Final Notes

Question 1

balance of payment

Answer 1

sum of all transactions that take place between a country’s residents and the residents of all foreign nations
overall BoP = 0

Question 2

credits vs debits

Answer 2

credits = cash inflows
debits = cash outflows

Question 3

current account

Answer 3

reflects payments arising from trade in goods and services and income flows due to foreign investment
CUR = BoT + BoS + NFII

Question 4

balance of trade (BoT)

Answer 4

value of exported goods – value of imported goods

exports = credits; imports = debits

Question 5

balance of services (BoS)

Answer 5

value of exported services – value of imported services

includes tourism and business services

Question 6

net foreign investment income

Answer 6

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

Question 7

capital accounts

Answer 7

reflects payments arising from non-resident purchases of assets
purchases of foreign assets create debit
purchases of domestic assets create credit

Question 8

short-term capital flow (STCF)

Answer 8

highly liquid assets; sensitive to short-term interest rate changes

Question 9

long-term capital flow (LTCF)

Answer 9

more permanent investments
direct investment = changes in non-resident ownership
portfolio investment = minority holdings of shares

Question 10

changes in official international reserve (OIR)

Answer 10

holdings of foreign currencies by the central bank; very important in a fixed exchange rate system

Question 11

BoP surplus in a fixed XR system =

Answer 11

gain OIR

Question 12

BoP surplus in a flexible XR system =

Answer 12

currency gains value

Question 13

demand for cdn$ increases

Answer 13

cdn$ appreciates

Question 14

supply of cdn$ increases

Answer 14

cdn$ depreciates

Question 15

if the interest rate of one country increases compared to Canada, what happens to cdn$?

Answer 15

demand decreases, supply increases, cdn$ depreciates

Question 16

if there is a BoP surplus, what happens to cdn$?

Answer 16

excess demand, currency undervalued

Question 17

if there is a BoP deficit, what happens to cdn$?

Answer 17

excess supply

Question 18

terms of trade (ToT)

Answer 18

quantity of imported goods obtainable per unit of exported goods
(export price index / import price index) x 100

Question 19

aggregate demand

Answer 19

quantity of goods and services that economic agents want to buy at each price level

Question 20

interest rate effect

Answer 20

a higher price level increases money demand and the interest rate, reducing I and C

Question 21

wealth effect

Answer 21

a higher price level makes consumers feel less wealthy, encouraging PS and reducing C

Question 22

real exchange rate/foreign purchases effect

Answer 22

a higher price level makes domestically produced items less attractive, reducing X and encouraging M (decreasing NX overall)

Question 23

biggest factor affecting consumption

Answer 23

income

Question 24

what causes shifts in AD?

Answer 24

caused by anything that results in more or less spending at any price level
(ex. currency appreciation decreases AD)

Question 25

aggregate supply

Answer 25

quantity of goods and services that firms choose to produce and sell at each price level

Question 26

long-run aggregate supply

Answer 26

production depends on supply of resources and available technology; vertical at the natural rate of output

Question 27

short-run aggregate supply

Answer 27

output produced and price level move in the same direction; tends to steepen as output increases

Question 28

unit cost theory

Answer 28

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

Question 29

sticky wage theory

Answer 29

nominal wages do not adjust immediately to the price level, so higher prices make production more profitable and output increases

Question 30

Keynesian aggregate supply

Answer 30

in a depression, supply accommodates demand; horizontal

Question 31

increases in AD

Answer 31

creates boom, increases inflation rates, increased prices push inflation

Question 32

decreases in AS

Answer 32

creates recession, factor prices decrease

Question 33

average propensity to consume

Answer 33

fraction of total income that is consumed; apc decreases as income increases apc = consumption / income apc + aps = 1

Question 34

marginal propensity to consume

Answer 34

how much extra consumption increases given an increase in income

Question 35

marginal propensity to save

Answer 35

proportion of extra income money consumers decide to save

Question 36

multiplier effect

Answer 36

relationship between changes in spending and change in GDP

Question 37

marginal propensity to import

Answer 37

proportion of extra income that consumers spend on imports

Question 38

tax multiplier

Answer 38

if people are taxed one less $, they will not generally spend the whole $

Question 39

closing the output gap

Answer 39

moving the economy to the natural rate of output (Yn) | ^Y = Yn -- Y

Question 40

if ^Y > 0

Answer 40

economy needs a boost

Question 41

in a recession, what should AD do?

Answer 41

want to increase AD by increasing G or decreasing T

Question 42

in a boom, what should AD do?

Answer 42

want to decrease AD by decreasing G or increasing T

Question 43

crowding out of investment

Answer 43

expansionary fiscal policy will boost income, raise Md and r, and lower I and AD

Question 44

crowding out of net exports

Answer 44

under flexible XRs, expansionary fiscal policy will boost interest rates, which will cause currency appreciation, and lower NX and AD

Question 45

recognition lag

Answer 45

long for both fiscal and monetary policy

Question 46

decision lag

Answer 46

long for fiscal policy, short for monetary policy

Question 47

impact lag

Answer 47

can be short for fiscal policy, long and uncertain for monetary policy

Question 48

revesibility

Answer 48

difficult for fiscal policy, possible for monetary policy

Question 49

visibility

Answer 49

fiscal policy is well understood by public, monetary policy is not well understood

Question 50

influences on fiscal and monetary policy

Answer 50

fiscal: domestically controlled monetary: influenced by foreign monetary policy

Question 51

targets of fiscal and monetary policy?

Answer 51

fiscal: can be targeted monetary: cannot be targeted