Deficits, Inflation, and Unemployment Flashcards
Budget Deficits
The difference between federal government spending and tax collections in one year
National Debt
The accumulation of past deficits (total amount the government owns at a given time)
Ricardian Equivalence Theory
States that deficit financing is no different from tax financing because if the former is chosen, people will simultaneously increase their savings by the amount they would have been taxed in preparation for the inevitable repayment of the debt over time
Phillips Curve
Shows the inverse relationship between inflation and the unemployment rate
Structural Shocks
When other components of AD fall out of favor, rather than lowering their prices and decreasing payments to their inputs, firms responds with cutbacks and layoffs
Balance of Payments
A statement of all international flows of money over a given period
Merchandise Trade Balance
Merchandise Trade Balance = Merchandise Exports - Merchandise Imports
Trade Deficit
Exists when imports exceed exports
Trade Surplus
Exists when exports exceed imports
Current-Account Balance
Current-Account Balance = Trade Balance + Services Balance + Transfers
Capital-Account Balance
Capital-Account Balance = Foreign Purchases of Home Assets - Purchases of Foreign Assets
Depreciation
Currency becomes weaker when it falls in value relative to other currencies
Appreciation
Currency becomes stronger when it rises in value relative to other currencies
Arbitrage
The practice of buying at a low price and selling at a high price for a certain profit
Fixed Exchange Rate
Changes in demand only affect the quantity of dollars purchased
Flexible Exchange Rate
A fix in the quantity of assets denominated in the home currency affects only price of the other currency
Managed Exchange Rate
Changes in demand result in changes in the exchange rate, but the fluctuations of the exchange rate are dampened by a positively sloping curve
Sources of Economic Growth
- Increased Investments in Human Capital
- Increased Investments in Physical Capital
- Improvements of Technology
- Enhanced Resource Utilization
Arithmetic Rate
Adding a constant amount each period
Geometric Rate
Increasing by a constant proportion each period
