ch13-16 Flashcards
Equation for private savings? S_p=???
Y-T-G
Equation for Public Savings? S_g = ???
S_g=T-G
National Income Identity?
Y=C+I+G+EX-IM
What is net foreign wealth?
Amount of assets/wealth you have in other countries. When Exports > Imports, NFW is increasing
What are 2 equations for Total Savings (S)?
S= ? - ? - ?
S=?+?
S=Y-C-G
S=I+CA
Money demand equation in equilibrium?
L(R, Y) = ???
L(R, Y) = M^d/P
also, L(R, Y) = M^s/P
since M^s = M^d in equilibrium
Interest parity equation?
R_$=R_euro + (E_expected-E)/E
Monetary approach to exchange rate (USD-EURO)
M=P_us/P_eu =
[M_s_us/L(R_$,, Y_us)]/[M_s_eu/L(R_euro, Y_eu)]
Difference between longrun and shortrun approaches to exchange rates? Name 3 things that happen in longrun only
In longrun, prices adjust to market conditions.
- Wages adjust to supply/demand of labor
- Output and income are determined by #workers and factors of production, NOT by quantity of money supplied
- Real interest depends on supply and demand of saved funds
Aggregate money demand - what happens to it when R (interest) increases?
demand decreases, because opportunity of holding money increases, non-money assets are more valuable investments now
Aggregate money demand - what happens when prices increase?
demand increases, people need more money to afford the same basket of goods as before
Aggregate money demand - what happens when Y (output) increases?
demand increases as people’s income increases, since they want to spend more money now
In equilibrium, express inflation in terms of money supply and demand
inflation = money supply growth - money demand growth
P = Change in M_s/M_s - Change in M_d/M_d
In the short run, how would a domestic increase in the money supply affect the exchange rate?
Increase in money supply causes increase in prices domestically, causing exchange rate to rise (depreciate)
Real exchange rate: q=??
q=(E_$/euro * P_eu)/P_us
Nominal exchange rate in terms of real interest rate? E_$/euro = ?
E_$/euro = q_us/eu * (P_us/P_eu)
what happens to real and nominal exch rate when increase in domestic demand for goods?
real: increased demand for us products causes increase in domestic prices P_us, which decreases q_us/eu (appreciation)
nominal: real determines nominal, it also appreciates
what happens to real and nominal exch rate when increase in domestic supply for goods?
real: increased supply causes domestic prices to decrease. thus, q_us/eu increases (depreciates).
nominal: real depreciates. HOWEVER, increases domestic supply causes increases output Y_us, which increases domestic money demand, which decreases US prices, causing appreciation. So effect is ambiguous, since:
real causes depreciation, but increased output causes appreciation
when money growth increases, what happens to inflation? is it temporary or permanent?
permanent increased inflation
when money supply increases once, what happens to inflation? permanent or temporary?
temporary increase in inflation
draw the graph for us-euro exchange rates when the dollar interest rises, then give an explanation for why this happens.
(in your notes). dollar appreciates because the return on the dollar is higher, therefore the demand for the dollar is higher now relative to the euro
draw the graph for us-euro exchange rates when european (foreign) interest rates rise. explain why this occurs
in your notes. a rise in european interest causes the expected euro return line to shift out, because euro deposits have higher returns now.
draw the graph for aggregate real money demand when income, Y, increases
in your notes. The demand for money increases and the line shifts out, since at every level of interest, people are more to spend money and thus have higher demand for money.
draw the graph for real money holdings in the short term when money supply increases and justify
in notes. increase in M implies increase in M/P, so real money holdings shifts out (in the short term) causing interest to fall.
draw the graph for real money holdings when real income rises. justify
a rise in real income increases demand for real money
write two ways to represent the nominal interest differential, R_$ - R_euro.
in your notes.
write an expression that is equivalent to expected real interest differential
in your notes!
difference between nominal and real interest?
real interest only affected by money supply and demand.
nominal affected by everything else
draw a double-graph showing the affects on exchange rate and real money holdings, when an increase in money supply happens
in notes.
show what happens to money supply, domestic interest, domestic price level, and exchange rate, when the us government announces a rise in money supply growth rate.
in notes.
when us money supply growth decreases, what happens to the exchange rate and why?
nominal interest falls, so demand for money rises, so domestic prices fall, so exchange rate appreciates, usd appreciates
what happens to exchange rate when us output supply decreases?
real exchange rate appreciates due to less supply, causing nominal interest to depreciate. however, output decrease causes income to fall, so money demand falls, so domestic prices fall, which will make usd appreciate. thus effect is ambiguous.
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