Final Notes Flashcards
balance of payment
sum of all transactions that take place between a country’s residents and the residents of all foreign nations
overall BoP = 0
credits vs debits
credits = cash inflows debits = cash outflows
current account
reflects payments arising from trade in goods and services and income flows due to foreign investment
CUR = BoT + BoS + NFII
balance of trade (BoT)
value of exported goods – value of imported goods
exports = credits; imports = debits
balance of services (BoS)
value of exported services – value of imported services
includes tourism and business services
net foreign investment income
profits, dividends, and interest accruing to residents of country X due to investment abroad – profits, dividends, and interest accruing to foreigners due to investment in country X
FII inflows = credit; FII outflows = debit
capital accounts
reflects payments arising from non-resident purchases of assets
purchases of foreign assets create debit
purchases of domestic assets create credit
short-term capital flow (STCF)
highly liquid assets; sensitive to short-term interest rate changes
long-term capital flow (LTCF)
more permanent investments
direct investment = changes in non-resident ownership
portfolio investment = minority holdings of shares
changes in official international reserve (OIR)
holdings of foreign currencies by the central bank; very important in a fixed exchange rate system
BoP surplus in a fixed XR system =
gain OIR
BoP surplus in a flexible XR system =
currency gains value
demand for cdn$ increases
cdn$ appreciates
supply of cdn$ increases
cdn$ depreciates
if the interest rate of one country increases compared to Canada, what happens to cdn$?
demand decreases, supply increases, cdn$ depreciates
if there is a BoP surplus, what happens to cdn$?
excess demand, currency undervalued
if there is a BoP deficit, what happens to cdn$?
excess supply
terms of trade (ToT)
quantity of imported goods obtainable per unit of exported goods
(export price index / import price index) x 100
aggregate demand
quantity of goods and services that economic agents want to buy at each price level
interest rate effect
a higher price level increases money demand and the interest rate, reducing I and C
wealth effect
a higher price level makes consumers feel less wealthy, encouraging PS and reducing C
real exchange rate/foreign purchases effect
a higher price level makes domestically produced items less attractive, reducing X and encouraging M (decreasing NX overall)
biggest factor affecting consumption
income
what causes shifts in AD?
caused by anything that results in more or less spending at any price level
(ex. currency appreciation decreases AD)
aggregate supply
quantity of goods and services that firms choose to produce and sell at each price level
long-run aggregate supply
production depends on supply of resources and available technology; vertical at the natural rate of output
short-run aggregate supply
output produced and price level move in the same direction; tends to steepen as output increases
unit cost theory
in order to increase production, firms may have to pay overtime or use less efficient factors; if unit cost goes up, need higher prices to justify production
sticky wage theory
nominal wages do not adjust immediately to the price level, so higher prices make production more profitable and output increases
Keynesian aggregate supply
in a depression, supply accommodates demand; horizontal
increases in AD
creates boom, increases inflation rates, increased prices push inflation
decreases in AS
creates recession, factor prices decrease
average propensity to consume
fraction of total income that is consumed; apc decreases as income increases
apc = consumption / income
apc + aps = 1
marginal propensity to consume
how much extra consumption increases given an increase in income
marginal propensity to save
proportion of extra income money consumers decide to save
multiplier effect
relationship between changes in spending and change in GDP
marginal propensity to import
proportion of extra income that consumers spend on imports
tax multiplier
if people are taxed one less $, they will not generally spend the whole $
closing the output gap
moving the economy to the natural rate of output (Yn)
^Y = Yn – Y
if ^Y > 0
economy needs a boost
in a recession, what should AD do?
want to increase AD by increasing G or decreasing T
in a boom, what should AD do?
want to decrease AD by decreasing G or increasing T
crowding out of investment
expansionary fiscal policy will boost income, raise Md and r, and lower I and AD
crowding out of net exports
under flexible XRs, expansionary fiscal policy will boost interest rates, which will cause currency appreciation, and lower NX and AD
recognition lag
long for both fiscal and monetary policy
decision lag
long for fiscal policy, short for monetary policy
impact lag
can be short for fiscal policy, long and uncertain for monetary policy
revesibility
difficult for fiscal policy, possible for monetary policy
visibility
fiscal policy is well understood by public, monetary policy is not well understood
influences on fiscal and monetary policy
fiscal: domestically controlled
monetary: influenced by foreign monetary policy
targets of fiscal and monetary policy?
fiscal: can be targeted
monetary: cannot be targeted
