Review Class 28 Flashcards
3 main sources of demand for US dollar
- Foreign firms etc. that want to buy goods and services produced in the U.S.
- Foreign firms, households, governments that want to invest in the US
- Currency traders who believe the value of the dollar in the future will be greater than its value today
If interest rates in US go up but EU hasn’t
EU investors want to buy US treasury bonds
Americans buying Japanese cars:
Supply U.S. dollars and demand Japanese yen
3 main determinants of an exchange rate
- Trade ( prices and income are the major determinants in the volume of
- Investment
- Speculation
Among others economists examine the changes of the following three variables to determine the change in exchange rate: income, prices, and _____
Interest rates
- Why an increase in US GDP which is larger than increase in another country gdp typically causes a devaluation of the currency
Us income increase more than foreign incomes
Imports increase more than exports
Overall price increase in us
Substitute domestic product with foreign products
If the interest rate in US goes up (assuming EU stays same)
US financial assets become more attractive because pay more interest
Interest rates and capital inflows
Expansionary monetary policy tend to reduce both:
Imopoets are the difference between
Consumption and domestic income ?
Households own what
All the factors of production
The economy is in long run and short run equilibrium when
Something
Expansionary fiscal policy
Increasing govt expenditures
Lowering become taxes (people have more money and consume and invest more) shift aggregate demand curve to right
Lower interest rates
Determine investment domestic and exchange rates
Y= AD=
(+ I + G + X - M)
Lower interest rate implies
Domestic investment goes up
NAIRU
Long run Phillips curve
Keynesian economists believe that expansionary fiscal policy
Shift AD curve to the right (that is the income goes up so do prices depends if economy is in recession or boom)
Keynesian economists suggest expansionary fiscal policy
Should be undertaken when economy is in recession
Neoclassical economists think expansion fiscal policy ?
Ineffective
They believe in recardian equivalence theorem
People assume later taxes and save for them
Cut of business taxes in both Keynesian and neoclassical view
Will shift the SAS to the right
