Macro unit 5 Flashcards
Inflation
A general increase in prices and fall in purchasing value of money
Deflation
Contraction of the supply of circulated money within the economy
Disinflation
A reduction in the rate of inflation
The Phillips Curve
Shows the short run tradeoff between inflation and employment
What change causes a shift along the Phillips curve?
A change in AD
Negative supply shock
Occurs when a reduction in short run AS causes stagflation
Shifts short run Phillips Curve
Ex. Natural disaster, change in expecations
Positive supply shock example
Finding natural resources
Relationship between inflation and unemployment in the long run Phillips Curve
No tradeoff between unemployment and inflation
Rational expectations theory
Short run economics policies can be negated by people’s expectations and perceptions
People change behaviors based on what they foresee in the future
What shifts the SRAS curve?
anything that shifts LRAS (LLC+T)
Expectations
Effect on expected price level and short run Phillips Curve with expansionary monetary policy
Change in expected price level: INCREASE
Effect on short run Philips Curve: SHIFTS RIGHT
Effect on expected price level and short run Phillips Curve with contractionary monetary policy
Change in expected price level: DECREASE
Effect on short run Philips Curve: SHIFTS LEFT
National savings
Total income in the economy that remains after paying for consumption and government purchases
Private savings
The income that households have left after paying for taxes and consumption
Public savings
The tax revenue that the government has left after paying for its spending
Savings=
Investment
Savings
Unspent income put into accounts, bonds, mutual funds, or stocks
Investment
The purchase of new capital
What is needed for long term economic growth?
Investment and savings
What happens to long run economic growth when the real interest rate FALLS?
More investment->more investment->more capital->increases in economic growth
What happens to long run economic growth when the real interest rate RISES?
Less investment->less replacement of capital->decrease in economic growth
Increase in productivity shifts LRAS
RIGHT
Market for loanable funds
The market in which those who want to save supply funds and those who want to borrow invest demand funds
Where does the supply for loanable funds come from?
People with extra income they want to save and lend out? (Ex. Buying a bond from a firm, depositing into a bank)
Where does the demand for loanable funds come from?
People who wish to borrow to make investment (ex. Taking out a mortgage to buy a home, firms borrowing to buy new equipment or build factories)
What is the price of a loan?
The interest rate, it represents the amounts borrowers pay for loans and he amount lenders receive on their saving
How would a high interest rate affect the quantity of loanable funds?
A high interest rate makes borrowing more expensive, raising the interest rates, and causing the demand to fall. Because a high interest rate makes saving more attractive, the quantity of loanable funds supplied rises
What happens if the interest rate is lower than the equilibrium level?
The Q of loanable funds supplied is less than the Q demanded. This shortage would encourage lenders to raise the interest rate charged, encouraging saving which would increase the quantity of loanable funds supplied, discouraging borrowing for investment
What happens if the interest rate is higher than the equilibrium level?
The quantity of loanable funds would exceed the quantity of loanable funds demanded. Interest rates would decrease, and would approach equilibrium where the supply and demand for loanable funds exactly balance
Tariffs
Sets the price of imports
Import quotas
Fixed quantity of imports
Balance of payments
Current account vs. financial capital account
Current account
Measures flow of physical goods and services (includes trade balance-imports vs. exports)
Financial/capital account
Measures flow of money
Current account + capital account=
0
Net capital outflow=
Net exports
Outflow of $ in capital account - inflow of $ in capital account
Current account surplus
Imports
Current account deficit
Imports>exports
Capital surplus
Inflow>outflow
Capital deficit
Inflow
How is deficit spending in the U.S. financed?
By the sale of treasury bonds
Supply in foreign market model
U.S. buying foreign goods/services/assets
Demand in foreign market model
Foreigners buying U.S. goods/services/exports (NX)
Appreciation
Relative rise in the value of currency
Depreciation
Relative decrease in the value of currency
When one currency depreciates, the other
Appreciates
Things that shift supply and demand for a foreign currency
- changes in flows based on changes in interest rates
- changes in the rate of inflation
- business cycle of a foreign economy
What happens to imports and exports when currency APPRECIATES?
Exports fall, imports rise
What happens to imports and exports when currency DEPRECIATES?
Exports rise, imports fall
When interest rates increase, what happens to the exchange rates and exports?
Exchange rate: APPRECIATES
Exports: DECREASE
When interest rates decrease, what happens to the exchange rates and exports?
Exchange rate: DEPRECIATES
Exports: INCREASE
Capital flight
A large and sudden movement of capital in and out of a country
Import quota
A limit to the amount of goods that can be produced abroad and sold locally
