Eco 202 Final Exam Review

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If price level is high

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the quantity of money demanded increases

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If price level is low

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the quantity of money demanded decreases

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quantity theory of money

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determines the price level and the growth rate in the quantity of money available determines the inflation rate

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Nominal Varialbes

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variables measured in monetary units (dollar values)

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Real varialbes

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variables measured in physical units

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theoretical separation of nominal and real variables

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classical dichtomoy

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rate at which money changes hand

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velocity of money

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the revenue the government raises by creating money

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inflation tax

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an increase in the rate of money growth raises the raite of inflation but changes in money supply do not affect real variables

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monetary neutrality

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When the Fed increases the rate of money growth, the long-run result is..

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both a higher inflation rate and a higher nominal interest rate

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one-for-one adjustment of the nominal interest rate to the inflation raet

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fisher effect. Does not hold true in the short run because inflation may be unanticipated

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Inflation discourages saving because of capital gains:

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the profits made by selling an asset for more than its purchase price

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Trade surplus

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an excess of exports over imports

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trade deficit

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an excess of imports over exports

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factors that influence a country, exports, imports, and net exports

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-tastes of consumers for domestic and foreign goods
-prices of goods at home and abroad
-exchange rates at whcih people can use domestic currency to buy foreign currencies
-incomes of consumers at home and abroad
-cost of transporting goods from country to country
-government policies toward internation trade

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Net capital outflow

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purchase of foreign assets by domestic resiendents minuts the purchase of domestic assest by foreigners

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rate at whcih a person can trade the currency of one country for the currency of another

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nominal exchange rate

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appreciation

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increase in the value of a currency as measured by the amount of foreign currency it can buy

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depreciation

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a decrease in the value of currency as measured by the amount of foreign currency it can buy

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Depreciation in the U.S real exchange rate means

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us goods are cheaper relative to foreign goods

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appreciation in the U.S real exchange rate means

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that U.S goods are more expensive compraed to foreign goods

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a theory of exchange rates whereby a unit of any given currency should be able to buy the same quantity of goods in all countries

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purchasing power parity

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Key facts about (short run) economic fluctuations

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-Economic fluctuations are irregular and unpredictable
-as output falls, unemployment rises

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model of aggregate demand and aggregate supply

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model that most economists use to explain short-run fluctiations in economic activity around its long-run trend

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Why the aggregate demand curve slopes downward

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-the wealth effect
-the interest rate effect
-the exchange rate effect

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The wealth effect

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a lower price level increases wealth, which stimulates spending on consumption

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The interest rate effect

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a lower price level reduces the interst rate, which stimulates spending on investment

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The exchange rate effect

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a lower price level causes the real exchange rate to depreciate, which stimulates spending on net exports (Exports>Imports)

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When the price level rises...

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decreased wealth depressed consumer spending, higher interest rates depress investment spending, and a currency appreciation depress net exports

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Shifts arising from changes in government purchases:

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-an increase in government purcahses of goods and services shifts the aggreate demand to the right
-a decrease in government purchases on goods and services shift the aggregate-demand curve to the left

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an event that rises the spending on net exports at a given price level...

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-shifts the aggregate-demand curve to the right
Ex: a boom overseas, speculation that causes exchange-rate depreciation

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an event that reduces spending on net exports at a given price level

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shifts the aggregate demand curve to the left

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natural rate of output

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the production of goods and services that an economy achieves in the long run when unemployment is at its normal rate

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Why the long-run curve might shift

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-Shifts arising from changes in labor
-Shifts arising from changes in capital
-Shifts arising from change sin natural resources
-Shifts arising from changes in technological knowledge

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Why the aggregate supply curve ships upward in the short run

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-Sticky-wage theory
-sticky-price theory
-misperceptoins theory

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Stick wage theory

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an unexpectedly low price level raises the real wages, whcih causes firms to hire fewer works and produce a smaller quantity of goods and service

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Stick-price theory

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unexpectedly low price level leaves some firmst with higher-than-desired prices, which depresses their sales and leads them to cut back production

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The misperceptoins theory

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an unexpectedly low price level leads some supplier to think their relative prices have fallen, which induses a fall in production

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Stagflation

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when the economy is experiencing both stagnation (falling output) and inflation (rising prices)

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Wage-price spiral

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phenomenon of higher prices leading to higher wages, in turn leading to even higher prices

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If policy makers do not get involved...

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the aggregate demand curve will remain constant and the economy willl have to regulate itself bakc to norm

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if policy makers do influence aggregate demand

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they increase money supply or increase government spending, this moves the demand curve to the right to prevent the shift in aggregate supply curve from affecting output

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The msot important reason for the downward slope of the aggregate-demand curve is the

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interest-rate effect

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Theory of liquidity preference

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Keyne's theory that the interest rate adjusts to bring money supply and money demand into balance

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When the fed buys government bonds....

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they add to the money supply

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when the fed sells government bond

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bank reserves and the mone supply falls

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Fed can change the supply by decreasing the...

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discount rate: the interest rate at which bands can borrow reserves from the FED

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What determines the quantity of money demanded

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the interest rate

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When the fed increases money supply..

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it lowers the interest rate and incrases the aggregate-demand curve to the right

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When the fed decreases money suplly

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money supply curve shifts to the left, increasing the interest rate and reducing the quantity of goods and services demanded, shifting the aggregate-demand curve to the left

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Federal Funds rate

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intrerst rate the banks charge one another for short-term loans

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FOMC

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federal open market comittee

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If the fed wants the aggregated demand to increases....they can either

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increase the money supply or lower the interest rate

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if the fed wants the aggregate demand to decrease they can either...

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decrease money supply or raise the interest rate

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Fiscal policy

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the setting of the level of government sepdning and taxation by government policymakers

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multiplier effect

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the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending

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Marginal propensity to consume (MPC)

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the fractoin of extra income that a household consumes rather than saves

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Crowding-out effect

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offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending

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Change in aggregate demand

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-the government-use fiscal policy
-the fed- use monetary policy

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Automatic stabilizer

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changes in fiscal policy that stimualte aggregate demand when the economy goes into a recession without policy-makers having to take any deliberate action

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Phillips curve

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curve that shows the short-run trade-off between inflation and unemployment

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the vertical long-run Phillips curve illustrats the conclusion that...

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unemployment does not depend on money growth and inflation in the long run

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Natural ratment e of unemployment

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unemployment rate toward which the economy gravitates in the long run

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Expected inflation

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meausures how much people expect the overall price level to change and determines the poisiton of the short-run aggregate-supply curve

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Natural-rate hypothesis

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claim that unemployment eventually returns to its natural rate, regardless of the rate of inflaiton

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Supply shock

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event that directly alters firms' costs and prices, shifting the economy aggregate-supply curve and thus the Phillips curve

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Disinflation

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a reduciton in the rate of inflation

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Deflation

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reduction in the price level

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Sacrifice ratio

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number of percentage points of annual output lost in the porcess of reducing inflation by 1 percentage point

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Rational expectations

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theory that people optimally use all the information they have, including information about government policiies, when forecasting the future