Chapter 1: What Is Economics?

● Economics as a Social Science.

○ Economics is the study of the way we make decisions about the use of scarce
resources.
○ Economics falls into the category of social science, attempting to study some
aspect of human behaviour.
● What Is an Economy and How Does It Work?
○ An economy is a self-sustaining system in which many independent transactions
in a society create distinct flows of money and products or services.
○ An economy involves numerous transactions that create two circular flows
(goods and services move in one direction while money flows in the opposite
direction to pay for what is received).

Chapter 2: Economic Fallacies, Theories, and Laws

● Opportunity Cost and Production Possibility Theories.
○ Opportunity Cost: The value or benefit that must be given up to achieve
something else.
○ Economic Laws Affecting Production Possibilities (Key Terms).
■ Production Possibilities Curve: A graphical representation of the
production choices facing an economy.
■ Trade-Off: The sacrifice of one resource or production choice for another.
■ Consumer Goods: The goods or services that an economy produces to
satisfy human needs.
■ Capital Goods: Goods, such as tools or machinery, used to produce
consumer goods.
■ Relative Cost: The cost of producing one item, A, expressed in terms of
the numbers of another item, B, which must be given up to produce A.
■ 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.
■ Frontier: The curve on a production possibilities graph representing the
maximum number of two items that can be produced with a given amount
of resources.
○ Law of Diminishing Returns and Law of Increasing Returns to Scale.
■ Law of Diminishing Returns: The eventual decline in the rate of extra
outputs produced occurs when one input used in the production of the
output is held constant and the others are increased.
■ 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.
○ Opportunity Cost Worksheet.
○ Creating a PPC Curve for Two Products and What Happens to PPC Curves
if Different Events Occur.
 ■ Droughts and layoffs will decrease production for both goods (shifting
curve inwards), while technological and education improvements will
increase production for both goods (shifting curve outwards).

Chapter 3: Productive Resources and Economic Systems

● Making Resources Productive.
○ Factors of Production: Resources (such as land, labour, and capital) that are
used to produce goods and services.
○ Tangible Resources: Physical resources (such as land and labour) that are
necessary for production and are visible.
○ Intangible Resources: Resources that are necessary for production, such as
entrepreneurship, knowledge, and an environment for enterprise.
● Economic Systems and Production Questions
○ What to Produce?
○ How to Produce?
○ For Whom to Produce?
○ Economic System: The laws, institutions, and common practices that help a
country determine how to use its resources to satisfy as many of its people’s
needs and wants as possible.
○ Traditional Economy: An economic system in which production decisions are
determined by practices of the past.
○ Command Economy: An economic system in which production decisions are
made by government-appointed central planners.
○ Market Economy: An economic system in which production decisions are made
by the actions of buyers and sellers in the marketplace.
○ Mixed Economy: An ergonomic system, such as Canada’s, that contains
elements of market, command, and traditional systems.
Chapter 4: Political Economies and Policy Goals
● Understanding Political Economies
○ Capitalism: An economy characterized by private ownership of business and
industry, the profit motive, and free markets.
○ Communism: A political system on the extreme left, founded on the theory of
Karl Marx, that calls for government or community ownership of the means of
production.
○ Socialism: A political system of the moderate left that calls for public ownership
of the principal means of production, to be achieved democratically and
peacefully.
○ Fascism: A political system on the extreme right, combining a free-market
economy with a non-democratic form of government.
● Setting Economic Goals: A Canadian Model
○ Political stability.
○ Reduced public debt.
○ Economic growth.
○ Increased productivity and efficiency.
○ Equitable distribution of income.
○ Price stability.
○ Full employment.
○ Viable balance of payments and stable currency.
○ Economic freedom.
○ Environment stewardship.
● Setting Economic Priorities When Stakeholder Interests and Policy Goals Conflict
(Government Perspective on Responding to Economic Challenges)
○ Economic policies often include strategies to promote economic growth.

Chapters 5 and 6: Early and Classical Economics and Modern Economics

● Ideas That Advanced Economic Thought
○ Self-Interest: An idea, central to the philosophy of Adam Smith, that each
individual’s strongest drive is better his or her condition.
○ Invisible Hand: Adam Smith’s notion that the unintended result of individual
producers’ desire for profit is to supply society with the goods and services it
needs, at prices consumers are willing to pay, as a result of competition.
○ Division of Labour: The specialization of workers in a complex production
process, leading to greater efficiency.
○ Law of Accumulation: Adam Smith’s theory that business people who invest a
percentage of their profits in new capital equipment increase the economy’s stock
of capital goods, thus ensuring economic growth and future prosperity.
○ Law of Population: Adam Smith’s theory that the accumulation of capital by
business people requires more workers to operate the equipment, leading to
higher wages, which in turn leads to better living conditions, lower mortality rates,
and an increase in population.
Chapter 7: Microeconomics: The Basics
● Demand and Supply
○ Demand: The quantity of a good or service that buyers will purchase at various
prices during a given period.
○ Law of Demand: The quantity demanded of a good or service varies inversely
with its price.
○ Ceteris Paribus: Latin for “other things being equal” or “as long as other things
do not change”; an assumption made when economists want to understand the
cause-and-effect relationship between any two factors and want other factors
affecting that relationship to be held.
○ Supply: The quantities that sellers will offer for sale at various prices during a
given period.
○ Law of Supply: The quantity supplied of a good or service varies directly with its
price.
○ Change in Quantity Demanded: Refers to the amount of a product that people
are willing to buy at a specific price. Change is represented through a movement
along a demand curve.
○ Change in Demand: Refers to the entire series of price-quantity relationships.
Change is represented through a shift in the demand curve.
● Market Equilibrium
○ Equilibrium Price: A price set by the interaction of demand and supply in which
the absence of surpluses or shortages in the market means there is no tendency
for the price to change.
■ Surplus: A price above the equilibrium when the amount of resources
exceeds the amount that is actively utilized.
■ Shortage: A price below the equilibrium when there is an excess demand
for products in comparison to the quantity supplied in the market.
○ Changes in Demand: Non-price factors cause the demand curve to shift. An
increase in demand causes the curve to shift right, while a decrease in demand
causes the curve to shift left.
■ Income: As one’s income rises, the demand will increase.
■ Population: An increase in population causes an increase in customers
and, therefore, the demand to rise.
■ Tastes and Preferences: If consumer preference for a good or service
increases, the demand increases.
 ■ Expectations: If consumers believe that the price of a particular product
is going to rise in the future, they may decide to purchase it immediately,
thereby increasing the demand for the product.
■ Price of Substitute Goods: Substitute goods are goods that are similar
to other goods and that serve as an alternative if the price of a particular
good rise. If the price of good B increases, the demand for good A will
increase.
■ Price of Complementary Goods: Complementary goods are goods that
are interrelated and used together. If the price of good B increases, the
demand for good A will decrease.
○ Changes in Supply: An increase in supply causes the curve to shift right, while a
decrease in supply causes the curve to shift left.
■ Costs: An increase in production or manufacturing costs causes supply to
decrease.
■ Number of Sellers: If the number of sellers in a market increases, the
quantity supplied of a product at any given price will increase.
■ Technology: An improvement in technology will decrease the cost of
production, and this, in turn, will enable manufacturers to supply more of a
product at any given price.
■ The Environment: Weather changes may have an enormous effect on
supply.
■ Prices of Related Products: The switch to the production of product B
causes a decrease in the supply of product A.
● Determination of Price in a Competitive Market

● The Elasticity of Demand

○ Price Elasticity of Demand: An expression of how much more or fewer
consumers will buy a product if its price changes.
 ○ Price Inelastic: If the quantity of a good or service bought does not change
much when the price rises or falls.
○ Price Elastic: If the quantity of a good or service bought changes a lot when the
price rises or falls.
○ Factors Affecting Elasticity of Demand
■ Availability of Substitutes: Goods that have substitutes tend to be more
elastic than goods that do not.
■ Nature of Product: Goods that are necessities tend to be more inelastic
than goods that are considered luxuries.
■ Fraction of Income Spent on Product: Goods that are expensive and,
therefore, take up a large part of the household budget, will be elastic.
■ Amount of Time Available: Over time, some goods may become more
elastic because consumers eventually find substitutes for them. In the
short run, however, demand for these same goods can be quite inelastic
because consumers may not know what substitutes are available
immediately after the price rises.
● The Elasticity of Supply
○ Price Elasticity of Supply: An expression of how responsive the quantity
supplied by a seller is to a rise or fall in the price of a product.
○ Factors Affecting Elasticity of Supply
■ Time: The longer the time a seller has to increase production, the more
elastic the supply will be.
■ Ease of Storage: When the price of a product drops, sellers can either sell
the product at the new low price or put some of their inventory into
storage and sell it after the price rises again.
■ Cost Factors: Supply is more elastic in industries that have lower input
expenses.

Chapter 8: Applications of Demand and Supply

● Government Intervention in Markets
○ Ceiling Price: A restriction imposed by a government to prevent the price of a
product from rising above a certain level.
■ Shortages can cause long lineups for the product, price ceilings may
create a black market for certain goods, and price ceilings may cause the
quality of a product to suffer if sellers try to reduce their costs to make
more money.
○ Floor Price: A restriction imposed by a government to prevent the price of a
product from rising below a certain level.
■ An additional surplus of goods is created and consumers pay a higher
price for the product and receive less.
○ Subsidy: A grant of money from a government to a producer to achieve some
desired outcome, such as the installation of pollution-control equipment.
 ○ Quota: A restriction placed on the amount of product that domestic producers are
allowed to produce; also, a limit on the total quantity of goods imported into a
country.
○ Rent Controls: A government program that limits the amount landlords can
increase rents (price ceiling).
○ Minimum Wage: A government-established wage, higher than one set by the
demand for, and supply of, workers (price floor).

Chapter 9: Labour Economics

● Market Demand Curve: A graphical representation of the relationship between the
quantity of labour demanded and the wage rate.
● Changes in Labour Demand
○ A change in the demand for the product of labour.
○ A change in the price of related productive resources.
○ A change in worker productivity.
● Labour Unions
○ Labour Union: A workers’ organization that negotiates with employers and
promotes the interest of its members.
○ Trade or Craft Unions: Unions that represent workers in a single occupation.
○ Industrial Unions: Unions that represent all workers in a given industry,
regardless of the type of job they do.
○ Public Sector Unions: Unions representing workers employed by governments.
● Collective Bargaining
○ Collective Bargaining: A process whereby a union negotiates wages and working
conditions with the employer on behalf of all members of the union.
○ Collective Agreement: A contract lasting a specific period, negotiated by a union
with the employer through the process of collective bargaining.
○ Unions Dues: The amount of money that each member of a union pays to
support its activities.
○ Open Shop: A clause in the collective agreement between a union and an
employer that allows union membership to be voluntary.
○ Closed Shop: A clause in the collective agreement between a union and an
employer stipulating that the employer may hire only union members.
○ Union Shop: A workplace where all employees, upon being hired, must become
members.
○ Rand Formula: A 1945 rule stating that all workers in a workplace in which a
union exists and bargains for all workers must pay union dues, even if they are
not members.
○ Conciliation (Mediation): A process in which a third party helps a union and an
employer reach an agreement.
○ Voluntary Arbitration: A process during a labour dispute in which the parties
agree to submit proposals to a third party who is given the power to decide which
proposal, the union’s or the employer’s, is fairer.
 ○ Compulsory Arbitration: A process in which a government forces both sides in a
labour dispute to accept the decisions of a third party.
● Job Actions
○ Strike: A temporary work stoppage by employees to force their employer to
accept the union's contract demands.
○ Lockout: The shutting down of the workplace by an employer to force the union to
accept the employer’s contract offer.
○ Rotating Strike: A union strategy, used when an employer has several
workplaces, of withdrawing services for a short time from each workplace on a
rotating basis.
○ Work-To-Rule: A union tactic of performing only the duties required in the
contract, and not extra work carried out voluntarily or after hours.
○ Boycott: A union tactic of bringing pressure upon an employer by encouraging
the public not to purchase the employer’s product.

Chapter 10: Production, Firms, and The Market

● Production Choices and Issues
○ Importance of Profit and Controlling Costs of Production
■ Explicit Costs: Costs that appear on a business’s accounting statements,
such as payment for material, machines, rent, utilities, and taxes.
■ Implicit Costs: Costs not included among expenses on the income
statement of a business, such as the amount of owner's time spent
devoted to his or her business and the money invested in the business
that could have earned interest if invested somewhere else.
■ Economic Profit: The excess of a business’s revenue over its economic
costs (implicit and explicit).
■ Economic Profit Formula: Total Revenue - (Total Explicit Costs + Total
Implicit Costs)
■ Firm: A privately owned organization engaged in business activities.
■ Efficiency: A firm’s ability to produce at the lowest possible cost,
measured by either its cost per unit or its unit labour cost.
■ Cost per Unit: A measure of a firm’s efficiency, obtained by dividing total
costs by the number of units produced.
■ Unit Labour Cost: A measure of a firm’s efficiency, obtained by dividing its
total labour costs by the number of units it produces.
○ Gross Domestic Product (GDP): The total market value of all final goods and
services produced by an economy in a given year.
○ Theory of the Firm
■ Total Revenue: The price of a product multiplied by the quantity
demanded of the product.
■ Total Cost: The total of a firm’s fixed and variable costs, which includes
all the purchases made by a firm for productive resources to produce a
good or service.
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡
■ Average Cost Formula: 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑈𝑛𝑖𝑡𝑠 𝑃𝑟𝑜𝑑𝑢𝑐𝑒𝑑
 ■ Fixed Costs: Costs (such as rent and property taxes) that remain the
same at all levels of output and must be paid whether the firm produces
or not.
■ Variable Costs: Costs that change or vary with the level of output, such
as labour and raw materials.
■ Total Profit Formula: (Price × Quantity Solid) - (Fixed Costs + Variable
Costs)
■ Marginal Revenue: The additional revenue gained by a firm from
producing one more unit of its product.
■ Marginal Cost: The additional cost for a firm of producing one more unit
of its product.
■ Profits are maximized at a production level when marginal revenue equals
marginal cost.
○ Firms, Competition, and The Market

Chapter 12: Macroeconomics: The Basics

● Measuring Price Stability: The Consumer Price Index (CPI)
○ Inflation Rate: The annual percentage by which the CPI has risen.
■ Consumer Price Index (CPI): A price index that measures changes in the
level of prices (inflation) of consumer goods and services.
● Measuring Output: Gross Domestic Product (GDP)
○ Expenditure Approach: A calculation of GDP that totals all that the economy
spends on final goods and services in one year.
■ GDP Formula (Expenditure Approach) = C + G + I + (X - M)
● C = Consumption
● G = Government Spending
● I = Investment
 ● (X - M) = Exports - Imports
○ Economic Growth: An increase in an economy’s total production of goods and
services.
○ Standard of Living: The quantity and quality of goods and services that people
can obtain to accommodate their needs and wants.
● Measuring the State of Employment: The Unemployment Rate
○ Unemployment Rate: The percentage of the labour force that is not working at
any given time the total number of unemployed people divided by the total labour
force.
𝑁𝑢𝑚𝑏𝑒𝑟 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
■ Unemployment Rate Formula = 𝐿𝑎𝑏𝑜𝑢𝑟 𝐹𝑜𝑟𝑐𝑒
× 100
○ Types of Unemployment:
■ Structural unemployment. When the skills or location of workers no longer
match the patterns of labour demand in the economy.
● Technological unemployment. Automation.
● Replacement unemployment. Moving production to other
countries.
■ Geographical unemployment. Affects a specific region.
■ Frictional unemployment. People moving between jobs.
■ Cyclical unemployment. Reduction in overall consumer spending.
■ Seasonal unemployment. Climate.
■ Classical unemployment. Wages are driven too high, causing a surplus of
workers.
○ Full Employment: The lowest possible rate of unemployment, seasonally
adjusted, after allowing for frictional and structural unemployment.
■ Maximize the efficient use of the productive input of labour.
■ A high unemployment rate burdens the government with the cost of
financial programs.
■ Social costs are associated with unemployment.

Chapter 13: Business Cycles and Fiscal Policy

● Aggregate Demand and Supply
○ Aggregate Demand (AD): The total demand for all goods and services produced
in an economy.
■ As price levels rise, the aggregate quantity demanded falls.
○ Aggregate Supply (AS): The total supply of all goods and services produced in
an economy.
■ The curve is flat at low output levels since resources are idle and their
prices are low until the full-employment output is reached.
■ At higher output levels, prices tend to rise more rapidly until maximum
capacity output (the economy would run out of resources, such as
workers).
○ Full-Employment Equilibrium: The intersection of aggregate demand and
supply, at which full employment is reached and prices have just started to rise.
 ■ Recessionary Gap: The gap between aggregate demand and
full-employment equilibrium (to the left of full-employment output);
characterized by high unemployment, low inflation, and low GDP growth.
■ Inflationary Gap: The gap between aggregate demand and
full-employment equilibrium (to the right of full-employment output);
characterized by high inflation, low unemployment, and high GDP growth.
○ Changes in Aggregate Supply:
■ A decrease in aggregate supply causes the curve to shift upward and to
the left, except for the perfectly inelastic section of the curve.
■ An increase in aggregate supply causes the curve to shift outward.
■ Changes in prices of inputs.
● Resources.
○ Land.
○ Labour.
■ Changes in the number of inputs available.
● New capital goods.
○ Workforce.
○ Capital goods.
■ Changes in efficiency.
○ Changes in Aggregate Demand:
■ Shifts in the aggregate demand curve can be attributed to changes in the
variables that make up the GDP.
■ An increase in aggregate demand (shifting the curve to the right).
● Increase in consumption.
● Decrease in taxes.
● Decrease in savings.
● Decrease in import spending.
● Increase in investment.
● Increase in government spending.
● Increase in exports.
■ A decrease in aggregate demand (shifting the curve to the left).
● Decrease in consumption.
● Increase in taxes.
● Increase in savings.
● Increase in import spending.
● Decrease in investment.
● Decrease in government spending.
● Decrease in exports.
● Business Cycles
○ Business Cycle: A rise and fall in national economic performance characterized
by four phases.
■ Expansion.
● Begins when consumer spending increases and production
increases.
 ● The upward trend in the business cycle.
● Prosperity Cycle: An increase in aggregate demand leads to a
cycle of higher production, more jobs, increases income, and
greater consumption resulting in even higher aggregate demand.
■ Peak.
■ Contraction.
● Exhausted all of the resources and met all the demands, so not as
much spending happening.
● Can also be the result of producers competing for capital funds to
support business expansion, causing interest rates to rise.
● Recession: A contraction of the economy in which real GDP
declines for a minimum of two consecutive business quarters (six
months).
● Depression: A prolonged recession characterized by falling GDP,
very high unemployment and price deflation.
■ Trough.
○ Circular Flow of Income: A model of the economy that sees GDP as a total of
all the money payments made to businesses and individuals.
■ Leakage: Any use of income (such as saving, paying taxes, and spending
on imports) that causes money to be taken out of the income-expenditure
stream of the economy.
■ Injections: Expenditure that leads to money returning to central income
(government spending, investment, exports).
● Fiscal Policy
○ Fiscal Policy: Government taxation, spending, and borrowing policies are used
to try to stabilize the economy.
○ Expansionary Fiscal Policy: A government policy to increase aggregate
demand through tax cuts, increased spending, or both.
○ Contractionary Fiscal Policy: Government policies to decrease aggregate
demand through tax increases and/or decreased spending.
○ Automatic Stabilizers: Mechanisms built into the economy that help to stabilize
it by automatically increasing or decreasing aggregate demand.
○ Discretionary Policy: Deliberate government action taken to stabilize the
economy in the form of taxation or spending policies.
○ Multiplier Effect: The multiplied effect upon GDP that results from a change in
people’s income.
● The Challenges of Using Fiscal Policy
○ Government Budgets
■ Decific Budget: Government spends more than it collects in tax revenue.
■ Surplus Budget: Government spends less than it collects in tax revenue.
■ Balanced Budget: Government spends an amount equal to what it
collects in tax revenue.
○ Size of the Government Debt.
■ Can limit the use of fiscal policy as an effective tool.
 ■ The higher the government debt, the higher amount of government
spending that must be devoted to servicing the debt.
○ Time Lags.
■ Recognition Lag: The time it takes a government to recognize a problem
in the economy that requires an appropriate fiscal policy to correct it.
■ Decision Lag: The time required for a government to decide on an
appropriate fiscal policy after recognizing that an economic problem
exists.
■ Implementation Lag: The time required to implement an appropriate fiscal
policy after deciding to carry it out.
■ Impact Lag: The time required for a fiscal policy to bring about a change
in the economy.
○ Election Cycles.
■ Harder to make budget cuts before an election.
○ Impact on Investment.
■ Driving up interest rates and reducing the number of funds available for
private investment.
○ Income Equity.
■ Creating debt and financing it through bonds redistributes income from
the poor to the rich.
○ The Burden on Future Generations.
■ Citizens will have to pay deficits back, in the form of taxes.

Chapter 14: Money and Banking

● What is Money? (Functions of Money)
○ Medium of Exchange: The main function of money, allowing the exchange of
goods and services.
○ Measure of Value: A function of money that allows comparisons of the value of
various goods and services.
○ Store of Value: A function of money that allows value to be stored for the future,
allowing it to be used in the purchase of goods and services.
● Measuring Canada’s Money Supply
○ Money Supply: The total amount of cash in circulation plus bank deposits.
■ Demand Deposit: A bank deposit that can be used to make immediate
payment.
● Chequing Account: An account that serves primarily as a medium
of exchange, paying little or no interest.
● Current Account: A bank account for a business that operates like
a chequing account, paying little or no interest and service as a
medium of exchange; also, part of a balance of payments
accounts that record totals for three components: goods, services,
and investment income.
● Saving Account: A bank account that allows holders to earn
interest on saved money.
 ■ Term Deposit: Bank accounts in which the holder agrees to deposit a
fixed amount of money for a fixed period for a fixed interest rate.
● GIC.
■ Notice Account: A deposit that requires the depositor to give some notice
to the bank before a withdrawal of funds.
■ Money Market Mutual Fund: Mutual funds specializing in short-term
governmental and corporate securities.
● Bonds.

Chapter 15: Monetary Policy

● The Bank of Canada
○ Functions:
■ Stabilizing the Canadian economy.
■ Operates separately from the Canadian government.
■ Director of monetary policy.
● Growth of money supply.
■ Banker to the chartered banks.
● Chartered banks have deposit accounts with the central bank.
■ Banker to the federal government.
● The government’s revenues are on deposit.
■ The issuer of currency.
○ Objectives:
■ Tight Money Policy: A monetary policy of high-interest rates, more
difficult availability of credit, and a decrease in the money supply. Used in
inflation.
■ Easy Money Policy: A monetary policy of low-interest rates, easy
availability of credit, and growth of the money supply. Used in a recession.
● Interest Rates
○ The supply of loanable funds is based on savings. The demand for loanable
funds is based on borrowing.
■ When interest rates decrease, more loanable funds are borrowed.
■ When interest rates increase, more loanable funds are supplied.
○ While interest rates can affect both the supply of and demand for loanable funds,
the inverse applies as well: the supply and demand for loanable funds can affect
interest rates.
○ Prime Rate: The lowest rate of interest a financial institution offers to its best
customers, such as large corporations.
○ Bank Rate: The rate of interest charged by the Bank of Canada to the chartered
banks, which serves as a benchmark for the interest rates charged by financial
institutions to their customers.
○ Inflation Premium: An allowance for inflation that is built into all interest rates.
○ Nominal Interest Rate: An interest rate that includes an inflation premium, an
allowance for risk, and creditworthiness.
 ○ Real Rate of Interest: The nominal rate of interest minus the expected rate of
inflation.
● Tools of Monetary Policy
○ Overnight Rate Target: A monetary tool used by the Bank of Canada to control
the overnight rate; it is set by the Bank of Canada at the midpoint of the operating
band.

○
● Monetary Policy at Work in the Economy
○ Recession:
■ Aggregate demand is below the full-employment equilibrium.
■ Increased government spending and tax cuts to achieve full employment.
■ Stage 1: Lowering overnight lending rate.
■ Stage 2: Increased spending and borrowing.
■ Stage 3: Increased money supply growth and output.
■ Stage 4: Full employment is reached.
○ Inflation:
■ Aggregate demand is past the full employment equilibrium.
■ Lowered government spending and tax increases to achieve full
employment.
■ Stage 1: Increasing overnight lending rate.
■ Stage 2: Decreased spending and borrowing.
■ Stage 3: Decreased money supply growth and output.
■ Stage 4: Full employment is reached.
Chapter 18: Equity and Income Distribution
● Equity: Fair and just distribution of income within an economy.
● Inequity: A condition or privilege that benefits some to the detriment of others because
fairness and distributive justice have been overlooked.
● Reasons for Income Inequality:
○ People have different physical and mental abilities.
○ People differ in the degree of education and training they receive.
○ Some people are willing and able to work longer and harder than others.
○ People who take on extra risk and responsibility are usually rewarded.
■ Risk Premium: An additional bonus or compensation paid to individuals
for the risks voluntarily assumed and handled responsibility as part of
their work.
○ Luck and health can affect income.
○ Family background can affect future earnings.
○ Marker power means higher income.
○ Discrimination harms incomes.
○ Regional economic disparities contribute to economic differences.
● Poverty in Canada
○ Absolute Poverty: Lacking the essentials for survival.
○ Relative Poverty: Lacking the conditions of life enjoyed by most people in the
same economy.
○ Poverty Line: The unofficial term used for Statistics Canada’s low-income cut-off.
● The Redistribution of Income in Canada
○ Found in Question 2 of Essay Writing Preparation.
Essay Writing Preparation

I. Solutions to An Economic Recession

A. Indications: Name and Explain 4 to 5 Indicators That the Economy Is in a
Recession.
1. Low prices, high unemployment, low production, and low incomes.
2. Leading up to a recession, aggregate demand begins to decrease. This is
because the customer needs are being satisfied. As fewer people are
purchasing products, businesses have more inventory and more products
are not being sold. Businesses recognize this issue and start employee
layoffs and selling capital. This leads to fewer people having money and
purchasing fewer goods and services. The decrease in demand leads to
low prices, and a layoff of employees leads to high unemployment, low
production, and low incomes.
B. Policies: Propose Monetary and Fiscal Policies to Implement to Stimulate
the Economy.
1. Fiscal policy is used by the government to increase or decrease
aggregate demand and stabilize the economy. During a recession, the
government can use expansionary fiscal policies to increase aggregate
demand.
2. For monetary policy, the Bank of Canada would promote an easy money
policy, and decrease the overnight lending rate.
C. Analysis: Analyze the Economic Impacts of Each of the Policies Described
in Part B Above.
1. Fiscal Policy: This would be decreasing taxes (more disposable income)
and increasing government spending (spending money on building
infrastructure).
2. Monetary Policy: Easy money policy is aimed to decrease interest rates,
making credit more available, and grow the money supply. When the
Bank of Canada decreases the overnight lending rate, it signals that all
lending and saving rates should fall. These lower interest rates encourage
consumers to borrow for larger sums of money because they pay less
interest than before and save more money. Businesses respond to this
increase in demand by increasing their supply by investing in capital and
hiring new workers.
II. The Goal of Economic Equity
A. Indications: Explain Five Reasons Why Incomes Are Unequal.
1. People have different physical and mental abilities.
a) A limited supply of people with specific skills combined with a
heavy demand for their services means they can demand high
incomes.
b) Abilities can make one worker far more productive and valuable
than another.
2. People differ in the degree of education and training they receive.
a) A postsecondary degree is a valuable asset to potential
employers.
b) Students pay an opportunity cost and expect future earnings with
higher incomes.
3. Some people are willing and able to work longer and harder than others.
a) This includes working overtime and completing additional tasks.
4. People who take on extra risk and responsibility are usually rewarded.
a) Dangerous and stressful occupations are compensated with a risk
premium, which is an additional bonus paid to individuals for the
risks voluntarily assumed and handled responsibly as part of their
work.
5. Luck and health can affect income.
a) Being at the right place at the right time can positively affect
income. This might include inheriting money or winning the lottery.
b) However, there’s always a negative aspect, where someone can
fall unexpectedly ill or suddenly lose a job.
B. Policies: Describe Five Programs Governments Use to Achieve the Goal of
Equity.
C. Analysis: Analyze the Economic Impact of These Programs on the Goals of
Equity, Stability and Growth.
● Structural Strategy: A program attempting to eliminate the causes of
poverty. They focus on long-term economic adjustments that are needed
to reduce income disparities.
1. Education.
a) Education is directly related to a higher income.
b) The government provides universal elementary and secondary
education, as well as subsidizing the cost of colleges and
universities. The government helps lower-income students with
post-secondary costs to provide them with an equal opportunity to
gain post-secondary education. However, increasing tuition costs
has resulted in a greater amount of student debt.
c) Education helps in reducing poverty and improving financial
literacy.
2. Daycare.
a) Allows parents to attend school or work.
b) Provincially run, such as Quebec’s universal daycare program.
3. Increasing employability and employment.
a) Workers with limited skills who lose their jobs are likely to fall
below the poverty line.
b) Governments increase employment opportunities by funding
training, teaching marketable skills, and sponsoring relocation
programs.
c) Another method to increase employment is through business
expansion.
4. Minimum wage legislation.
a) Ability to live on the wages they earn.
b) With the decline of labour unions, wages have not been keeping
up with the rising cost of living. Additionally, many companies are
outsourcing work to developing countries, which prevents wages
from increasing.
c) Governments legislate minimum wage amounts to protect workers
and ensure living wages.
5. Affordable housing.
a) Many individuals are left homeless or spend a large portion of their
income on accommodations. This leaves an insufficient amount of
money to spend on other necessities.
b) By supporting the construction of affordable housing, governments
help improve the living conditions of the working poor, especially
with the rising property prices in Canadian cities.