B17 Flashcards
Output and the exchange rate in the short run
What are the effects of a fiscal expansion on output and the exchange rate
output increases as the government spending does and so the exchange rate appreciates with the temporary demand for money
How can monetary and fiscal policy temporarily effect employment
fiscal policy can increase demand for the countries outputs directly by enabeling access to money at the cost of apreciating the currency while monetary policy has a similar effect but temporarily depreciates the exchange rate through increased money supply
Explain fiscal inflation bias
Governments may feel presure to fuel an economic boom at the cost of inflation which is why central banks normally are separate entities
Has a permanent change in the money supply a greater effect on output and the exchange rate than a temporary one
yes becouse it sets expectations
Does a fiscal expansion have an effect on tue long run price levels
No becouse it foes not effect the money supply
What is the effect of a permanent switch in fiscal policy on output and demand
Output does not change but the exchange rate is altered to undo the change in demand. Demand switches from exports to government and vice versa
What is the current account
The trade balance
How is the current account effected by a monetary expansion
It raises the current avcount aka increases exports
How does a fiscal expansion effect the current account
It decreases it
What is a j curve
A curve showing a time lagg in the improvement of the current account after a monetary expansion. This is becouse orders are made in advance and if they know a change is comming they may pospone their purchases untill the prices have fallen
What is the degree of pass through
The percentage by which import prices rise when the home currency depreciates by 1%
What are the reasons for imperfect pass through
Imperfect competition and segmented markets, firms might see kextra profits or security by reacting to exchange rate differences slower
What is the liquidity trap
The fact that increasing money supply when interest rate is zero is hard
Foes exchange rates change at a trmporary minetary expansion in the liquidity trap
No, they have no incentive to
what are the components of agregate demand in an open economy
consumption demand, investment demand, government demand and the current account
