CIA4U Exam Review PDF

Grade 12 CIA4U Exam Review Part A: Definitions Multidimensional Poverty Index: Index that tracks many components of poverty, such as health, education, and standards of living, giving a more thorough indication of poverty. Absolute Poverty: When people are unable to access basic human needs su...

Grade 12 CIA4U Exam Review Part A: Definitions Multidimensional Poverty Index: Index that tracks many components of poverty, such as health, education, and standards of living, giving a more thorough indication of poverty. Absolute Poverty: When people are unable to access basic human needs such as food and shelter. Transfer Payments: Payments made by the government to individuals specifically for the purpose of redistributing income, thus transferring income from those who work and pay taxes towards those who cannot work and need assistance. Groups receiving transfer payments are referred to as ‘vulnerable groups’. Unemployment: People of working age actively looking for a job but are not employed. There are four different types of unemployment. Debt trap:A certain type of borrowing where a country or firm needs to keep on taking out new loans in order to pay back the old ones. Leakages: Refers to the withdrawal from the income flow of funds corresponding to savings, taxes, or imports. Nominal Value: Money value, or value measured in terms of prices that prevail at the time of measurement. Consumer Price Index: Measure of the cost of living, or the cost of goods and services purchased by the typical household in an economy. Crowding Out: The impacts on real GDP of increased government spending financed by borrowing. If increased government spending results in a higher rate of interest, private investment spending may decrease, reversing the impacts of the government’s expansionary fiscal policy. Quantitative Easing: Tool used by central banks to increase money supply in the economy and facilitate commercial bank lending as part of monetary policy. Involves the buying of bonds by the central bank on a larger scale. Minimum Reserve Requirement: A legally determined fraction of total deposits of commercial banks that must be kept within their vaults, which cannot be lent out. Deregulation: Policies involving the elimination of government regulation of private sector activities, based on the idea that government regulation stifles competition and increases inefficiency. Fiscal Policy:Manipulations by the government on its expenditures and taxes to influence the level of aggregate demand. It is a demand-side policy. Automatic Stabilizers:Factors that work towards stabilising the economy by reducing the short-term fluctuations of the business cycle. Government intervention is not required. An example is unemployment benefits. Industrial Policy:Interventionist supply-side policies designed to support the growth of the industrial sector in an economy. Forms of industrial policy include tax cuts, grants, subsidies, and more. Part B: Short Answer ​ Unemployment, and types Types of unemployment: ​ Cyclical Unemployment: Unemployment as a result of a downturn in the business cycle. It can be represented using a deflationary gap on an AD/AS curve. A downturn leads to a fall/low AD, a fall in real gdp, and an increase in unemployed due to the laying off of workers. Upturns alleviate these conditions. At real GDP, cyclical unemployment is 0.  ○​ Both initially produces potential output w/ zero cyclical unemployment ○​ A fall in AD = recessionary gap as output falls to yrec = at yrec, cyclical unemployment is created ​ Structural Unemployment: Unemployment as a result of a skill mismatch. If you're an expert welder, but all welding jobs are automated and the only jobs available are programming welding robots, you are in structural unemployment. It takes time to learn new skills, and it might involve moving. ​ Seasonal Unemployment: Unemployment caused by periodical changes in demand. If you're a ski lesson instructor, you will be unemployed in the summer.  ​ Frictional Unemployment: Unemployment as people are transitioning to a new job. There will be a few weeks/months in which people are updating their resumes, applying for jobs, and attending interviews. Costs of Unemployment ​ Stress, poverty, bad for family relationships (no $$ means family will Personal Costs: struggle and go through many hardships) ​ Social Costs: Crime, indebtedness, social deprivation (people will do anything for $$, even isolate themselves just to earn a quick buck). ​ Economic Costs: Lower GDP (if less people are working, there is less output), lower tax revenues (unemployed don’t have incomes so they don’t pay taxes), more unemployment benefits (government has to funnel more money to pay for more ppl that are unemployed), more inequality (certain races may face higher unemployment due to discrimination, leading for these races to overall be poorer) ​ Inflation and types of inflation Inflation: Inflation is the sustained rise in the general price level in an economy over time. Price stability refers to the general price level remaining constant due to low and stable inflation. ​ Types and causes of inflation ○​ Demand pull inflation ​ excess of aggregate demand over aggregate supply at full employment level of output ​ Aggregate demand > aggregate supply ​ An increase in aggregate demand = demand pull inflation = rightward shift ​ ○​ Cost-push inflation Explanation: ​ Initially it's at full employment level of output at Yp ​ There is an increase in the cost of production (wages and prices of other outputs) ​ The SRAS curve will shift left = increase in price level = equilibrium falls to Yrec ​ Thus this increase in price level = cost push inflation ​ Sticky wages and reasons Sticky wages: A term coined that describes how wages are unable to drop to an equilibrium level, causing a surplus of labour supplied during demand deficient periods. This is due to minimum wages preventing firms from cutting wages and labour unions preventing wages from lowering to keep a fair income for members. Contracted or salaried work agreements are long-term contracts, making it difficult to adjust wages, especially lower, as the worker agreed to the price they were being paid beforehand. ​ Automatic stabilizers Automatic Stabilizers:Factors that work towards stabilising the economy by reducing the short-term fluctuations of the business cycle. Government intervention is not required. An example is unemployment benefits. Automatic stabilizers make recessions less severe. Examples: ​ Progressive taxes: A tax system where people with higher income have a higher tax rate. If people suddenly earn less in a recession, tax rates automatically decease as people go into lower tax brackets. ​ Unemployment benefits: A form of transfer payments for the unemployed, ensuring they have enough money to cover their needs. This is given to every unemployed person and will therefore automatically adjust when more people lose their jobs. ​ Poverty and types Poverty is an economic condition of being extremely poor and unable to meet basic needs. There are 2 types of poverty: ​ Absolute Poverty: When people are unable to access basic human needs such as food and shelter. ​ Relative poverty: When people are unable to reach a specified level of income, typically 50% of their countries' average earnings. ​ Fiscal and Monetary policy Monetary Policy: Monetary Policy refers to the way that the central bank (independent authority responsible for the monetary system) actively manages money in the economy. It refers to the central bank using the money supply (stock of money available at a specific period) and interest rates to manage the economy. Functions of Central Bank: ​ Determines the money supply and interest rate ​ Prints physical money and mints coins ​ Lender of 'last resort' ​ Issues bonds and other financial instruments ​ Regulates the banking system Important responsibilities of central banks ​ Banker to the govt ○​ Holds govt cash ○​ receives payment for the govt ○​ makes payments for the govt ○​ manages the govts borrowing by selling bonds to commercial banks and the public ​ Does not provide services directly to the public (doesn’t accept deposits or lend money directly to individuals) ​ Banker to commercial banks ○​ Holds deposits ○​ [central banks] makes loans to them [commercial banks] in times of need ​ Regulator of commercial banks ○​ Regulates and supervises commercial banks to make sure they operate with appropriate levels of cash to ensure a safe financial system ​ Conduct monetary policy ○​ Controls the supply of money and interest rates Fiscal Policy: Fiscal policy is when the government intervenes in the market and uses government expenditures and/or taxes to manage the economy. The government uses a budget to outline how the government will spend the revenue it receives in taxes. If expenditure exceeds revenue, there is a budget deficit. If revenue is more than expenditure, there is a budget surplus. Sources of Revenue: -​ (direct + indirect) Taxes of all types -​ most important source of govt revenues -​ (direct taxes = income tax, indirect taxes = taxes on food) -​ Sales of g/s (utilities) -​ Transportation, electricity, water, etc -​ Although many g/s are free of charge, there are many services for which users must make a payment — revenues from these go toward govt costs of providing these g/s -​ (ex. Service Ontario) -​ Sales of govt-owned (state-owned) assets/property -​ Known as privatisation which involves the transfer of ownership from govt to private owners ​ Current expenditures ○​ Govts spending on day to day items ​ Wages + salaries fro govt employees ​ Supplies + equipment for operation of govt activities (school + medical) ​ Provision of subsidies ​ Interest payments on govt loans ​ Capital expenditures ○​ Public investments or spending to produce physical capital (buildings, infrastructure ​ Transfer payments ○​ Payments by the govt to vulnerable groups to redistribute income (employment insurance EI, child allowances) ​ Balanced budget: Revenue = Expenditure ○​ Surplus: R>E ○​ Deficit: R population, GDP per capita increases. Total GDP < population, GDP per capita decreases) Part C: Long Answer (Likely Opinion Based?) ​ Constraints and Strengths Refers to the Monetary and Fiscal Policy tools below. Italics are used to demonstrate a strength/pro. Underlines are used to demonstrate a constraint/con. ​ Monetary and Fiscal Policy tools Monetary Tools: Open Market Operations (OMOs): ​ The buying and selling of government bonds by the central bank. ​ If the central bank sells bonds, it gets money while the buyer gets a bond. The central bank can lock this money up. This reduces the money supply in the economy, increasing interest rates and reducing inflation. ​ If the central bank buys bonds, it gets bonds while the buyer gets money. This increases the money supply in the economy, decreasing interest rates and encouraging economic growth.  Sell bonds -> Contractionary policy Buy bonds -> Expansionary policy Minimum Reserve Requirements: ​ Banks want to lend out as much money as possible, as they make more off of interest. ​ The more money is lent out, the more money is invested and consumed.  ​ If the central bank sets a minimum reserve requirement, banks are obliged to keep a certain amount of customer deposits safe (not lending them out). This decreases the amount of money lent out, indirectly decreasing investment and consumption. Changes in the central bank minimum lending rate (base rate): ​ Central banks of countries sometimes lend money out to commercial banks when they need it. If they increase this interest rate, commercial banks have a higher cost of borrowing money. ​ Commercial banks will offset this by raising their interest rates, making borrowing more expensive for households and firms. ​ This decreases consumption and investment. Quantitative Easing: ​ Sometimes the central bank base interest rate is so low it can't go lower. So what do they do when the economy is in need of expansion? ​ Quantitative Easing refers to the buying and selling of bonds, but on a larger scale (and more long-term) than OMOs. ​ It is the same principle as OMOs, but the purchases are larger, and typically involve riskier bonds (corporate bonds instead of government bonds for example) Fiscal Tools: Sources of Revenues: ​ : Income taxes, inheritance taxes (both direct), sales taxes, Direct and indirect taxation carbon taxes (both indirect). ​ Sale of goods and services from state-owned enterprises: Most governments own some companies, who provide revenue. ​ Sale of government assets: By selling state-run businesses like the postal service, the state telecom, etc., the government can make money. This can only occur once, though, as you can't sell a company twice. Sources of Expenditures:  ​ : Spending on goods and services within the current year, such as Current expenditures spending on healthcare and education. ​ Capital expenditures: Long-term investments by the government, such as a new airport. ​ Transfer payments: Payments sent to people without any return. When the government gives unemployment benefits, no good or service is given in return. ​ Economic Inequality Economic Inequality: How wealth, assets, or incomes are distributed differently among individuals and the population as a whole. This is called the ‘wealth gap’ between the rich and the poor. There are 2 types of economic inequality: ​ Unequal distribution of income: There are inequalities present in people's income in a society ○​ Income distribution remains an issue, with inequality rising in many countries after a period of post-war decline. In capitalist systems, resources and wealth are concentrated in the hands of business owners, who earn disproportionately higher incomes compared to employees. This structure ensures that perfect income equality is unattainable. ○​ Fairness in these systems is often judged by whether the lowest-income earners can maintain a decent standard of living and if equal opportunities for social mobility exist. A key question is determining the level of inequality that is acceptable before it becomes detrimental to society. ​ Unequal distribution of wealth: There are inequalities present in people's wealth in a society ○​ The unequal distribution of wealth has become a significant issue, with individuals amassing unprecedented fortunes, often through accumulation during their lifetimes and intergenerational transfers. Wealth inequality arises from unequal incomes and the ability to save and invest, creating disparities in opportunities and long-term security.  ○​ Wealth concentration can hinder social mobility, as those without financial resources may lack access to quality education, healthcare, and living standards, preventing them from climbing the economic ladder. This leads to a monopoly of wealth, where resources remain concentrated among a few instead of being utilized efficiently by many. ​ Income and wealth inequality Causes (AO2) ​ : Some have less access to opportunities than others, leading Inequality of opportunity to less economic prosperity ​ Different levels of resource ownership ​ Different levels of human capital: Some have accumulated more skills, knowledge, and experience in working ​ Discrimination ​ Unequal status and power ​ Government tax and benefits policies : Indirect taxes primarily affect the poor, and tax breaks for the rich make things more unequal ​ Globalization and technological change: While it can boost economies, outsourcing and technological change can lead to large structural unemployment ​ Market-based supply-side policies: They aim to remove regulations to make markets more efficient, but deregulation, tax breaks, and trade liberalization will all benefit big firms and leave poor people worse off (unlike what Reagan said) Effects (AO2) Economic growth : ​ Inequality could on one hand incentivize hard work and good education (so that you can "make it"), which increases Aggregate Supply. ​ However, it could also lead to dissatisfaction, protests, and more government money spent on transfer payments to the poor. More inequality may also disincentivize entrepreneurship, as small firms will be unable to compete with the large multinational companies. Standards of living :  ​ Standards of living will improve more for rich people and less for the poor. The rich will be able to afford better educations, increasing inequality and the gaps in standard of living. Social stability : ​ More equal countries like the Nordics have relatively low crime rates and higher rates of trust and respect. ​ Less equality generally leads to more unrest and violence. Part D: Graphs and illustrations ​ Partial and Complete crowding Recall: Crowding Out: The impacts on real GDP of increased government spending financed by borrowing. If increased government spending results in a higher rate of interest, private investment spending may decrease, reversing the impacts of the government’s expansionary fiscal policy. Partial Crowding Out: AD shifts rightward from AD1 to AD2 due to the increase in component G in Real GDP, and then leftford from AD2 to AD3 due to the fall in the component I. This is partial crowding out, where the fall in investment spending is smaller than the increase in government spending. Complete Crowding Out: AD shifts rightward from AD1 to AD2 due to the increase in component G in Real GDP, and then leftward from AD2 to AD1 due to the fall in the component I. This is complete crowding out, where the fall in investment spending is equal to the increase in government spending. ​ Lorenz Curve and its relationship with income inequality To measure economic inequality, we use the Lorenz curve as a visual indicator and the Gini coefficient as the Mathematical indicator. For the Lorenz Curve, the closer the curve is to a straight line, also known as the Line of Equality, the greater the equality in income distribution. The closer the curve is to the diagonal line representing perfect income equality, the greater the equality in income distribution. Each quintile showcases what percentage of the population holds a certain percentage of income. The quintiles go up by 20%. If the lower percentage quartiles possess little total income, this means that there is income inequality as those who are richer possess the majority of the income from the country. For the Gini Coefficient, it ranges from 0-1, where zero is perfect equality (household income is = population wide) and one is perfect inequality (one individual has all income). Gini coefficient = A / (A+B) A = Area of Lorenz Curve B = Area under Lorenz Curve To measure economic inequality, we use the Lorenz curve as a visual indicator and the Gini coefficient as the Mathematical indicator. Part E: Case Studies ​ An article will be provided (Might be about the ECU/EMS) ​ Respond to questions on : ​ Economic Inequality: The degree to which people in a population differ in their ability to satisfy their economic needs, particularly through income and wealth. ​ Actual Output: The amount being outputted at that certain point in time. ​ Potential Output: The amount that is projected to be outputted at a future date and time. ​ Economic growth: Increases in total real output produced by an economy (real GDP) over time. Can be referred to as increases in real output (real GDP) per capita. ​ Improvement in technologies in the economy: If improvements in technology result in the production of goods being more efficient, firms will be willing to supply more than before. This increases the output of firms.