Inflation and exchange Rates Flashcards
Real
Allowing for inflation
Investment
Purchase of capital to the economy’s capital stock
Gross investment
Total amount that the economy spends on new capital
How to work out net investment
Gross investment - capital depreciation
Net
Increase
Net
Increase
Gross
Total
Factors influencing investment
- Actual and expected AD
- Expected profit and taxes
- Intrest rates and availability of business finance
- Business confidence and profit
Accelerator effect
Positive relationship between planned capital investment and rate of income
The output gap
Difference between actual level of gdp and its estimated potential level
Negative output gap
When actually output falls below potential level
Trade balance
Difference between exports and imports
Factors influencing exports
- Relative prices
- Exchange rate
- Nonprice demand factors
- Strength of AD in key export markets
Exchange rate
Rate at which one currency can be changed to another
Floating exchange
- It can either appreciate or depreciate
- No intervention by central bank
- Not an explicit target or monetary policy
Advantages of floating exchange
Shock absorption
Reduced speculate attacks
Currency reserves
Drawbacks of floating exchange
Currency risk
Inflation pass-through
Loss of exchange rate as a policy tool
Fixed exchange
Central banks fixes the currency value
Holds foreign exchange rates
Pegged rate becomes the official rate
Adjustable peg
Advantages of fixed exchange
Price stability
Reduced exchange rate risk
Discipline on monetary policy
Foreign investment
Drawbacks of fixed exchange
Lack of flexibility
Balance of payments issues
Speculative attacks
Dependence of reserves
Drawbacks of fixed exchange
Lack of flexibility
Balance of payments issues
Speculative attacks
Dependence of reserves
Managed floating
Central banks MAY intervene to influence value
Buying/selling currency
Intrest rates
Positive multiplier
An initial change in spending leads to a bigger increase in total output
Negative multiplier
An initial change in spending leads to a bigger decrease in total output
Multiplier equation
1 / Marginal propensity to save
Multiplier in open economy
1 / Marginal propensity of withdrawals
Marginal propensity of withdrawals
MPS + Tax + Imports
High multiplier
Economy has spare capacity to meet higher AD
Low multiplier
Economy is close to capacity limits during a boom phase
