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18 Cards in this Set
- Front
- Back
- 3rd side (hint)
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Give our standard definition but include trade. What is it in words? |
Y - [c + I + G] = NX Ttl domestic production - total domestic spending = Net exports |
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What does nx stand for? How is it calculated? |
Net exports Exports - imports = nx |
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What does it mean to have balanced trade? |
Total domestic production - total domestic spending = 0 and exports - imports equals 0. |
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What does it mean to have a trade deficit? Trade surplus? |
-nx = deficit +nx = surplus |
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Give and example of how an economy could end up with a trade deficit. Explain in simple words. |
Economy decides to increase domestic spending. Total domestic production is fixed in the short run so the only variable that can move is spending on imports. We can't just create more production out of nothing so we have to borrow from elsewhere to support the increase in spending. |
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Using the loanable funds market, explain how an economy can end up with a trade surplus from balanced trade. Start by rearranging our standard definition. Explain in simple terms |
Y = C + I + G + NX (Y + C + G) - I = NX S - I = NX Net capital outflow = net exports When s - I is negative: deficit When we produce more than we consume, we export the additional production. Exports > imports |
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Do small open economies change in fiscal policies have an effect on the world interest rate (r*)? |
No |
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In the long run, (blank) is fixed by the factors of production and the production function. Give the equation |
Output (y) Y = ybar = F(Kbar, Lbar) |
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(Blank) is a function of disposable income. Give the Equation |
Consumption C = C(y-t) |
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(Blank) is determined by the world interest rate. Give the Equation |
Investment spending i = I(r*) |
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Government spending and taxation are (blank) |
Fixed |
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National saving is not determined by (blank) interest rates |
World |
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What happens when the world interest rate is greater than a country's real interest rate? |
Savers prefer high interest rates, so they will lend at the world interest rate due to perfect capital mobility. Investors demand decreases as interest increases. Thus, saving will exceed investment in the economy resulting in a surplus |
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What balance of trade will a small open economy experience when the world interest rate is larger than domestic interest rates? Vice versa? Equal rates? |
Surplus when r* > r Deficit r* < r Balanced when r* = r |
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When the relative value of exports to imports changes we see a change in the volume of net (blank) and can be described through the concept of (blank) rates |
Exports Exchange |
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The relative price of a good is expressed in terms of another (blank). Give an equation to explain this concept |
Good Relative P good A = P good A / P good B |
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What's the difference between nominal and real exchange rates? |
Nominal: exchange rate we see in financial markets P good A = P good A / P good B Real: relative price of goods between 2 countries E thingy = e × p / p* e = nominal exchange rate |
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Explain a way that equilibrium real exchange rates for the dollar increases |
G spending increases. So saving have to decrease. Thus, the difference between s and I decreases and less money is in supply. When supply drops, each dollar becomes more valuable in nominal and real exchange rate terms |
Start with an increase in Gov spending |
