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29 Cards in this Set
- Front
- Back
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closed economy
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an economy that does not interact with other economies in the world:
Y= C + I + G |
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open economy
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has interactions in trade and finance with other economies around the world
Y = C + I + G + NX |
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NX measures the ____ in a country's trade in goods and services
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imbalance
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trade deficit
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an excess of imports over exports
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trade surplus
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excess of exports over imports
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balanced trade
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when exports = imports
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determinants of exports
-exports depend on: |
-real exchange rate (e)
-GDP of our trading partners (Y(for.)) -Tastes and preferences of people abroad for our goods and services -trade policies |
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determinants of imports
-imports depend on: |
-real exchange rate (e)
-Domestic GDP (Ydom.) -domestic tastes and preferences for foreign goods -trade policies |
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how r affects NX:
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if r(U.S.) goes up relative to r in ROW---> NX goes DOWN because:
--demand for $-denominated assets goes up --demand for $ goes up --E goes up --e goes up --X goes down, IM goes down --NX goes DOWN |
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balance of payments
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the record of a country's trade with other countries in goods, services, and assets
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balance of payments are made up primarily of:
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a. current account: trade in goods and services
b. financial account: trade in assets; (capital coming in) - (capital leaving); Net Capital Inflow (NCI) |
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relationship b/w current account and financial account:
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current account = -financial account
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net capital outflow (NCO)
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aka "net foreign investment"; it measures the imbalance in a country's trade in assets
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when NCO >0:
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"capital outflow": domestic purchases of foreign assets exceed foreign purchases of domestic assets
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when NCO < 0:
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"capital inflow": foreign purchases of domestic assets exceed domestic purchases of foreign assets
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variables that influence NCO:
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-real interest rates paid on foreign and domestic assets
-perceived risks of holding foreign assets -government policies affecting foreign ownership of domestic assets |
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when a foreigner purchases a good from the U.S.:
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-U.S. exports and NX increase
-the foreigner pays with currency or assets, so the U.S. acquires some foreign assets, causing NCO to RISE |
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when a U.S. citizen buys a foreign good:
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-U.S. buyer pays with U.S. $ or assets
-so the other country acquires U.S. assets, causing U.S. NCO to fall |
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what's physical capital?
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machines, factories, office buildings, etc.
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when private saving (S) > Investment (I)
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the excess loanable funds flow abroad in the form or positive net capital outflow
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When private saving (S) > Investment (I)
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foreigners are financing some of the country's investment, and NCO < 0
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Aggregate Demand (AD) Curve
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it relates the price level to aggregate expenditure on the economy's goods and services
--for every possible price level, it shows the total level of aggregate expenditure in the economy |
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the Price level (P) in the AD Curve measures:
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the overall price level, such as the GDP deflator or the CPI
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Effect of an increase in interest rates on consumption
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r goes up--> more incentive to save, costs more to borrow--> C goes down
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why does the AD curve slope down?
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1. wealth effect
2. interest rate effect 3. International trade effect |
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what could shift the AD curve?
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1. government policies
-monetary policy (affects r) -fiscal policy (affect G and/or T) 2. changes in expectations of households or firms 3. changes in foreign variables |
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government policies shifting the AD curve: what's monetary policy
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policies which affect r --done by the Federal Reserve
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governmental policies shifting the AD curve: what's fiscal policy?
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policies which affect G and/or T done by Congress, White House, or the Treasury dept.
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Long-Run Aggregate Supply (LRAS): What determines an economy's capacity to produce in the long run?
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1. capital stock (factories, office buildings, machinery and equipment)
2. labor 3. technology **NOT THE PRICE LEVEL |
