Chapter 7: Balance of Payments 2: Output, Exchange Rates, and Macroeconomic Policies

Question 1

Disposable Income (Yd)

Answer 1

How much a household has to spend after taxes

Question 2

Marginal Propensity to Consume (MPC)

Answer 2

Slope of the consumption function. It tells us how much of every $1 of extra disposable income received by households is spent on consumption

Question 3

Marginal Propensity to Save (MPS)

Answer 3

How much of every $1 of extra disposable income received by households is saved

MPS = 1 - MPC

Question 4

Government Transfer Programs

Answer 4

Government programs that redistribute income between households, such as social security, medical care, or unemployment benefit systems. These are not included in government consumption

Question 5

Government Consumption

Answer 5

What the government spends

Question 6

Expenditure Switching

Answer 6

When spending patterns change in response to changes in the real exchange rate, we say that there is expenditure switching from foreign to domestic purchases

Question 7

Trade Balance

Answer 7

TB = EX - IM (sort of)

An increasing function of the real exchange rate

Question 8

Marginal Propensity to Consume Foreign Goods (MPC(f))

Answer 8

How much of every $1 of extra disposable income received by households is spent on foreign goods

Question 9

Marginal Propensity to Consume Home Goods (MPC(h))

Answer 9

How much of every $1 of extra disposable income received by households is spent on home goods

Question 10

Real Effective Exchange Rate

Answer 10

The weighted average of a country’s currency relative to an index or basket of other major currencies adjusted for the effects of inflation. The weights are determined by comparing the relative trade balances, in terms of one country’s currency, with each other country within the index.

Question 11

Goods Market Equilibrium Condition

Answer 11

Y = C + I + G + TB = D

Question 12

IS (Investment saving) Curve

Answer 12

Shows combinations of output Y and the interest rate i for which the goods and forex markets are in equilibrium

Question 13

LM (liquidity preference money supply) Curve

Answer 13

Shows an upward-sloping relationship between the interest rate i and output Y

Question 14

Monetary Policy

Answer 14

Policy actions, implemented through changes in money supply

Question 15

Fiscal Policy

Answer 15

Policy actions, involving changes in government spending or taxes

Question 16

Stabilization Policy

Answer 16

Policies that the governments can use to try and keep the economy at or near its full-employment level of output