Vecka 3 sammanfattningar del 2 Flashcards
What happens When aggregate demand is greater than output in the short run?
firms increase production to avoid unintended inventory depletion.
What happens When aggregate demand is less than output?
firms cut back production to avoid unintended accumulation of inventories.
Where does The economy’s short-run equilibrium occur?
at the exchange rate and output level where aggregate demand equals aggregate supply and the asset markets are in equilibrium. Where the DD and AA curves intersect.
What happens if there is A temporary increase in the money supply, which does not alter the long-run expected nominal exchange rate?
It causes a depreciation of the currency and a rise in output.
What happens if there is Temporary fiscal expansion?
A rise in output, but it causes the currency to appreciate.
Why can Monetary policy and fiscal policy be used by the government?
to offset the effects of disturbances to output and employment.
When is Temporary monetary expansion powerless?
when the economy is in a liquidity trap with the nominal interest rate at the zero lower bound.
What is different with Permanent shifts in the money supply?
It alters the long-run expected nominal exchange rate and cause sharper exchange rate movements and therefore have stronger short-run effects on output than transitory shifts. In the long run, output returns to its initial level and all money prices rise in proportion to the increase in the money supply.
For what is The government spending multiplier zero?
for permanent fiscal expansion, unlike for temporary fiscal expansion.
What is a J-curve pattern?
first worsening and then improving. If such a J-curve exists, currency depreciation may have an initial contractionary effect on output, and exchange rate overshooting will be amplified
What happens When a country’s central bank purchases foreign assets?
The country’s money supply automatically increases, but if they sell foreign assets the money supply decreases.
How can A central bank fix the exchange rate of its currency against foreign currency ?
By trading unlimited amounts of domestic money against foreign assets at that rate. the central bank must intervene in the foreign exchange market whenever necessary to prevent the emergence of an excess demand or supply of domestic currency assets.
What does the central bank need to sacrifice to fix an exchange rate?
Its ability to use monetary policy for stabilization.
Do the money supply and output change when there is A purchase of domestic assets by the central bank?
No, it causes an equal fall in its official international reserves, leaving the money supply and output unchanged.
On what exchange rates does Fiscal policy has a more powerful effect on output under?
fixed exchange rates.
