What does 1/p represent? and what is its relationship with p
1/p = Value of money (interest rate)
p = Price level
1/p is the quantity of goods and services $1 can buy, so as p increases the value of money lowers
(p) up —-> (1/p) down
What is the primary cause in inflation?
Growth in the quantity of money
What does increasing the policy rate do to the supply of money, price level, and value of money?
decrease in supply
decrease in price level
increase in value of money
What does decreasing the policy rate do to the supply of money, price level, and value of money?
increase in supply
increase in price level
decrease in value of money
What is a policy rate?
= Target interest rate set by the county’s central bank (Bank of Canada) to manage inflation and influence economic growth.
What do they mean by price level?
= Represents the weighted average of all goods and services in the economy
What will happen if Canada increases money supply?
1) Price rises
2) Nominal GDP rises
3) Velocity of money falls
Net exports and explain when a country would be in a trade surplus, trade deficit, or trade balance
= Exports - Imports
Trade Surplus: Exports > Imports
Trade Deficit: Exports < Imports
Trade balance: Exports = Imports
Net Capital outflow
= Difference between domestic saving and investment
or:
Purchase of foreign assets by domestic residents
-
Purchase of domestic assets by foreign residents
Real exchange rate
= Nominal exchange rate * Domestic price
———————————————————-
foreign price
= Rate at which a person can trade the goods/services of one country with another
Whats the difference between the real exchange rate being above / below the equilibrium
If the real exchange rate is below = Value of $ up
–> Domestic currency would then appreciate
If the real exchange rate is above = Downward pressure on the real exchange rate
–> Currency depreciates back to equilibrium level
