Chapter 15 Flashcards
What do you call the exchange rate in Canada?
Flexible/floating rate
Determined by the forces of supply and demand
What are some factors that effect the exchange rate?
Differences in: interest rate, inflation rate, productivity, consumer preference, economic stability, nominal exchange rate
what determines if we hold cash or bonds?
Interest rates
Ex. Interest rates are high so buy bonds
What increases money demand?
Inflation, economic recovery, increase in population
What are 2 characteristics of a small open economy?
Perfect capital mobility
Domestic interest rates tend to follow world interest rates
For an open and closed economy what are the interest rates on graphs (in general)?
Open:
Bond return rate
Closed:
Cost of Borrowing
Domestic Impact assume a Expansionary monetary policy?
Foreign Impact?
EXP MP —> increased money supply—> decreased interest rates –> increased C/increased I/ decreased S –> AD –> Real GDP
Foreign Impact:
Decreased P of Cdn$ –> increased X/decreased M–> Increased Xn –>AD –> Real GDP
Review: what would a government do when implementing a fiscal policy?
G and T
What is one of the expenditure multiplier?
Expenditure multiplier = Change in real GDP/Change in spending
What is the Marginal Propensity to Consume?
MPC= change in C/ Change in Y
How much does consumption change when there is an increase to income
What is Marginal Propensity to Save?
MPS = Change in S/ Change in Y
How much does savings change when there is an increase to income
What does MPC + MPS = ??
1, always
What formula would you use to find the expenditure multiplier?
Multiplier = 1/(1-MPC) = 1/MPS
What is the Crowding Out Effect?
- Negative impact of fiscal policy on the economy
- The positive effect of expansionary fiscal policy leads to a reduction in private sector investment which leads to a decline in real GDP
