midterm 2 Flashcards
(313 cards)
1
Q
circular flow diagram
A
model of economy that shows how households and businesses are linked
total output, income, spending, are all equal
2
Q
on the circular flow diagram: total output must be equal to …..
and total spending must be equal to…..
A
total spending, total income
3
Q
gdp per capita (per person)
A
total gdp/population
4
Q
gdp
A
market value of all final goods and services produced within a country in a year
5
Q
gdp is total spending on
A
final goods, including new inventories
6
Q
gdp (y) = (categories of spending)
A
consumption + investment + government spending + net exports
7
Q
gdp only counts…. goods and does not account for …… goods
input costs are not included in gdp
A
final, intermediate
8
Q
consumption
A
ex) household purchases
household spending on final goods and services
9
Q
investment
A
spending on new capital assets that increase economy’s productive capacity
10
Q
transfer payments
A
transfer income from one entity to the next
government to individual
not counted in gdp
11
Q
exports
A
goods or services produced domestically and purchased by foreign buyers
12
Q
imports
A
goods or services produced in a foreign country and purchased by domestic buyers
13
Q
net exports
A
spending on exports- spending on imports
also called trade balance
14
Q
value added
A
amount by which value of an item is increased at each stage of production
15
Q
value added =
A
total sales - cost of intermediate inputs
16
Q
gdp is the total income which is the sum of
A
total wages and total profits
17
Q
capital gains and losses are counted as
A
new income
18
Q
labor’s share of total income is
A
declining
19
Q
3 ways to measure gdp: gdp is
A
total spending, total output, total income
20
Q
3 ways to measure gdp: it can be measured by
A
y=c+i+g+nx
sum of total value added
total wages + total profits
21
Q
3 ways to measure gdp: measurement is called
A
gdp, value added, gross domestic income
22
Q
6 limitations of gdp:
A
1) prices are not values
2) non market activities are not included
3) misses the shadow economy
4) doesnt count environmental degradation
5) leisure does not count
6) gdp ignores distribution
23
Q
nominal gdp
A
gdp measured in today’s prices
24
Q
real gdp
A
gdp measured in constant price
can we account for price changes to see if economy has grown over time in value
25
nominal gdp =
p*q
26
real gdp =
avg p *q
27
calculate nominal gdp using .... prices
current
28
calculate real gdp using ...... prices
constant
29
% change in nominal gdp=
% change in real gdp + % change in prices
only works when the years are close together
30
how to scale big numbers
1) evaluate what it means per person
2) compare big numbers to size of their own history
3) use rule of 70 to evaluate long run growth rates
4) compare big numbers to size of economy
31
rule of 70
doubling time (years) =
70/ annual growth rate
32
economic growth
ability of society to produce more over time
making the economic pie bigger
how can we increase circular flow model?
33
flow of real resources
wood, labor, electricity, groceries, services
34
flow of money
spending to acquire inputs, spending to buy outputs
35
market value
value everything goes into gdp at its market price
36
e^10 , e^9
ten bil, bill
37
calculate gdp by
asking people how much they spent, asking people how much they produced, asking people how much they earned
38
imports do not factor into gdp because
they already count into consumption and investment
39
production functions
methods by which inouts are transformed into output
determines total production possible with a set of ingredients
how inputs turn into outputs
40
aggregate production function
links gdp to labor, human capital, and physical capital
how much of everything a country can produce
41
human capital
accumulated knowledge and skills that make a worker more productive
42
physical capital
tools/machinery/structures that are inputs in production process
43
production function:
Y= f...
(L,H,K)
output is a function of labor, human capital, and physical capital
44
a country will produce more if
it employs more labor
workers become highly skilled, accumulating human capital
accumulates more physical capital
45
output depends on
L,H,K and recipe for inputs/outputs
46
population growth boosts total gdp but not
gdp per capita
47
dependency ratio
number of people too old or too young to work per 100 people of working age
48
labor productivity
quantity of goods and services that each person produces per hour of work
49
capital stock:
total quantity of physical capital that can be used in production of goods and services
50
technological progress
new methods for using existing resources
new recipe for combining ingredients
51
constant returns to scale
increasing all inputs by same proportion will cause output to rise by the same proportion
doubling inputs means outputs will double
52
diminishing returns to capital
law of diminishing returns
53
catch up growth
enjoyed by poor countries, rapid growth that occurs when a relatively poor country invests in physical capital
54
capital stock will grow as long as
investment outpaces depreciation
55
depreciation
decline in capital due to wear and tear, obsolescence, accidental damage, aging, when price of a currency falls
56
physical capital per worker will eventually start
declining
57
capital accumulation cant sustain
long term economic growth
58
what shifts the production function
technological progress
59
technology allows us to break the cycle of poverty. it has 3 good features
ideas can be freely shared, ideas do not depreciate with use, ideas may promote other ideas
however, ideas are nonexcludable
60
why do institutions matter for public growth?
property rights
government stability
efficiency of regulation
61
property rights
control over tangible or intangible resources
provide incentive to invest in capital, maintain resources, develop a new tech
62
government stability
instability discourages investment and innovation
63
efficiency of regulation
make it no harder than necessary for people to start businesses and invest
ex) not hard to start a business in the US
64
encouraging innovation: government policy
create incentives through intellectual property laws
subsidize r and d
65
institutions that promote economic growth
property rights
gov stability
efficient regulation
gov policy that encourages innovation
66
imports dont make gdp smaller because
they cancel out
67
profits
share of money we spend going to businesses
68
wages
share of money we spend going to workers
69
gdp is a good proxy for economic well-being
decreases infant mortality, increases life expectancy, education, life satisfaction
70
how to calculate real gdp
1) find y1 and y2 average
2) compute GDP for both years using avg price
3) calculate growth if necessary
71
growth = (using real gdp)
(real gdp (this)- real gdp (last))/ real gdp (last)
gives gdp as a growth rate
to get as a percent, multiply by 100
72
growth = (as a percent change in real gdp)
% change in real gdp= % change in nominal gdp - % change in prices
73
even as world population grows,
growth grows at the same pace but is unevenly distributed
use real gdp
74
small growth rates build up
dispartity and inequality we see across the world emerged over time, not all at once
75
working age population
16 and older who are not in military or institutionalized
76
employed
working age population who are working
77
unemployed
working age population without jobs who are trying to get jobs
78
4 requirements to be considered unemployed
part of working age population
not currently working
actively searching for work
able to accept a job if it were offered
79
labor force
unemployed + employed
80
not in the labor force
working age population who are neither unemployed or employed
81
labor force participation rate =
(employed + unemployed)/ working age population
*100
differs for men and women
shows how many potential workers are working
82
unemployment rate
unemployed/labor force
* 100
percent of labor force that is unemployed
varies across groups, fluctuates over time but is never 0
83
equilibrium unemployment rate
long run unemployment rate to which economy tends to return
84
dynamic labor market makes it
easier for people to find new jobs
85
most job seekers are .....
most unemployment spells are .....
employed, short
86
long term unemployment
people who have been unemployed for 6 months or longer
87
..... and ..... make it hard for the long term unemployed to find work
discrimination and skill loss
88
marginally attached
someone who wants a job who hasnt looked for a job within the past year, but who isnt counted as unemployed because they are not currently searching for work
type of discouraged worker
closest discouraged worker to being back in labor force
89
underemployed
someone who has some work but wants more hours or someone whose job isnt adequately using their skills
90
involuntarily part time
someone who wants full time work and is working part time because they have not found a full time job
91
alternative measures of unemployment tend to follow
movements in unemployment
ex) if unemployment goes up, involuntary part time work will go up
92
on a graph of labor demand and labor supply
equilibrium occurs where everyone who wants to work is hired
93
frictional unemployment
due to the time it takes for employees to search for workers and workers to search for jobs
when there are efficient methods for job searches, frictional unemployment is lower
94
structural unemployment
unemployment that occurs because wages do not fall do bring L(s) and L (d) into equilibrium
95
cyclical unemployment
due to temporary down turns in the economy
96
frictional and structural unemployment explain why
equilibrium rate is never below zero
97
3 factors of frictional unemployment
1) efficiency of resources employers and workers use to find eachother
2) alignment of skills workers have and skills employers desire
3) employment insurance and other income support during unemployment
98
structural unemployment occurs when
prevailing market wage is stuck above equilibrium wage
99
efficiency wage (cause of structural unemployment)
higher wage paid to encourage greater worker productivity
makes it unprofitable for employers to lower wages
can lower total labor costs
create unemployment
100
institutions (cause of structural unemployment)
unions keep wages high for some workers
job protection regulations make it hard to fire workers
min wage keeps wages from following below set wage
101
economic costs of unemployment
unemployed often end up with less opportunities and lower wages
permanent unemployment can arise from periods of high unemployment
high unemployment means less gov tax revenue but more spending
102
hysteresis
period of high unemployment leads to higher equilibrium unemployment rate
103
social costs of unemployment
isolating and painful
long term unemployment causes worse outcomes
children whose parents experience unemployment suffer
104
2 ways to build capital stock
1) saving and investment
2) foreign investment
105
capital by itself has diminishing returns. if you add more and more capital growth in output will get
smaller and smaller
106
solow model
preserving/growing capital stock seems to be key component of economic growth
107
how societies create economic growth
1) accumulate physical capital/develop human capital
2) develop new ideas and tech
108
retired people are not
unemployed
109
discouraged workers
could work if offered a job, but not actively searching for a job due to discouragement with labor market
110
what two surveys are used in unemployment situation
household and establishment
111
there is always a ...... in the labor market
surplus
112
high unemployment =
loose labor market
benefits businesses, not workers
113
low unemployment =
tight labor market
benefits workers
114
unemployment insurance
makes frictional unemployment last longer, but for good reason. we want people to find the right job, not the first one
115
skill mismatch
skills become less valuable to firms, employees cant agree on right wage
116
idea behind efficiency wages
you pay a worker a little more and they make you a lot more money
117
efficiency wages cause
price floor effect
increased price of labor and increased quantity of labor supplied
118
minimum wage creates
price floor setting a min price for selling labor
persistent surplus is created, creating persistent unemployment
119
economists are skeptical of the idea that min wage causes
structural unemployment
120
natural rate of unemployment
typical rate of unemployment when economy is growing normally
comprised of structural and frictional unemployment
121
inflation
generalized rise in overall level of price
122
inflation rate definition
annual percent increase in average price level
123
inflation rate equation
100* p(this)-p(last)/ p(last)
124
consumer price index
average price consumers pay over time for a representative basket of goods
how much of budget the average person spends on all goods and services they buy
125
cpi formula
CPI= (cost of basket in given year / cost of basket in base year)*100
then, to calculate inflation, use 100 as the base year and calculate inflation using growth formula
126
use cpi to think about how
value of a dollar has changed
127
deflation
generalized fall in overall price level
128
what does the cpi not tell us?
1) only measures price changes for existing goods
2) quality improvements hide price increases
3) people change their basket when price rises
129
indexing
adjusting wage, ss, taxes, ect, to compensate for inflation
130
gdp deflator
price index that includes everything economy produces
can be used to calculate real gdp between years
131
how to calculate gdp deflator:
1) pick base year
2) use prices from base year to calculate real gdp in a year
3) take nominal gdp in that other year, divide by real gdp from step 2
4) multiply by 100
132
gdp deflator =
(nGDP/rGDP)*100
133
money illusion
mistaken tendency to focus on nominal dollar amounts instead of inflation adjusted amounts
134
money
asset regularly used in transactions
135
money functions (3)
medium of exchange
unit of account (relative value)
store of value (savings/retirement)
136
when inflation is high
money's ability to complete its three functions decreases
137
menu cost
marginal cost of adjusting prices
reprinting menus for price adjustments
138
shoe leather cost
costs incurred to avoid holding cash
139
hyperinflation
excess inflation, no trust in money
140
business cycle
short term fluctuation in economic activity
141
peak
high point in economic activity
142
recession
a period of falling economic activity
decrease in RGDP and rise in unemployment
143
trough
low point in economic activity
144
expansion
a period of rising economic activity
145
potential output
level of output that occurs when all resources are fully employed
unemployment at natural rate
economy at healthy limit
no inputs/ raw resources wasted
capital and labor being used productively
146
output gap (formula)
actual output-potential output / potential output
*100
147
positive output gap
producing more than potential
some resources over used
148
negative output gap
economy producing less than potential
resources being under used
149
boom
economy operating above sustainable potential
150
bust
economy operating below sustainable potential
150
recessions happen when
boom turns into bust
151
recessions are ....
expansions are...
short and sharp
long and gradual
152
persistence
economic conditions today are closely related to economic conditions in near future
153
economic variables .....
rise and fall together
ex) gdp falls, employment also falls
154
leading indicator
predicts future path of economy
155
lagging indicator
variables that tend to follow business cycle with a delay
156
example of leading indicator
confidence indicators, stocks
157
example of lagging indicators
gdp, cpi, unemployment
158
financial sector
creates liquidity, reallocates resources and spreads risk
159
banks
take deposits and turn them into loans
turn money in the future into money in the present
160
interest rate
price bank is charging for this service
161
deposit =
paid interest
162
borrow
charged interest
163
5 functions of banks
1) pool savings
2) spread risk
3) solve info problems
4) provide payment services
5) banks create long term loans with short term deposits
164
bank run
many people try to withdraw savings at the same time
165
consequences of bank runs
threatens stability of financial system, very contagious
166
bond
an IOU, promising to pay back a loan or debt with interests over time to whoever holds the bond
usually tradable
get loan payment + interest payment
167
bond market (4 functions)
1)creates liquidity
2)moves funds from savers to borrowers
3) spreads risk
4) funds gov debt
168
stocks
partial ownership of a business, entitling the owner to a share of the companies future profits as well as a say in how the company is run
169
dividends
share of companies profits paid directly to shareholders
170
functions of stock market
1) channel money from savers to investors
2) spread risk by bringing in more investors
3) reallocates control of a company
171
one big risk of financial sector
creates interdependence and negative outcomes can spread outside of sector
172
fundamental value of an asset
present value of future profits, payments, or other cash flows that a financial asset entitles you to earn
173
efficient markets hypothesis
at any point in time, prices reflect publicly available information about the fundamental value of an asset
says anything predictable is already incorporated into price
reason why it is tough to predict how stocks will move better than the overall market itself
174
x axis of AD AS model
quantity of output (real gdp)
175
y axis of AD AS model
price level (gdp deflator)
176
aggregate demand curve
summarizes purchasing plans of all buyers throughout the economy. shows relationship between average price level and quantity of output that all buyers plan to purchase.
177
why is the AD curve down sloping?
because higher prices cause the Fed to raise interest rates, raising the opportunity cost of spending money now instead of saving it
a lower average price level means buyers will demand a larger quantity of output
178
aggregate supply curve
summarizes production plans of all suppliers throughout the economy. shows the relationship between average price level and quantity of output that suppliers collectively produce.
179
why is the AS curve upward sloping?
Some prices and wages are "sticky," meaning they adjust slowly, so higher demand leads firms to produce more at higher prices in the short run.
180
Aggregate expenditure
total amount of goods and services that people want to buy across the whole economy
181
aggregate expenditure is the sum of
consumption, planned investment, gov purchases, net exports
182
planned investment excludes
unplanned changes in inventories
183
a higher price level leads to
a higher inflation rate
184
higher inflation causes the fed to
raise real interest rate
185
higher real interest rate leads to ....... aggregate expenditure
lower
186
changes in price level lead to ....... the AD curve
movements along
187
what shifts the AD curve?
1) consumption increases when people feel more prosperous
2) investment increases when it is profitable for business to expand
3) government purchases increase when policymakers decide to spend more on goods and services
4) net exports increase due to global factos
188
anything that shifts ....... shifts the AD curve
Aggregate expenditure
189
higher output leads to ..... prices
higher
190
what shifts the AS curve?
1) higher input prices raise production costs
2) higher import prices reflect international shocks
3) weaker productivity raises production costs
4) depreciating US dollar raises production costs and reduces competition from abroad
191
AS shifts in response to changes in production costs, caused by shifts in:
1) input prices
2) import prices
3) productivity
4) exchange rate
192
the fed cuts interest rates in response to (2 things)
low inflation and weak output
193
what type of change in interest rates does not shift the AD curve
inflation induced (only a movement along the curve)
194
lower real interest rates are
expansionary
195
higher real interest rates are
contractionary
196
fiscal policy
governments use of spending and tax polices to attempt to stabilize the economy
197
monetary policy
setting interest rates in an effort to influence economic conditions
198
increase in spending has a ...... effect on aggregate expenditure
multiplied
199
multiplier
measure of how much GDP changes as a result of both the direct and indirect effects flowing from each extra dollar of spending
200
if output and prices move in the same direction what shifted?
aggregate demand
201
if output and prices move in opposite directions what shifted?
aggregate supply
202
in the long run a change in average price level has
no effect on real variables
203
classical dichotomy
a purely nominal change, like a change in the average price level, wont have any effect on real variables in the long run
204
LRAS curve
AS curve that applies to the long run when prices have fully adjusted. the economy will return to producing its potential output, so the curve is vertical
205
VSRAS curve
AS curve that applies to the very short run in which no prices have changed. because prices are basically fixed, this curve is horizontal
206
sticky prices
prices that adjust sluggishly to changes in market conditions
207
SRAS curve
AS curve that applies over a period when prices are neither fully fixed nor fully flexible. upward sloping
208
AS curve is steeper in the
medium run
209
crowding out effect
government spending that leads to decrease in private sector spending
210
what shift occurs during stagflation
AS shifts left
211
what shift occurs when a recession is announced in a week
AD shifts left
212
AD reflects decision to
buy today instead of tomorrow
213
fed's dual mandate
1) promote max sustainable employment (output induced response, shifts AD)
2) maintain stable prices (controlling inflation, movement along AD curve)
214
if the fed lowers interest rates when price level isnt changing
AD shifts right, expansionary monetary policy
215
if the fed raises interest rates when price isnt changing
AD shifts left, contractionary monetary policy
leads to less inflationz
216
zero lower bound
nominal interest rates cannot go below zero
217
government purchases increase
AD
218
if the government wants to increase consumption it can
lower taxes or give stimulus
219
why does the multiplier effect happen?
circular flow model, more payment in one place will spread to another
220
neutral real interest rate
rate at which real GDP is = to potential GDP so output gap is 0
221
real interest rate =
nominal interest rate- inflation
222
federal funds rate (FFR)
nominal interest rate that the fed uses as its primary policy tool. rate banks pay to borrow from one another over night
223
when inflation is higher the fed makes
interest rates higher
224
when the economy is above potential the fed
raises interest rates
225
why 2 % inflation?
1) a little inflation keeps labor market moving
2) 0% inflation runs risk of deflation
3) 2% gives the fed some room. we know the fed cant push nominal interest rate below 0, but with some inflation fed can make real interest rates negative
4) measured inflation might be overstated
226
taylor rule (fed rule of thumb)
describes how fed sets the interest rate in order to manage its dual mandate
227
FFR-inflation=
real interest rate
228
when the output gap is positive, or inflation is too high
the fed raises interest rates
229
inflation and FFR
when inflation rate is above or below the feds target, it raises the FFF half the difference
230
reserves
the cash banks need to keep on hand to make payments
231
fed controls interest rates by influencing banks and their reserves
1) banks earn profit by lending money
2) banks need to avoid bank runs
232
discount rate
interest rate on loans that the fed offers banks through discount window
if a bank cant get a loan from another bank it can get it from the fed
means that banks will never charge each other more than the discount rate
233
interest rate on reserves
the interest paid by the Federal Reserve to banks on funds held in reserves
234
overnight reverse repurchase agreements
the fed sells government bonds overnight and buys them back at a higher price the next day
basically borrowing money overnight and paying it back with interest tomorrow
235
changing the FFR makes it more or less valuable for banks to make loans
ex) fed raises interest on reserves rate
banks make more money by keeping it in the vault
236
forward guidance
providing info about future course of monetary policy in order to influence expectations about interest rates
can help lower longer term interest rates
237
quantitative easing
purchasing large quantities of longer term bonds, in order to lower long term interest rates
makes long term investment easier
238
lender of last resort
fed will give loans to banks that are about to collapse
can prevent a financial crisis
239
discretionary spending
spending that the federal government decides on annually
240
mandatory spending
spending on programs that are set in law
241
fed wants to set interest rates to keep
GDP as close to potential output as possible
242
recession
a sustained period of economic decline, characterized by a decrease in real GDP (output) and an increase in unemployment
243
2 causes of structural unemployment
1) wages increase, and labor supply increases, which causes businesses to not be able to hire everyone who wants to work
2) minimum wage
244
real interest rate
the interest rate in terms of changes in your purchasing power
245
the cpi tends to .........state inflation because
over
households change their buying patterns in response to price changes
246
is the buying and selling of stocks or bonds counted in GDP?
are exports counted in GDP
no
yes
247
if the two years are right next to eachother and you are looking for growth in RGDP
use average prices
avg p*q
248
buying a newly build house increases which component of GDP
investment
249
what shifts LRAS
LRAS is only affected by economic shocks that influence real factors like labor and capital. Potential output has to change for LRAS to shift.
ex) cutting some tax expenditures to fund research at universities increases GDP because of the potential created by the research
ex) tech/ai, human capital, physical capital changes (anything that shocks total productivity)
250
changes to tarriffs, tax cuts, interest rates alone do not shift
LRAS
251
if the FFR is below the sum of inflation and neutral real interest rate this means the economy is in a
bust
the interest rate is lower, indicating an attempt to stimulate economy
252
if the FFR is above the sum of the inflation and neutral real interest rate, this means the economy is in a
boom
interest rate is higher, indicating an attempt to slow the economy
253
an improvement of the world economy (neighboring gdp increase) shifts what curve
AD
254
change in currency rates will shift
both AD and AS
they will shift in opposite directions
ex) if the dollar depreciates relative to the yen: AD shifts right and AS shifts left
255
currency that it is "in"
numerator
256
currency we're in the market for
denominator
257
what do you use to find RGDP when the years are right next to eachother!!!!!!!!!
average price *q
258
when the dollar is down, exports are
up
259
when the dollar is up, exports are
down
260
what shift occurs?
tsunami wipes out US factories
LRAS and SRAS shift left
demand will not shift because a change at the factories doesn't change how much you want the product, but a movement along the demand curve will happen because of the change in price level
261
where does the business cycle start on a graph
the peak
262
how does the fed actually set the FFR? (4 steps)
1) pays interest to banks on reserves
2) borrows money overnight from financial institutions
3) lends directly through discount window
4) buys and sells government bonds
263
buying government bonds is what type of policy
expansionary monetary policy
increases liquidity and lowers interest rate, therefore encouraging borrowing
264
risks associated with being lender of last resort
can lose money
can lead borrowers to take bigger risks
265
what is the majority of government spending
mostly federal, mostly on social insurance programs
266
how has government spending changed over time
has expanded overtime, spending has grown especially on social insurance programs
267
where does the majority of gov revenue come from
payroll and income taxes
268
income taxes
taxes collected on all income, regardless of source
269
payroll taxes
taxes on earned income
270
earned income
wages from an employer or net earnings from self employment
271
progressive tax
tax where those with more income are paying a higher share of income in taxes
income taxes are progressive
272
marginal tax rate
tax rate you pay if you earn another dollar
273
taxable income
income you pay taxes on
274
tax expenditure
special deductions, exemptions, or credits that lower your tax obligations to encourage certain behavior
hidden gov spending
275
fiscal policy is most effective when it is
timely, targeted, temporary
1) gets ahead of problems and acts quickly
2) targets those who need the most help, unlike monetary policy
3) extra spending is no longer necessary after a certain point
276
expansionary fiscal policy
increase in gov spending, decrease in taxes
277
contractionary fiscal policy
decrease in gov spending, increase in taxes
278
budget deficit
spending greater than revenue
279
4 facts about gov spending
1) federal gov typically runs a deficit
2) persistent large budget deficits are a relatively recent thing
3) wars and pandemics require sudden surge of spending that results in budget deficits
4) business cycles create budget deficit cycles
280
why should the gov run a deficit
1) creates long term benefits that we shouldnt have to pay for right away
2) prompts gdp growth that can be used to pay the debt off
3) necessary surge spending (like in a pandemic) means that it is an inefficient time to collect the necessary funds all at once. smooth taxes between years reduce possible economic distortions
281
debt
total amount of money owed
running a deficit is a way to get into debt
282
reasons to worry about gov debt
slow growth
constrains the future in terms of fiscal choices
risks crisis of confidence
debt crisis becomes more likely
283
reasons not to worry about gov debt
most debt is owned by americans
future generations can help pay debt
wouldnt take a big adjustment to repay the debt
gov doesnt actually have to repay the debt
gov has options you dont
284
nominal exchange rate
price of a currency in terms of another countries currency
285
nominal exchange rate
price of x in y
y/x
in/for
can be rearranged to find other values
286
appreciation
when price of a currency rises
287
depreciation
price of a currency falls
288
if the dollar depreciates, the other currency
appreciates
289
if the dollar depreciates
imports:
exports:
decrease
increase
290
if the dollar appreciates
imports:
exports:
increase
decrease
291
if the (import/export) is increasing, it is
cheaper
292
what goes on the x axis in the market for dollars in euros
q $
293
what goes on the y axis in the market for dollars in euros
p $ in euros
294
what does demand reflect in a currency market
foreigners buying exports or investing in the US
295
why does demand slope down in a currency exchange market
when the price of a dollar is low, it take fewer euros to buy
296
what does supply reflect in a currency exchange market
Americans buying imports and investing abroad
297
why does supply slope up in a currency market
when the price of a dollar is high you get a lot of euros in exchange for your dollar
298
what shifts demand in a currency market
exports
increased exports will means increased demand for the currency
financial inflows
increased inflow means increased demand for the currency
299
what shifts supply in a currency market
imports
increased imports means increased supply
financial outflows
increased outflow means increased supply
300
when demand for the currency increases, the currency exchange rate
increases
301
when supply of the currency increases, the currency exchange rate
decreases
302
real exchange rate
ratio of domestic to foreign prices, measured in the same currency
303
formula for real exchange rate (expanded)
domestic price (in dollars) /
(foreign price (in foreign currency)/ nominal exchange rate)
304
what does the real exchange rate measure
uncompetitiveness of US products
305
high real exchange rate means
RER>1
uncompetitive
imports>exports
306
low real exchange rate means
competitive
imports
307
who benefits from a higher than expected inflation rate
borrowers
308
buying a bond
lending
309
selling a bond
borrowing
310
coupon payment
annual interest paid on a bond
311
what shift occurs
sudden increase in oil prices
SRAS shifts left, but will eventually return to original LRAS output level as input prices eventually stabilize
312
increasing interest rate on reserves pushes up the
FFR. increasing this rate means that banks want to keep their money in the reserve so they are going to charge more to lend it out
