
Production Possibility Curve
September-25-08
8:35 AM
1. The choices that a country has to make about the use of scarce resources available and the associated
sacrifice of1 product for the other. (OPPORTUNITY COST)
a. The PPC can illustrate the various combinations of goods or services that are possible if an
economy uses all of its available resources (PRODUCTION POSSIBILITIES)
b. What a country produces with its limited resources is an important question. It doesn't matter
how big you are but how you use your resources that counts-
i. Does this country operate at full capacity
ii. Does it utilize the best available technology?
iii. Is it producing at full potential?
c. The curve is based on assumption that the country only produces two goods.
d. If it devotes all its resources to making one product, it will not be able to make any of the other
one.
Unit 1 Page 9
PIZZA
COKE
2. The PPC curve is concave to the origin because:

a. Along this curve, an economy uses all of its available resources.
b. It shows the inverse relationship between the 2 products.
3. Opportunity cost is the cost of something in terms of what must be given up in order to obtain it.
(sacrifice)
4. The combination of products measured shows an inefficient use of available resources, misallocation of
resources
5. Economic scarcity - limited amount of natural resources (THE LAW OF SCACRCITY).it shows the
maximum amount of goods available.
a. Economic choices- choices of individuals are endless for each decision made by a producer, the
concept of the PPC could be used in order to map out the various options.
b. Economic tradeoffs- the economy must sacrifice some of the goods to be produced for more of
the other goods that are produced.
6. "LAW OF SCARCITY"; it is based on the number of choices that are available to an individual. The PPC is
not fixed because of the number of choices that individuals are faced with, and the decisions that a
producer makes (TECHNOLOGICAL CHANGES).
7. Law of increasing relative cost- the increase in the relative cost of producing more of item A, measured
by the numbers of another item B, that could be produced with the same resources.
8. Relative Cost - Cost of producing one item, A, expressed in terms of the numbers of another item, B,
which must be given up in order to produce A. (OPPORTUNITY COST).
Unit 1 Page 10
Review Quiz
September-29-08
8:15 PM
1. The PPF illustrates scarcity in that we can only produce at maximum efficiency given the total number of
resources available to produce them. Because we cannot attain outside of the PPF, this shows we are
limited and thus show scarcity.
2. By producing closer to the PPF we can gauge how efficient production is, and vice versa if we are
producing farther away.
3. For every x or y quantity that we produce more of, we must forego an amount of the opposite x or y.
Thus as we move along the PPF, for every quantity of X we produce we must give up some of Y.
4. The PPF illustrates opportunity cost since for every X value we produce, a Y value must be foregone in
order to produce it. This is the opportunity cost as we move along the PPF.
5. Opportunity cost is a ratio because the decrease of quantity of one good is divided by the increase of
production in another good.
6. As the production of product X or Y increases so does the opportunity cost, which explains the outward
bow of the curve.
Unit 1 Page 11
Laws of ...
September-30-08
8:51 AM
Law of increasing relative costs - The increase in the relative cost of producing more of item A,
measured by the numbers of another item, B, that could be produced wit the same resources.
Relative Cost - cost of producing one item, A, expressed in terms of the numbers of another item, B,
which must be given up in order to produce A
Law of Diminishing Returns - The eventual decline in the rate of extra outputs produced that occurs
when one input used in production of the output is held constant and the others are increased.
Input - a productive resource such as labour
2 Variables - fixed, variable
Law of increasing returns to scale - the increase in the rate of extra outputs produced when all inputs
used in production are increased and no inputs are held constant
2 Variables / inputs
1.3 Practise Questions
1.
Production Scenario Coconuts Fish Opportunity Cost
a 24 0
b 20 1 4
c 12 2 8
d 0 3 12
a) 4, 8,12
b) Yes because the cost is increasing for each quantity of fish
c) It would bow outwards since the opportunity cost is increasing
d) That he has no misallocated resources, and producing at maximum efficiency. Full capacity.
e) We would be outside the PPF given if he is at maximum efficiency.
f) The amount of fish captured would increase, meaning the curve will extend further.
2.
a) 1/600
b) 1/300
Unit 1 Page 12
Gross Domestic Product
October-21-08
8:21 AM
By : DYNAFROM WANG
National income accounts - accounts showing the level of total income and spending in the Canadian
economy
Gross Domestic Product - the total dollar value at current prices of all final goods and services produced
in Canada over a given period.
Income approach - a method of calculation GDP by adding together all incomes in the economy - money
flow
Expenditure approach - a method of calculating GDP by adding together all spending in the economy -
real flow
Product Current Price (p) Annual Output (Q) Total Dollar Value (PxQ)
Lasers $1000 3 $3000
Milk 2 1000 2000
GDP = $5000
GDP Identity - Gross domestic product calculated as total income is identical to GDP calculated as total
spending. GDP expressed as total income = GDP expressed as total spending
The Income Approach
- INCOME COMPONENTS OF GDP - wages, profit, interest, and rent.

- GDP is the sum of 7 categories
○ Wages and salaries
 Largest income category representing 50% of GDP; payment to workers.
○ Companies profits
 Represents all corporate earnings declared to the government, profits paid as corporate
income tax
 Retained Earnings -profits kept by business for new investment
○ Interest income
 Interest paid on business loans
○ Proprietors' incomes and rents
 Sole proprietors and partnerships earnings
○ Indirect Taxes
 PST, not included in main income components of GDP, value is included in expenditure
approach
 Direct taxes are taxes taken away from your income, indirect = gst, pst, gas tax
○ Depreciation
 Durable assets considered a cost of doing business and shows up in both approaches.
○ Statistical Discrepancy
 GDP figures are estimates, discrepancies between the approaches are known as statistical
discrepancy, to balance the two figures, STAT can divides the difference between the two
approaches. IE 1.4B in 2005, half of that 0.7B was added to lower the estimate of GDP, and
HALF 0.7B was deducted from the higher GDP estimate
 Difference between actual and estimated
Unit 2 Page 13
GDP
October-23-08
8:21 AM
Consumer expenditure C
Investment expenditure I
Government expenditure G
Export expenditure X
Import expenditure M
Savings S
Taxes T
Income Y
Disposable income Yd
Y = $100 - (taxes, other deductibles) = T = $90 = YD
Yd = 90 - (spend + save)
Y= C + S + T
Injections Leakages
I S
G T
X M
If injections are greater then leakages than the circular flow will increase causing the economy to
expand, causing output and employment to increase.
CIRCULAR FLOW
Unit 2 Page 14
GDP = C + I + G + (X-M)
GDP EXPENDITURE APPROACH
Final Product - products that will not be processed further and will not be resold
Intermediate Products - products that will be processed further or will be resold
CONSUMER EXPENDITURE APPROACH -
1) DISPOSABLE INCOME
2) CONSUMER CONFIDENCE (FUTURE EXPECTATIONS)
3) MARGINAL TIME PREFERENCE
4) AVAILABILITY OF CREDIT
5) ADVERTISING
a. DURABLE GOODS - GOODS THAT ARE CONSUMER OVER TIME
b. NON-DURABLE GOODS - GOODS THAT ARE CONSUMED JUST ONCE
BUSINESS INVESTMENT DEPENDS ON:
1) BUSINESS CONFIDENCE (FUTURE EXPECTATIONS)

2) RATE OF INTEREST (MARGINAL EFFICIENCY OF INVESTMENT)
3) RATE OF RETURN ON INVESTMENT (PROFITS)
GOVERNMENT EXPENDITURE DEPENDS ON:
1) ELECTION PROMISE
2) ANTI-CYCLICAL BEHAVIOUR
3) TAX REVENUE
NET EXPORT EXPENDITURE DEPENDS ON:
1) QUALITY OF PRODUCTS
2) PRICE OF CANADIAN VS FOREIGN GOODS
3) VALUE OF CANADIAN CURRENCY VS FOREIGN CURRENCY
CATEGORIES OF PRODUCTS
FINAL PRODUCTS - PRODUCTS THAT WILL NOT BE PROCESSED FURTHER AND WILL NOT BE RESOLD
INTERMEDIATE PRODUCTS - PRODUCTS THAT WILL BE PROCESSED FURTHER OR WILL BE RESOLD
DOUBLE COUNTING - THE PROBLEM OF ADDING TO GDP THE SAME ITEM AT DIFFERENT STAGES IN ITS
PRODUCTION
VALUE ADDED - THE EXTRA WORTH OF A PRODUCT AT EACH STAGE IN ITS PRODUCTION; A CONCEPT
USED TO AVOID DOUBLE COUNTING IN CALCULATING GDP
EXPENDITURE EQUATION: C + I + G + (X-M)
EXLUDED PURCHASES:
FINANCIAL EXCHANGES - GIFTS OF MONEY BETWEEN FAMILY MEMBERS ARE NOT COUNTED IN GDP
SECOND-HAND PURCHASES - EXCLUDED BECAUSE THEY HAVE ALREADY BEEN COUNTED AT THEIR FIRST
SALE
PERSONAL CONSUMPTION (C)
LARGEST PORTION OF GDP 55%
PERSONAL CONSUMPTION - HOUSEHOLD SPENDING ON GOODS AND SERVICES

DURABLE GOODS - GOODS THAT ARE CONSUMER OVER TIME
NON-DURABLE GOODS - GOODS THAT ARE CONSUMED JUST ONCE
GROSS INVESTMENT (I)
15-25% OF THE GDP
GI = inventory + (capital stock - depreciation) = NI
GROSS INVESTMENT - PURCHASES OF ASSETS THAT ARE INTENDED TO PRODUCE REVENUE

INVENTORIES - STOCK OF UNSOLD GOODS AND MATERIALS
CAPITAL STOCK - THE TOTAL VALUE OF PRODUCTIVE ASSETS THAT PROVIDE A FLOW OF REVENUE =
Gross - Net
DEPRECIATION - THE DECREASE OF VALUE OF DURABLE REAL ASSETS OVER TIME
Unit 2 Page 15
NET INVESTMENT - GROSS INVESTMENT MINUS DEPRECIATION
PERSONAL SAVINGS - (S) FUNDS SAVED BY HOUSEHOLDS
GOVERNMENT PRUCHASES (G)
GOVERNMENT PURCHASES - CURRENT GOVERNMENT SPENDING ON GOODS AND SERVICES

TRANSFER PAYMENTS - GOVERNMENT PAYMENTS TO HOUSEHOLD OR OTHER LEVELS OF
GOVERNMENTS
NET EXPORTS
EXPORTS (X)- FORIEGN PURCHASES OF CANADIAN GOODS AND SERVICES

IMPORTS (M)- CANADIAN PURCHASES OF GOODS AND SERVICES FROM THE REST OF THE WORLD
NET EXPORTS - EXPORTS MINUS IMPORTS
Gross National Product = GDP + Investment Income Received from non-residents - Investment income
paid to non-residents.
(IIR - IIP) = Net investments from non-residents
VALUE ADDED - the extra worth of a product at each stage in its production; a concept used to avoid
double counting in calculating GDP
Unit 2 Page 16
October-30-08
8:32 AM
1. -
a. Yes, expenditure - personal consumption
b. Yes, expenditure - gross investment
c. Yes, expenditure - personal consumption
d. Yes, income - interest income
e. Yes, expenditure - government spending
f. Nope
g. Yes , expenditure - government spending
h. Yes, expenditure - export
2. -
a. 162B = 29 + 76 + 25 + 17 + 38
b. 185B
c. 11.5B
d. 173.5B
e. 9B
Unit 2 Page 17
GDP vs Real GDP
October-29-08
7:39 PM
Self Test 2
1. (6000 / 1) x (100 / 140) = 4285.7143 , 285.7143/4000 = 0.0714 Which means a total increase of 7%
2. (5800 / 1) x (100 / 160) = 3625 , -575 / 4200 = 0.1369 which means a decrease of 13%.
Self Test 3
1. -
a. When the person buys a good or service from other people and are reported then it counts.
b. Legal bets are counted in the GDP. State lotteries are also counted.
c. None
2. They should be included into GDP because illegal production is still a sale of a good or service and is still
a form of production which is included in the definition of GDP.
3. Some physical benefits includes a higher quality of life in general, more production, nature of the
workforce.
Self Test 4
1. GDP / Population
2. 3.55x greater.
3. 5000000000000/250000000 = 20000 per capita GDP.
CASE STUDY
1. GDP is everything bad in an economy.

2. Less leisure time, downsizing of the middle-class, and the reduction of community and civic needs.
3. Crime, pollution, commuting, family breakdown expenditures.
4. Good marriages, friendly communities, clean water, leisure time, and wild places.
5. -
GPI GDP
Not real representation of economy Makes economy look like it's growing
Looks bad for economy Universal standard
Better economic policies Shows prosperity
GNP
a) INCOME BASED EXPENDITURES -854B EXPENDITURE - = 490+157+184+(67-27) 872B

b) Minus or add the difference on either approaches and it's the same value. =9b
c) It is contracting since there is more expenditures then there is income. = GI - DEPR = 78
d) GNP =855B which is lower then GDP which means more dependencies of foreign investment
2. -
3. -
a. Diamond, since it can't be processed any further, only refined. Generally cut and sold as is.
b. Oil, it must be processed and filtered, and then sent to a distribution plant.
c. Water, can be sold as is, or is potentially filtered and then bottled and etc.
4. -
a. Y
Unit 2 Page 18
a. Y
b. y
c. n
d. y
e. y
f. y
g. n
h. y
i. y
j. y
k. n
5. -
a. Understates since leisure time has decreased
b. Overstates
c. Overstates since income is not distributed evenly
d. Understated since there is more efficiency.
Unit 2 Page 19
Inflation + CPI
November-07-08
8:21 AM
Deflation - a general decrease in the level of prices.

Hyperinflation - a situation in which prices increase rapidly and inflation is out of control.
CPI
Consumer Price Index - a measure of price changes for a typical basket of consumer products.
Item weights - the proportions of each good in the total cost of the basket of consumer goods used to
calculate CPI
Base Year - the survey year used as a point of comparison in subsequent years
Nominal versus Real Income

Cost of living - the amount consumers must spend on the entire range of goods and services they buy.
Nominal Income - income expressed in current dollars
Real Income - income expressed in constant base-year dollars
Real Income = Nominal Income

CPI (In hundredths)
Limitations of CPI
Consumer Differences
- Individuals needs vary between individuals
Changes of Spending Patterns
- Changes in consumption patterns can skew CPI
Product Quality and New Products
- TV's and medicine, tries to adjust but difficult
THE GDP Deflator
GDP Deflator - an indicator of price changes for all goods and services produced in the economy
Nominal GDP - Gross Domestic Product expressed in current dollars
REAL GDP = Nominal GDP

GDP Deflator (In hundredths)
Inflation's Effects
Incomes
- Cost Of Living Adjustment Clause - Provisions for income adjustments to accommodate changes in
private levels which are included in wage contracts.
- Full Indexed Incomes - nominal incomes that automatically increase by the rate of inflation
- Partially indexed incomes - nominal incomes that increase by less than the rate of inflation
- Fixed incomes - nominal incomes that remain fixed at some dollar amount regardless of the rate of
inflation
Borrowing and Lending

- Nominal interest rate - the interest rate expressed in money terms
- Real Interest rate - the nominal interest rate minus the rate of inflation
Real Interest Rate = Nominal interest rate - inflation rate
- Inflation Premium - a percentage built into a nominal interest rate to anticipate the rate of inflation for
the loan period
Unit 2 Page 20
the loan period
Nominal Interest Rate = Desired real interest rate + Inflation Premium
Unit 2 Page 21
Check Your Understanding
November-05-08
9:30 AM
4. 1990 = 13.4 B
1.
a) Unemployed since they are looking for a job. Frictional.
b) Not in labour force.
c) Unemployed, frictional.
d) Employed, still got a job.
e) Not in Labour Force, discouraged worker.
f) Employed, but is a underemployment.
2. -
a. Cyclical
b. Frictional
c. Structural - Replacement
d. Seasonal
e. Structural - Technological
f. Cyclical
3. Hidden unemployment is workers who are employed but are not utilizing their skills, discouraged
workers, which leads to misleading unemployment rates. They have no effect on employment
data, but if counted they will effect it negatively.
4. - The GDP GAP is at its minimum when the unemployment rate is below the full employment rate.
It is also at it`s highest when unemployment rate is too high.
1990 13.4B
1992 50.76
1994 43.9212
1996 34.98
1998 18.76
2000 -3.1476
Negatives = 0. No loss in national Production.
Unit 2 Page 22
Monitoring Employment
November-03-08
9:00 AM
Employment Rate = ( number employed / labour force )x 100

Unemployment Rate consists of those who are not working and are available for work =
(Unemployed / Labour Force) x 100
Categories -
- Under 15 and those institutionalised
- Homemakers
- Labour force who are employed
Pop = total population

LF = labor force = U + E
LFpop = labor force population
p = participation rate = LF / LFpop
E = number employed
e = rate of employment = E / LF
U = number of unemployed
u = rate of unemployment = U / LF
Pasted from <http://en.wikipedia.org/wiki/Labor_force>
Seasonally Adjusted Rate - eliminates short-term or seasonal unemployment

Participation Rate - Labour force includes both the unemployed and employed, with the exception of
military, students, and homemakers, the labour force is expressed as a percentage of the total
employable population.
= Total Labour Force / Total Employable Population x 100
Limitations of Employment Data

Underemployment - Workers who are not at work at jobs that utilize their skills.
Discouraged Workers - those who would like to work but have stopped looking because they believe
nothing is available for them
Hidden unemployed - underemployed, and discouraged refered to as hidden since they are not counted
in the official unemployment rate
Types of Unemployment
6 MONTHS UNEMPLOYED, AFTER IS DISCOURAGED

Frictional Unemployment - refers to short-term unemployment of those workers who presently
between jobs or who are entering
Seasonal Unemployment - is the result of climatic changes that may leave workers unemployed for
specific periods of the year.
Structural Employment - direct result of structural changes in the economy, ie industries disappearing.
Such as -
 Technological Unemployment -the structural unemployment is identified the cause.
 Replacement Unemployment - one of the costs that Canada and other industrial nations
will face in moving to a global economy such as downsizing and structural employment
Unit 2 Page 23
will face in moving to a global economy such as downsizing and structural employment
changes
Cyclical Unemployment - caused by upward swings and downward swings, caused by economic decline.
Inadequate Demand Unemployment - declining demand during periods of economic slowdown, bank
of Canada can contribute by raising interest.
Full Employment
Full Employment - highest reasonable expectation of employment, referred to as the natural

employment rate which includes frictional and structural unemployment and excludes cyclical and
seasonal (unemployment rate is between 6-7%)
Costs of Unemployment
Potential Output - GDP that can be potentially outputted with full employment
Actual Output -The GDP that the economy actually outputs.
- Chronic unemployment can hurt both individual and the Canadian economy as a whole. There are
human and economic costs associated with joblessness, especially unemployment lasting for extended
periods of time.
Cost of unemployment for the entire economy, is reflected by the GDP GAP.
GDP GAP = GDP x ((unemployment rate - full employment) x2 )

100
(Loss in National Production)
OKUN`s LAW: When potential output exceeds actual output, the greater the GDP gap, for every 1% gain
in unemployment, 2% gap in GDP
88
Unit 2 Page 24
November-07-08
8:30 AM
1. -
a. -
2006 2007
12.50 11
12.50 14.3
25.0 25.3
2. 0.25 / 12.50 x100 = 0.0002
b. 2006 = 23.75 2006 = 26.75 (DIFFERENCE / BASE x 100)
c. 12.6%
2.
Year Nominal GDP GDP DEFLATOR REALGDP

2004 205.344 97.458 210.7
2005 234.3 100 234.3
2006 245.9 101.34 249.19
2007 258.7 102.944 251.3
2008 275.19 105.438 261.4
Unit 2 Page 25
November-12-08
9:11 AM
1. -
(MILLIONS)
Unemployed members of labour force 2.3
Total population 15 years of age and over 58.9
Participation rate 64
Workers with full-time job 21.4
Part-time workers who do not wish to have full time jobs 4.2
Part-time workers who wish to have full time jobs 3.5
Total population less then 15 years of age 14.6
a. Labour force
b. Labour force population
c. Official unemployment rate
2. Using the information in the table derive an estimate of this economy unemployment that includes underemployment.
Unit 2 Page 26
Business Cycles and Employment Patterns
November-18-08
8:37 AM
• Globalization has led to increased replacement unemployment as jobs migrate to China

• High EI benefits act as a disincentive to permanent employment
• Automation has created technological unemployment as workers continue to be replaced by machines
• Greater economic freedom and worker mobility means frictional unemployment
Fluctuations in the economy refer to business cycle
PEAK
Recession/contraction
Expansion: • Decreasing prices
• rising prices • Increasing unemployment
• Lower unemployment • Decreasing production
• Rising production • Lower income
• Rising incomes
TROUGH
During first phase of expansion also known to be recovery mode.

2 consecutive business quarters with negative GDP growth = recession.
Stagflation - periods of economic stagnation where production slows down and both unemployment
and inflation rates increase
CHECK YOUR UNDERSTANDING
1. During high levels of GDP growth, there is higher employment due to more jobs created. During a
contraction, jobs are loss due to lowering production.
2. ALREADY DID
3. The business cycle occurs since it is the general trend for the economy. As the economy contracts for 2
quarters the economy is in a recession and a extended recession is a depression.
4. Cost-push is from operating expenses, and demand-pull is from excessive demand ie. Jordan wants 1000
milkshakes, and a milkshake costs 1000 to make.
5. As inflation rises, unemployment declines and vice versa due to higher prices.
6. Supply was not able to keep up with demand.
Unit 2 Page 27
Aggregate Demand
November-24-08
8:21 AM
Aggregate Demand - the relationship between the general price level and total spending in the
economy. - made up of spending by C, I, G, and (X-M).
Real Expenditure - total spending in an economy, adjusted for changes on the general price level, is
calculated by using the GDP deflator
Aggregate Demand Curve
Price Level
Real GDP
Demand Curve - relationship between the general price level and total spending in the economy
expressed on a graph
Demand Schedule - shows relationships between general price level and total spending in the economy
expressed in a table
Price Low = Demand High
Amount Spend by an Entire Economy is Determined by:
1. Wealth Effect: - when price level rises, the real value of households financial assets decreases. Because
consumers feel they have less wealth, they spend less on consumption items. As a result of this wealth
effect, real expenditures drop
Real Value of Financial Assets = Nominal value financial assets / price level
2. Foreign Trade Effect - with changes in the price level, expenditures on imports change in the same
direction, while expenditures on exports change in the opposite direction.
a. When the price level in Canada rises, Canadian exports become more expensive for foreigners -
sales in foreign markets fall - decreasing in export expenditures.
b. Products imported into Canada become cheaper relative to higher- priced domestic products -
import expenditures by Canadian rise.
c. Foreign Trade Effect - Net exports (X-M)
Changes In Aggregate Demand
1. Consumption
a. Disposable income
b. Wealth (wealth effect)
Unit 3 - Fiscal Policy Page 28

b. Wealth (wealth effect)
c. Consumer expectations
d. Interest rates
2. Investment (limited to planned investment)
a. Real rate of return - constant dollar extra profit provided by a project each year, slated as a
percentage of the projects initial cost.
b. Investment Demand - the relationship between interest rates and investments
c. Investment Demand Schedule - relationship between interest rates and investments expressed in
a table
d. Investment Demand Curve - the relationship between interest rates and investments expressed
on a graph
Investment Influenced by:

1) Interest rates
2) Business expectations
3. Government Purchases
4. Net Exports
5. Foreign Incomes (FDI)
6. Exchange Rates
Shifts in Aggregate Demand Curve
Aggregate demand increases and the AD curve shifts to the right, with the following:
1. An increases in consumption due to:

a. A rise in disposable income
b. A rise in wealth unrelated to a change in rice level
c. A expected rise in prices or incomes
d. A fall in interest rates
2. An increase in investment due to:
a. A fall in interest rates
b. An expected rise in profits
3. An increase in government Purchases
4. An increase in net exports due to:
a. A rise in foreign incomes
b. A fall in value of the Canadian dollar
Aggregate demand decreases and the AD curve shifts to the left with the following:
1. An decrease in consumption due to:

a. A fall in disposable income
b. A fall in wealth unrelated to a change in rice level
c. A expected fall in prices or incomes
d. A rise in interest rates
2. An decrease in investment due to:
a. A rise in interest rates
b. An expected fall in profits
3. An decrease in government Purchases
4. An decrease in net exports due to:
a. A fall in foreign incomes
b. A rise in value of the Canadian dollar
a) Shift to right, rise in disposable income (CONSUMPTION)

b) Shift to left
c) Shift to left, net exports
d) Shift to right, investment, consumption

d) Shift to right, investment, consumption
e) Shift to left, net exports
f) Shift to left, investment

Aggregate Supply
November-24-08
9:18 AM
Aggregate Supply - relationship between the general price level and real outputproduced in the
economy
AS-> Sellers - sell at highest price at lowest cost
Aggregate Supply Schedule : relationship between general price level and real output expressed in a
table
Aggregate Supply Curve : expressed on a graph
Changes in Aggregate Supply (AS) Aggregate Supply Curve

(these are variable that change total output at all price levels)
1. Input prices:
a. Short run decrease in AS : a decrease in total output at al price levels, with no change in potential
output
b. Short Run increase in AS: an increase in total output at all price levels, with no change in potential
output. Price
2. Resource Supplies: Level
a. Over the long term, supply of resources in an economy (human and capital) tend to grow. With Potential Output
such an increase, businesses tend to produce more real output at every price level. - More input (MAX EFFICIENCY)
over a long period of time increase AS.
b. Long Run Increase In AS: an increase in total and potential output at all price levels.
c. Long Run Decrease In AS: a decrease in total and potential output at all price levels.
3. Productivity:
a. Labour Productivity: Quantity of output produced per worker in a certain period of time. Real GDP
b. Labour Productivity = Real Output / Total Hours Worked
c. Increases in productivity are largely due to technological progress. Causes the AS to shift to the
right.
Aggregate Supply Curve
SHORT RUN
SHIFTS IN THE AS CURVE
Aggregate supply increases, with the AS curve shifting to the right, and potential output staying the
same with the following:
Price
1. A decrease in input prices due to Level
a. A fall in wages Potential Output
b. A fall in raw material prices (MAX EFFICIENCY)
Aggregate Supply increases, with the AS curve shifting to the right and potential output increasing
with the following:
Real GDP
2. An increase in supplies of economic resources due to
a. More labour supply
b. More capital stock Aggregate Supply Curve
c. More land LONG RUN
d. More entrepreneurship
3. An increase in productivity due to technological progress
4. A change in government policies:
a. Lower taxes
b. Less government regulation
Price
Aggregate supply decreases, with the AS curve shifting to the left, and potential output staying Level
the same with the following:
Potential Output
(MAX EFFICIENCY)
1. A increase in input prices due to
a. A rise in wages
b. A rise in raw material prices
Aggregate Supply decreases, with the AS curve shifting to the left and potential output Real GDP
increasing with the following:
2. An decrease in supplies of economic resources due to

a. less labour supply
b. less capital stock
c. less land
d. less entrepreneurship
3. An decrease in productivity due to technological decline
4. A change in government policies:
a. higher taxes
b. more government regulation
1. -
a. Long-run, shift to right, increase in resources
b. Shift to left, long run, government policy
c. Shift to left, long-run, input prices
d. Shift to right, short run
e. Shift to left, long run
f. Shift to left, long run
g. Shift to right, long run

Equilibrium
November-26-08
9:04 AM
-An economy`s equilibrium price level and real output occur at the intersection of the AD and AS
curves.
Inventory Changes
- Inventory increase
○ At this price level - real output exceeds real expenditures - more is produced than is purchased in
the economy
○ Businesses have an unintended increase in inventories - surplus - which represents a positive
unplanned investment. As a result of this surplus, prices of individual decrease, pushing down the
general price level.
○ Lower prices - cause businesses to decrease output (since real outputs and unemployment are
inversely related, this causes a rise in the unemployment rate
○ This trend continues until equilibrium
SURPLUS AS
Price Level 160 B (EQUILIBRIUM)
AD
SHORTAGE
700
Real GDP
- Inventory Decrease
○ Suppose price levels are below equilibrium levels-expenditures exceed production
○ Expenditures exceed production-creates a shortage
○ This leads to an unintended decrease in inventories - negative unplanned investment
○ Particular products are in short supply, prices rise
○ Buyers response - decrease spending
○ Higher price level causes businesses to raise real output- unemployment falls
Role of Unplanned Investments
Unplanned investment is
- +ve- when price level is above equilibrium value
- -ve - when price level is blow equilibrium value

Injections And Withdrawals
December-01-08
8:29 AM
Injections and Withdrawals
Injections - add to main income spending stream in economy (I,G,X)

Withdrawals - outward flows of funds. Divert funds from the income-spending stream (Savings, Taxes,
M)
Investments and Savings
- Most funds are borrowed by businesses for investments

- Companies keep a portion of their profits to reinvest
- Governments also borrow money - more government borrow, the less ends up with businesses
- Foreign flows
Government purchases and taxes
- Usually government purchase exceeds taxes

- To make up - governments borrow funds in financial markets
- Recent years - T >G, governments - use these excess funds to pay off some of their outstanding debts.
Exports and Imports
- Money spend on imports > exports

- Foreign lenders typically provided funds to Canadian financial markets, with lending by foreigners being
greater than borrowing by foreigners
- This surplus of lending by foreigners has helped make up the shortfall in net exports
Total Injections and Withdrawals
- Total injections. I (I-Planned investments) + g + x

- Total withdrawals: S + T + M
- When total injections exceed total withdrawals, flows into the income-spending stream > flows out. This
implies that real output and spending in the economy expand
- When total withdrawals exceed total injections, flows into the income-spending stream are less than
outflows. The income-spending stream falls and slows down. This implies that real output and spending
in the economy contract.
- Equilibrium : Total injections = total withdrawals
AS
Price Level (GDP Recessionary Gap

DEFLATOR)
AD
Potential Output
Real GDP

Equilibrium VS Potential Output
Recessionary Gap - is the amount by which equilibrium output falls short of potential output
- If equilibrium output is below its potential level, unemployment is above the natural unemployment
rate. (The difference between the equilibrium output and potential output is the RECESSIONARY GAP.
Inflationary Gap- is the amount by which equilibrium output exceeds potential output
- If equilibrium output is above its potential output, unemployment is temporarily below the natural
unemployment rate
- When equilibrium output > potential output - inflationary GAP
AD3
AS
AD 1
PRICE LEVEL AD2
Inflation Gap
Recessionary Gap
Equilibrium
REAL GDP
1. -
a. Surplus, Inflation gap, economy expands
b. Recessionary gap, deficit
2. -
a. IGX, STM
b. Yes
3. -
a. Below
b. Above
c. Higher

The Canadian Economy with an Increase in Government Spending
December-03-08
8:18 AM
AS
AD1
Income Price
AD0
Equilibrium 2
Y1 P1
Y0 P0
Full Employment, Full Output
Equilibrium 1
Q0 E0 Q1 E1
OUTPUT EMPLOYMENT
Economic Model : How will a change in government spending effect the economy.
At the point the economy is in equilibrium where the out level is Q0, Employment E0, Income level Y0,
Price Level P0
Now lets assume there is an increase in government spending. How will this effect the graph?
As G ↑, AD ↑ AD1 Because AD = C+I+G+X-M

This will cause curve to shift to the right.
Now there will be an new equilibrium where AD1 crossing the AS at that point the economy is in
equilibrium where the
- Output level increases from Q0 to Q1
- Employment increase from E0 to E1
- Income Level increase from Y0 to Y1
- Price Level increases from P0 to P1
In conclusions:
As G ↑ AD ↑ Q ↑ Employment ↑ Y ↑ P↑

The Canadian Economy with an Increase in Personal Income
Rates
December-03-08
8:34 AM
AS
AD0
Income Price
AD1
Equilibrium 2
Y0 P0
Y1 P1
Equilibrium 1
Q1 E1 Q0 E0
OUTPUT EMPLOYMENT
Economic Model: How will an increase in personal income tax rates effect the economy
To start we must show some kind of connection between tax rate and aggregate demand.
This is now a direct relationship like government spending was.
Now lets assume there is an increase in personal income tax rates how will this affect the graph?
Recall: YD = Y-T
T = f(Y)
T = t1Y
Therefore:
If T1 ↑ T2
↓ YD
C = F(yd)
C= ↓
As C ↓ AD ↓ to AD1: Because AD = C+I+G+X-M
This will cause the curve to shift to the left.

equilibrium where the:
• Output level decreases from Q0 to Q1

• Employment decreases from E0 to E1
• Income level decreases from Y0 to Y1
• Price level decreases from P0 to P1
In conclusion
AS t ↑ Yd ↓ C ↓ AD ↓ Q ↓ Employment ↓ Y ↓ P ↓

Ranges on the AS Curve
December-03-08
8:39 AM
Ranges on the AS Curve
AS
AD1
Income Price
Classical Range
AD0
Y1 P1
Intermediate Range
Y0 P0
Keynesian Range
Q0 E0 Q1 E1
OUTPUT EMPLOYMENT
• Keynesian Range: is known as the horizontal section of the aggregate supply curve. It is referred to as
the Keynesian section because there is substantial unemployment level occurring at that point. Recall
John Maynard Keynes came to fame in the time period of the great depression.
• Intermediate range : In the intermediate section of the aggregate supply curve there is a direct
relationship between employment and income levels.
• Classical range : is known as the vertical section of the aggregate supply curve. In this section, classical
economists' concern themselves with the belief that the economy will operate at full employment which
will result in full output

Phases of the Business Cycle
December-03-08
9:01 AM
Business cycle is divided into the major phases:

- Expansion
- Contraction
Expansion
- Is a period of increase in consumer confidence and economic activity. It is made up 3 smaller stages
known as
○ Recovery
 Is the first part of an expansionary phase. Consumer confidence starts to increase a little
people start to replace small items such as clothes and small appliances. This results in
business starting to replace or increase their inventory levels. Businesses start to increase
their output hiring more employees.
 Unemployment is decreasing while inflation is occurring
○ Boom
 Is the second part of an expansionary phase. Consumer's confidence starts to increase at a
faster pace buying more and more consumer goods. As businesses start to hire even more
people national incomes rise an unemployment levels fall. People now start to buy
consumer durable goods such as cars, houses. Resulting in businesses to start increase their
construction levels on homes, factories and stores. Businesses now also start to buy new
equipment and machines increasing their efficiency levels. This results in workers receiving
higher pay. Prices increase.
 Unemployment levels fall approaching full employment, inflation increases at very high
rates
○ Peak
 Occurs when expansion reaches a climax. Output starts to standstill and level off. Consumer
confidence starts to decline to the point where people start to stop their buying.
Contraction
- Is a period of decrease in consumer confidence and economic activity. It is made up of 3 smaller

stages known as
 Recession
□ Is the first part of a contractionary phase. Consumer's confidence starts to decrease a
little. People start to stop buying large items such as cars, major appliances and
houses. This results in businesses starting to reduce their output of these items
(inventory levels). Businesses start to decrease their hiring they may even start to lay
off some of their employees. Workers might have to take wage cuts. Resulting in
prices going down.
□ Unemployment is increasing while inflation is dropping
 Depression
□ Is the second part of a contractionary phase. Consumer's confidence starts to
decrease at a faster pace buying less of all consumer goods. Now businesses have to
try to get rid of their inventory levels on their shelves. Businesses decrease or slow
their production levels to a very low level. Business try to cut cost so they start to lay
off even more people national incomes fall as unemployment levels rises. This results
in an even lower level of confidence in people. Resulting in even less buying. Prices
must fall even lower; companies start to go bankrupt.
□ Unemployment levels increase approach Keynesian range, inflation becomes non
existent prices start to fall
 Trough
□ Contraction reaches a minimum. Output starts to standstill and level off. Consumer
confidence starts to level off at a low point to the point where people start to stop
their savings, they have to buy a little.

Conclusion
- If I+G+X =S+T+M - a country is in a state of economic equilibrium were the economy is not growing or
contracting.
- Therefore, periods of contractions:
- (I+G+X) < (S+T+M)
- And period of expansion:
- (I+G+X) > (S+T+M)
- These are not periods of equilibrium

Stabilization Policy
December-05-08
8:44 AM
Definition: A government policy designed to lessen the effects of the business cycle.
Goal: Is to keep the economy as close as possible to its potential output. Natural unemployment exists -
inflation is restrained
Two Categories:
- Expansionary policies
- Contractionary policies
Expansionary Policies
- Our government policies designed to reduce unemployment and stimulate output

- When total output is below its potential, policy-maker want to eliminate the recessionary gap
Contractionary Policies
- Our government designed to stabilize prices and reduce output

- The economy is booming, policy makers want to cut the inflationary gap - (to stabilize prices and bring
the economy back down to its potential output)
Fiscal Policy
- "Fiscal" - budgetary
- Definition: Government stabilization policy that uses taxes and government purchases as its tools:
budgetary policy
- Governments have an extensive impact on the economy through taxation and government purchases.
The government's annual budget sets out what the government will tax and spend.
- The budget becomes an instrument of stabilization policy
- Fiscal Year: the 1-month period to which a budget applies
Discretionary Fiscal Policy
- Is when the government takes deliberate actions through legislation to alter spending or taxation
policies in order to influence the level of spending and employment
- Discretionary fiscal policy occurs when the federal government takes on an active role in the economy
by increasing or decreasing government spending or tax policy.
- Non-discretionary fiscal policy is active accounts or stabilizers that are set up to operate even when the
government does not takes on an active role in the economy.
Uses of Fiscal Policy
FISCAL POLICY OPPOSITE OF BUSINESS CYCLE if POLICY IS CONTRACTIONARY then BUSINESS

CYCLE IS AT EXPANSIONARY
EXPANSIONARY FISCAL POLICY
1. Expansionary Fiscal Policy:

i. Government policy that involves increasing government purchases, decreasing taxes, or
both to stimulate spending and output.
1) This would entail a tax cut, an increase in government spending, or both
2) To stimulate economic growth and lower employment (PST - 8%, GST - 5% was 7%)
○ Expansionary discretionary Fiscal Policy
i. The economy is in an economic contraction. Most likely it is in recession. AT this time the
government will enact policies to reduce the recessionary gap and spur economic growth

government will enact policies to reduce the recessionary gap and spur economic growth
○ Increased Government Spending
i. The government increase spending which should increase aggregate expenditure
ii. As G + AD + Q + Employment + Y + P + (+ = increases)
○
i. Decrease taxes
ii. The government will reduce personal or corporate taxes which should increase aggregate
expenditure
iii. As T - C + AD + Q + Employment + Y + P +
iv. These two policies could also be run together at the same time
2. Contractionary Policy:
a. Government policy that involved decreasing government purchases, increasing taxes, or both to
restrain spending and output
b. The economy is in an economic expansion. Most likely it is in a boom. At this time the government
will enact policies to reduce the inflationary gap and spur stable but slower economy growth
c. Decreased Government Spending
i. The government decreases spending which should decrease aggregate expenditure
ii. As G - AD - Q - EMPLOYMENT - Y - P -
iii. Increase Taxes
iv. The government will increase personal or corporate taxes which should decrease aggregate
expenditure
v. At this point the teacher will try to involve students the below analysis
vi. As T + C - AD - Q - EMPLOYMENT - Y - P -
vii. These two policies could also be ran together at the same time
d. Automatic Stabilizers:
i. Certain elements in the economy tend to stabilize our growth. These items were up to set
up to automatically work when the economy grows too fast or contracts too fast. The
government established them.
ii. During a boom, these stabilizers will try to decrease Y, P, Q, and employment
iii. During a recession, these stabilizers will try to increase Y, P, Q, and employment
iv. In a period of contraction, net tax revenues .(taxes minus transfers and subsidies) decrease.
v. During a period of expansion, NET TAX REVENEUE increases
Examples of Stabilizers:
a) Income Tax:
a. The Canadian income tax system is a progressive system, meaning as incomes increase people pay
a higher total tax and also a higher tax rate. So in a boom as incomes go up the government
automatically collects more taxes from its people.
b. As incomes decrease people pay a lower total tax rate and also a lower tax rate. So in a recession
as incomes go down the government automatically collects fewer taxes from its people, giving
them more to spend.
b) Social Security Payments (welfare):
a. During a recession as people lose their jobs and become unable to find work. The can collect
welfare, so that they still have money to live with.
b. During a boom when people start to find work they are automatically cut off of welfare. They have
less money to spend.
c) Price Support Programs:
a. This is a program implemented by the federal government of Canada that is used to give farmers
aid. When farm output starts to receive a lower price. The government will use some artificial
means (grants) of increase the price farmers receive. These way farmers receive enough money to
continue their operations. They do not go out of business. When there are booms and farm
product prices go up, the price programs do not work.

The Spending Multiplier
December-09-08
8:19 AM
- Multiplier effect - the magnified impact of a change on aggregate demand; price level stays constant,
change in spending at one price value.
- Marginal Propensity to Consume - the effect on domestic consumption of a change in income
MPC = Change in consumption on domestic items / change in income
- Marginal Propensity to Withdraw - the effect on withdrawals 0 savings, imports, and taxes - of a change
in income
MPW = change in total withdrawals / change in income
1 = MPC + MPW
MULTIPLIER EFFECT
- Is the magnified impact of any spending change on aggregate demand. It assumes that the price levels
stays the same.
- The multiplier effect is the change in spending at one price level multiplied by a certain value to give the
resulting change in AD
Consumption Function
- Calculates the amount of total consumption in an economy. It is made up of autonomous consumption

that is not influenced by current income and induced consumption that is influenced by the economy's
disposable income level
C = Yd
C = Autonomous consumption + MPC / Yd
Consumption
Disposable Income
Marginal Propensity to Consume
- Measures the rate at which consumption is changing when disposable income is changing. In a
geometric fashion the MPC is the slope of the consumption function
- Is the effect on domestic consumption of a change in income:
MPC = change in consumption on domestic items

change in income

Marginal Propensity to Withdraw (SAVE)
- Withdrawals: savings, taxes, imports

- Is the effect of a change in income on withdrawals. It is the change in total withdrawals as a proportion
of the change in income.
- Marginal propensity to save : measures the rate at which savings is changing when disposable income is
changing
MPW = Change in total withdrawals

Change in Income
Consumption
C = 50 + .85YD
- This equation means that out of every extra dollar in disposable income 85 cents is spent on
consumption. Therefore the MPC = .85, the MPS = .15.
Disposable Income, Consumption and Savings
YD C MPC S MPS
100 135 -35
200 220 .85 -20 .15
300 305 .85 -5 .15
400 390 .85 10 .15
500 475 .85 25 .15
- As income levels increase people tend to consume by the same percentage

- That is the rich in society spend at the same rate as the poor
The Spending Multiplier
- Is the value by which the initial spending change is multiplied to give the total change in the output. (The
shift in the AD curve)
a) Total change in Output =
i. Initial change x spending multiplier
b) Spending Multiplier =
i. Total change in output (shift in the AD curve)
Initial change in spending
c) Spending Multiplier =
i. 1
MPW
- Average propensity to Consume is the ratio between a person's total and disposable income and
his/her total consumption
- Average Propensity to Save is the ratio between a person's total disposable income and his/her total
savings
Marginal Propensity
- Marginal Propensity to Consume is the ratio between a person's change in disposable income and his
consumption
- Marginal Propensity to Save is the ratio between a person's change in disposable income and his
change in savings
APC = C / Yd APS = S / Yd
Benefits of Fiscal Policy

1. Regional focus - some part of the country may be more effected than others by the business cycle
2. Impact on spending - when the first spending is assured by the government - multiplier effect
Drawbacks of Fiscal Policy
1. Policy Delays:
a) Recognition Lag - is the amount of time it takes policy makers to realize that a policy is needed
b) Decision Lag - is the period that passes while an appropriate response is formulated and
implemented
c) Impact Lag - is the time that elapses between implementing the policy and having its effect on the
economy
2. Political Visibility:
a) Discretionary Fiscal Policy - highly visible elements of government activity.
3. Public Debt:
a) Is the total amount owed by the federal government as a result of its past borrowing
b) Public Debt Charges - is the amounts paid out each year by the federal government to cover the
interest charges on its public debt.
1. -
a) 1 million
b) 0.33
c) 1/MPW
2. -
a) SM = 1.67, shift to left by 6667
-(MPC x change in T) x 1 / mpw
b) SM = 1.25, shift to right by 6250
c) 3750
d) -66666.666667

Impact of Fiscal Policy - Budget Surpluses and Deficits
December-11-08
9:03 AM
Budget Surplus
- Surplus Budget : occurs when the government's revenues exceed their expenditures = T > G
- Budget Surplus = government revenues - government expenditures)
Budget Deficit
- Deficit Budget: occurs when the government's expenditures exceed their revenues. = G > T
- Budget deficit = government expenditures - government revenues)
GDP
- The size of a governments surplus or deficit in relation to the economy's overall GDP gives an indication
of what type of discretionary fiscal policy is an operation, as well as the built in effects of automatic
stabilizers.
Balanced Budget
Balance Budget - occurs when the government's revenues equals their expenditures. = T= G
- Is where the government's expenditure and revenues are equal
Debt
- Debt: is the total amount of money the federal owes.

- The government debt represents the sum of all its past budget deficits and any surpluses.
Surpluses
- Budget surpluses are related to discretionary fiscal policy.

- Surpluses are more likely the result of built in factors
Deficits
- Deficits sometimes indicate active expansionary policies that increase government expenditures or
reduce revenues
- Deficits come about as a result of automatic stabilizers
Fiscal Policy Guidelines
1. Annually balanced budgets

a. Is the principle that government revenues and expenditures should balance each year.
2. Cyclically Balanced Budgets
a. Is the principle that government revenues and expenditures should balance over the course of
one business cycle (which is not necessarily one fiscal year)
b. The deficits from periods of contraction should roughly equal the surpluses from periods of
expansion
3. Functional Finance
a. Is the principle that government budgets should be geared to the yearly needs of the economy
b. Policy makers should concern themselves primarily with correcting fluctuations caused by the
business cycle.

Economic Application Questions
December-14-08
7:00 PM
1. -
a. -=
Interest Rate Total Investment
11 100M
9 150M
7 200M
5 250M
3 300M
1 350M
b. =
Investment
Interest Rate
c. 250Million since there is 50M worth of investment for each 2% decrease in interest rates
1. -
a. Shift to the right, consumption.
b. Shift to the left, investment
c. Shift to the left, consumption,
d. Shift to the right, government purchases
e. Shift to the right, increase net exports
f. Shift to the right, increase net exports
A, D, E, F
B, C
Price Level
Real GDP

3. -
a. Shift to left, short run
b. Shift to right, long run
c. Shift to right, long run
d. Shift to left, long run
e. Shift to right, short run
f. Shift to right, long run

SHORT RUN
Price
Level
Potential Output
(MAX EFFICIENCY)
Real GDP

LONG RUN
Price
Level
Potential Output
(MAX EFFICIENCY)
Real GDP
4. -
a. -
140
AS0
130
Price Level 120
110
100
AD0
180 200 220 240 260 280 300

Real GDP
Equilibrium price level is 120, and real output is 240B
b. If 140, there is a surplus, if at 110 it is a shortage.

c. =
140
AS0
130
Price Level 120

AD 1
110
100
AD0
180 200 220 240 260 280 300
Real GDP
The aggregate demand has shifted to the left. Two causes could be a rise in taxes, or fall in incomes.
d.
140
AS0 AS1
130
Price Level 120

AD 1
110
100
AD0
180 200 220 240 260 280 300
Real GDP

Shift to right, a decrease in government regulations, lower taxes.
5. A fall in injections results in lower income-spending since it effects (I,G,X) which conversely affects
aggregate demand by decreasing inventory resulting in shortages. Spending in economy contracts since
there is more withdrawals then injections due to lower flows of income -spending. This can be found on
AS and AD since it incorporates IGX, S,T,M
6. Wage increases are only bad shortly but you can ease them by raising prices. But on the other hand, a
change such as a low supply of land available could effect you for the long run since there is no
immediate solution.
7. Since a decrease when you are beyond your output would only lead you to your equilibrium, whereas a
decrease when you are below your potential output leads you into lower spending. Recessionary Gap.
1. -
a. 1982-1984,1986-1988, 1991-1994, 1996-1997, 1998-1999, 2001-2002, 2003-2004 since annual
percentage change in GDP
b. 1984-1986, 1988-1991, 1995-1996, 1997-1998, 1999-2001, 2002-2003, 2004-2005negative
percentage
c. Peak 5.8 @ 1984
d. Troughs -2.9 @ 1982
2. -
a. -
i. People buy a lot
ii. People don't buy a lot
b. -
i. People buy a lot
ii. People don't buy a lot
c. -
i. Plenty
ii. None
d. -
i. Plenty
ii. None
e. -
i. None
ii. Plenty
f. -
i. Loads of raises
ii. Good luck eating out of a garbage can
g. -
i. Plenty
ii. None
3. Contractions: Luxury goods, essential goods, farming, gold
Expansions: Luxury goods, housing, retail
4. -
a. Recessionary gap
b. Inflationary gap
c. Inflationary Gap
d. Recessionary Gap

Chapter 11
December-15-08
8:23 AM
1.
a) Inflationary gap, increase taxes; ad shift to left
b) Recessionary gap, tax cut, increase in government spending; ad shift to right
c) Equilibrium real output = equilibrium
2.
a) MPC = 0.35 MPW = 0.65 SM = 1.54
b) MPC = 0.25 MPW = 0.75 SM = 1.34
c) MPC = 0.4 MPW = 0.6 SM =1.67
3.
a) Low income cause smaller change in tax revenues. This dampens decreases in net tax revenues during
periods of falling incomes and also dampens increases in net tax revenue when incomes are rising.
Therefore, automatic stabilizers become less effective and the statement is true.
4.
a) 0.4 + 0.3 (0.6) + .05 (.60) = 0.6 .61
b) MPW = .61 MPC = .39
c) 1.64
90
5.
270
(BAR GRAPHS)
800
800 + 270 810
1070 + 90
6.
a) SM = 1.54, shift to the right, 3.076B

b) SM = 1.81, shift to the left, 9.0 B
c) SM = 1.43, shift to left, 4.285B
d) SM = 1.6, shift to right, 6.400B
7.
a) MPW = 0.55 MPC = 0.45, SM =1.82
b) Shift to left, 14.56 B

Roles of the Bank of Canada
November-24-08
8:22 AM
1. Regulate Economic Activity: - The governor of the Bank of Canada (Mark Coolly) and the minister of
finance (Jim Flaherty) set the monetary policy of Canada, The Bank of Canada can use monetary policy
to help stimulate the economy during a recession or to try and slow the economy during a period of
boom.
Interest Rates
High interest rates are better known as tight credit or tight monetary policy. Low interest rates are
better known as loose credit or easy monetary policy.
During period of easy monetary policy Canadians tend to start spending more. During periods of tight
monetary policy Canadians tend to save more.
Money Supply
The Bank of Canada can also increase of decrease the money supply available in Canada to Canadians to
try and affect their spending habits.
The Canadian Economy with Tight Monetary Policy
AS
AD0
Income Price
AD1
Equilibrium 2
Y0 P0
Y1 P1
Equilibrium 1
Q1 E1 Q0 E0
OUTPUT EMPLOYMENT
Economic model : how will a tight monetary policy effect the economy. To start we must show some
kind of connection between money supply and Aggregate Demand.
At this point the economy is in equilibrium where the : Out level is Q0, Employment E0, Income Level Y0,
Price Level P0
Now lets assume there is a decrease in money supply. How will the affect the graph?
M ↓ then C ↓
Therefore
As C ↓ AD ↓ to AD1 because AD = C + I + G + X + M
This will cause the curve to shift to the left
Now there will be a new equilibrium where AD 1 crossing the AS where the point in the economy is in
equilibrium where the output level decreases to Q1, employment decreases to E1, Income Level
decreases to Y1 and Price level decreases to P1.
Unit 4 - Monetary Policy Page 52

decreases to Y1 and Price level decreases to P1.
M ↓ C ↓ AD ↓ Q ↓ EMPLOYMENT ↓ Y ↓ P ↓
The Canadian Economy with an Easy Monetary Policy
AS
AD1
Income Price
AD0
Equilibrium 2
Y1 P1
Y0 P0
Equilibrium 1
Q0 E0 Q1 E1
OUTPUT EMPLOYMENT
Economic Model: How will a change in interest rates effect the Economy.
At that point the economy is in equilibrium where the output level is Q0, employment level E0, income
Y0, price level P0.
Now lets assume there is a decrease in interest rates how will the effect the graph?
As R ↓ S ↓ C ↑ AND THEREFORE AD ↑ TO AD1 BECAUSE AD = C + I + G+ X + M
This will cause the curve to shift to the right.
equilibrium where the:
• Output level increases from q0 to q1

• Employment increases from E0 to E1
• Income level increases from Y0 to Y1
• Price level increase P0 to P1
In conclusion
As R ↓ S ↓ C ↑ AD ↑ Q ↑ Employment ↑ Y ↑ P ↑
2. Fight Inflation: The B of C is set up to keep an eye on inflation. The B of C is truly set up as a watch dog
to make sure inflation rates do not go up that much. Currently Canada has a policy to maintain inflation
below 2-3% per year. In the late 80's and early 90s B of C wanted inflation to be 0.
Again B of C can use interest rates or money supply to try and maintain control of inflation. To control
inflation they will use tight money policy by increasing interest rate or decreasing money supply. See
graph one.
3. Regulation Foreign Exchange Rates : Canada has a floating exchange rate. This means the value of the
Canadian currency is decided on the world market. It is determined by the supply of the Canadian
dollars and the demand for Canadian dollars. However, at times the B of C feels that it is in the best

dollars and the demand for Canadian dollars. However, at times the B of C feels that it is in the best
interest of Canadians to regulate this activity. If the Canadian dollar falls too much this might create a
panic in Canadians, so B of C steps in to prevent huge drops. Also B of C also realizes that if the Canadian
dollar increases too much in value this will hurt Canadian Export market so they don't allow huge gains
either. For this reason Canada does not have a free float. It has a dirty float.
Example:
Dirty Float the Canadian Exchange with the Bank of Canada Intervention
S0
S1
Prices of one
Canadian Dollar in
terms of US
E0
E1
D0
Q0 Q1
As S0 = D0
The exchange is E0 at this exchange the Bank of Canada feels the exchange is too high and will hurt the
Canadian export sector, therefore they get involved and try to increase the supply of Canadian dollars
which will bring the exchange rate down to E1 which is more acceptable exchange rate.
4. Regulates the Banking System: the B of C is also known as the banker's bank. The B of C is the central
bank in Canada, and it holds some deposits from the Chartered banks in Canada (RBC, CIBC, BMO, TD,
HSBC). The B of C also sets the laws and rules that regulate the Chartered Banks, Trust companies,
Mortgage companies, and credit unions. Some of the laws that are created deal with cash reserves if the
banks, lending policies of bank, service charge policies, who can become a chartered bank and etc.
5. Government's Bank : The B of C is also known as the Government of Canada's Bank. The government
deposits its money with the B of C. The bank of Canada issues government bonds to be sold. It looks
after the Canadian Mint, printing of Canadian money. It also covers the paying of government expenses
and the collection of government revenues.
1. As a means of exchange, bartering requires coincidence of wants which leads to discrepancies, whereas
money, it can be exchanged for anything. As a store of purchasing power, bartering cannot be
liquidated easily, and therefore is lacking. As a measure of value, bartering a product or service has
no/over 9000 set values, which no standard is established.
2. M1 = 20B + 34B = 54B, M2 = 20B + 34B + 164B = 208B, M2+ = 20B+157B+34B+164B+215B+15B

Money Supply
January-12-09
8:40 AM
M1 - is the money stock consisting of non-bank holdings (money in people's pockets and money at
companies) of currency plus demand deposits in banks of people and businesses. This does not include
currency held by banks or owned by the bank of Canada
M1b - this is M1 plus all chequable deposits
M2 - Is defined as M1b plus all notice deposits in a bank and personal term deposits. This does not
include corporation term deposits.
M2a - consists of M2 plus deposits at trust companies, mortgage companies, and shares in credit unions
M3 - consists of M2a plus corporation term deposits plus Canadian foreign currency deposits
• Currency held outside of banks is 37B

• Demand deposits of individuals and businesses is 92B
• Personal saving deposits at chartered banks is 349B
• Non-personal notice deposits at chartered banks is 51B
• Deposits at trust and mortgage companies is 8B
• Deposits at credit unions and caisses populaires is 115B
• Deposits at other financial institutions is 113B
Quantity theory of Money:
P= M +V
Q
P is equalled to the consumer price level

Q is equalled to the quantity of goods and services in the economy.
V is the velocity of money (this is a measure of how fast money is spent in the economy).
M is the money supply
Transaction Velocity Approach
M*V = P*T
M is the money supply

P is the general price level of consumer goods
V is the velocity of money
T is the number of transaction in the economy
1. -
a. Expansionary
b. Increase money supply, shift AD to the right, more consumption and investment
2. -
a. 2%
b. Decrease?
1. -
a. Bonds + 10000
b. Decrease 500

b. Decrease 500
c. 9500
d. 475
2. -
a. -2000
b. -200
c. 1800
d. 9000
Bond Sales
Person A
Scotia Bank
100000
Cash reserve of eg. 10% ($10000)

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Factors of Production

• Is a very complex or intricate system

The 3 Basic Economic Questions

For whom to produce for?

The 3 ECONOMIC SYSTEMS THAT HAVE EMERGED ARE:

Some of the advantages for market system include:

Some of the disadvantages for the market system include:

Some of the advantages for the command system include:

Some of the disadvantages for the command system include:

Modern Mixed Economy

Traditional Mixed Economies

Mongolia India Myanmar

Canada: A Mixed Market Economy

• The Canadian economy contains elements of traditional and command economies.

Increases in employment +production as the opportunity cost of stable prices.

2. The PPC curve is concave to the origin because:

Input - a productive resource such as labour

2 Variables - fixed, variable

1.3 Practise Questions

The Income Approach

- INCOME COMPONENTS OF GDP - wages, profit, interest, and rent.

Y = $100 - (taxes, other deductibles) = T = $90 = YD

GDP EXPENDITURE APPROACH

CONSUMER EXPENDITURE APPROACH -

BUSINESS INVESTMENT DEPENDS ON:

1) BUSINESS CONFIDENCE (FUTURE EXPECTATIONS)

GOVERNMENT EXPENDITURE DEPENDS ON:

NET EXPORT EXPENDITURE DEPENDS ON:

EXPENDITURE EQUATION: C + I + G + (X-M)

PERSONAL CONSUMPTION (C)

LARGEST PORTION OF GDP 55%

PERSONAL CONSUMPTION - HOUSEHOLD SPENDING ON GOODS AND SERVICES

GROSS INVESTMENT (I)

15-25% OF THE GDP

GI = inventory + (capital stock - depreciation) = NI

GROSS INVESTMENT - PURCHASES OF ASSETS THAT ARE INTENDED TO PRODUCE REVENUE

GOVERNMENT PRUCHASES (G)

GOVERNMENT PURCHASES - CURRENT GOVERNMENT SPENDING ON GOODS AND SERVICES

EXPORTS (X)- FORIEGN PURCHASES OF CANADIAN GOODS AND SERVICES

NET EXPORTS - EXPORTS MINUS IMPORTS

(IIR - IIP) = Net investments from non-residents

1. GDP is everything bad in an economy.

a) INCOME BASED EXPENDITURES -854B EXPENDITURE - = 490+157+184+(67-27) 872B

Deflation - a general decrease in the level of prices.

Nominal versus Real Income

Real Income = Nominal Income

THE GDP Deflator

REAL GDP = Nominal GDP

Borrowing and Lending

Real Interest Rate = Nominal interest rate - inflation rate

Nominal Interest Rate = Desired real interest rate + Inflation Premium

Negatives = 0. No loss in national Production.

Employment Rate = ( number employed / labour force )x 100

Pop = total population

Pasted from <http://en.wikipedia.org/wiki/Labor_force>

Seasonally Adjusted Rate - eliminates short-term or seasonal unemployment

= Total Labour Force / Total Employable Population x 100

Limitations of Employment Data

6 MONTHS UNEMPLOYED, AFTER IS DISCOURAGED

 Technological Unemployment -the structural unemployment is identified the cause.

Full Employment - highest reasonable expectation of employment, referred to as the natural

GDP GAP = GDP x ((unemployment rate - full employment) x2 )

Year Nominal GDP GDP DEFLATOR REALGDP

• Globalization has led to increased replacement unemployment as jobs migrate to China