chapter 1 and 2 Flashcards
five most important ideas of econ
Every choice involves an opportunity cost
Choices are based on self interest
Comparative advantage-trade creates wealth
Prices transmit important information
Institutions matter
Gross Domestic Product
The market value of all final goods and services produced within a country over a given year
-value added
-expenditure
-income
GDP or national output is a
a countries budget constraint
balance of trade
EX-IM
factors of production
labor, capital, efficiency
Supply Siders
increase the factors of production so as to increase output
Lower tax rates: so people have incentives to contribute to these things
key point for a country…
the long-term constraint on consumption and investment is the amount of output that can be produced
Keynes
explained what he thought happened and what to do. Psychology and expectation (animal spirits), price rigidities, demand matters and the government should manage it
Rothbard
expansionary monetary policy in the 1920’s, H. Hoover’s wage rigidities. Government printed a lot of money.
money =
= Claim on future output. It is worthless
its is worthless without any output
investment is
renouncing to consumption to instant gratification to have a better future- if you don’t save there is no way to invest
savings come in three different ways
private, government, and foreign
heart of macoeconomics
national output
why run a trade surplus
They expect to get back additional output from their trading partners in the future
when they import more than export
the country must borrow from foreigners to finance the difference
current account
Current transactions such as exports and imports of goods and services are recorded in the
financial accounts
Financial transactions including sales of stocks and bonds to foreigners are recorded in the
david ricardo
first articulated comparitive advantage
manage demand
actual output can fall short of potential output when demand falters
Current output that is intended to increase future output is called
investment
main role of money
facilitate exchange
inflations, exchange rates and interest rates are all
prices of money
interest rate
price of holding money or consuming today
Why is lowering the interest rate a common policy in response to recessions?
because more people are spending money to get the economy moving. price of money is lower so people spend
exchange rate
the price of one currency in terms of another (appreciation favors imports and depreciation favors exports)
-$ gets more expensive/stronger- appreciates; depreciation- $ gets weaker/ cheaper, helps exports.
inflation
means the aggregate price level is increasing. Inflation, therefore, lowers the value of money . money is worth more when inflation is low cause you can buy more with it
monetary policy
Central Bank can increase money supply by printing more currency and injecting it into the economy
-Consequence is inflation
-Interest rates fall, exchange rate depreciates, price level rises
monetary policy (decrease supply)
Can also decrease the money supply by selling T-bills
-Bonds issued by government- debt- loaning money to the government
-Too much cash? They do this
-Interest rates rise, exchange rates appreciates, price level falls
nominal gdp
quantity * price, uses prices today (this year)
real gdp
uses prices from a different year, uses prices that are normal (base year is updated by bureau of statistics- chain link method)
GDP Deflator
nominal gdp / real gdp
-Measure of inflation
real interest rates=
nominal interest rates- expected inflation
real interest rates…
represents the effective rate of interest on a loan after controlling for inflation
appreciates and favors imports
If $ becomes more expensive, than your $ is appreciating and you want to buy japanese calculator
% change in real exchange rate
% change nominal exchange rate - (japan inflation %- US inflation %)
Why would the nominal exchange rate depreciate when there is an increase in money supply?
Currency becomes less valuable so nominal exchange rate goes down
money multipliers
I / proportion of leakage
bank runs or bank panics
When a lot of people go to the bank to withdraw money at the same time.
three basic tools of monetary policy
discount rate, open market operations, reserve requirments
discount rate
Rate at which banks can borrow from the federal reserve
Decreasing the discount rate– A way to expand money supply
open market operations
buying and selling treasury bills, buying treasury bills will increase the money supply because you buy them with cash. Too much money you sell the t bills to get money back. Most important
reserve requirements
banks keep 10% of all deposits for reserve. Increases to 20% then money supply decreases because the bank has it.
