Understanding Economic Principles Flashcards

When economists refer to 'real' interest rates as opposed to 'nominal' interest rates, they mean:

Answer: Interest rates adjusted for the effects of inflation

The real interest rate equals the nominal rate minus the inflation rate, reflecting the true purchasing-power cost of borrowing.

Which of the following correctly describes a 'yield curve inversion' and its economic significance?

Answer: Short-term bond yields rise above long-term yields, often signaling a coming recession

An inverted yield curve occurs when short-term yields exceed long-term yields and has historically been a reliable predictor of economic recessions.

How does increased government deficit spending during a recession typically affect aggregate demand in the short run?

Answer: It increases aggregate demand by injecting spending into the economy

Deficit spending injects money into the economy, boosting aggregate demand through government purchases of goods and services or transfer payments.

Which economic concept explains why an initial increase in spending leads to a larger total increase in national income?

Answer: The multiplier effect

The multiplier effect describes how an initial injection of spending ripples through the economy as each recipient spends a portion of what they receive.

In international trade theory, Canada would have a comparative advantage in producing a good when:

Answer: Canada gives up less of other goods to produce it than its trading partners do

Comparative advantage exists when a country can produce a good at a lower opportunity cost relative to its trading partners, even if it lacks absolute efficiency.

Which measure of the money supply is the narrowest and most liquid?

Answer: M0

M0 (the monetary base) is the narrowest measure, consisting only of currency in circulation plus central bank reserves, the most liquid form of money.

What happens to a country's currency value when its central bank unexpectedly cuts interest rates?

Answer: The currency typically depreciates as capital flows to higher-yield countries

Lower interest rates reduce the returns on domestic assets, causing foreign capital to flow out in search of higher yields, which depresses the currency's value.