Macro policy Flashcards
What constitutes an internal balance?
- There is a low unemployment rate
- Markets are in equilibrium
- Resources are efficiently used
What constitutes an external balance?
An external balance is when a desired trade balance is achieved, alongside desired international capital flows.
What is a goods market equilibrium and what curve denotes this?
A goods market equilibrium is when the quantity of goods demanded is equal to the quantity of goods supplied. The IS curve denotes the combinations of interest rate and Output For which the goods market is in equilibrium.
What is a money market equilibrium and what curve denotes this?
A money market equilibrium, which is when money demanded (The desire to hold money) is equal to the supply of money. This is denoted by the combinations of interest rates and income on the LM curve.
What is a balance of payments equilibrium and what curve denotes this?
A balance of payments equilibrium is when the current account deficit is equal to the capital account surplus, meaning the “official settlements” is equal to zero.
When the IS, LM and BP curves cross, what does the equilibrium interest rate do?
When the IS, LM and BP curves all intersect, it means the equilibrium interest rate clears all 3 markets simultaneously.
What are the two assumptions of the IS model?
The two assumptions of the IS model are that the economy in question is a small open economy, and that income leakages (S,T,IM) are equal to domestic spending injections (I+G+X).
In the Mundell Fleming model, S depends on …
In the Mundell Fleming model, S depends on the income of consumers, because with MPS remaining the same, as income rises, so will savings.
Why does IM depend on income?
In the Mundell Fleming model, IM also depends on income. With a constant marginal propensity to import, as income rises, so does imports.
How/why does I depend on the interest rate?
I depends on the interest rate because as the interest rate rises, it becomes more expensive to borrow money, so less businesses invest.
What does X depend on in the MF model?
In the Mundell-Fleming model, X (exports) depends on foreign income.
What is the IS curve?
The IS curve shows us the combinations of interest rates and income for which the Goods market is in equilibrium, meaning the quantity of goods supplied in the economy is equal to the quantity of goods demanded. The equation (S+T+IM = I+G+X) must also hold.
Why does money demand increase when income increases?
When income increases, demand for money increases because consumers needs money to finance their increased purchases.
Why does money demand decrease when interest rates rise?
When interest rates rise, the demand for money decreases. This is due to the fact that as the return on investing money increases due to the higher rate, the opportunity cost of holding cash as opposed to investing grows. Therefore, the demand for money falls.
Why does money demand decrease when interest rates rise?
When interest rates rise, the demand for money decreases. This is due to the fact that as the return on investing money increases due to the higher rate, the opportunity cost of holding cash as opposed to investing grows. Therefore, the demand for money falls.
