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102 Cards in this Set
- Front
- Back
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Open Economy:
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Interacts with other economies; buys and sells goods and services in world product markets and sells capital assets in world financial markets.
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Exports:
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Domestically produced goods and services sold abroad
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Imports:
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Foreign produced goods and services sold domestically.
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Net Exports:
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Exports - Imports=Net exports.
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Net Capital Outflow (Net Foreign Investment):
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The purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreign residents.
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Net capital outflow measures:
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the imbalance of a country's purchase and sale of assets (financial)
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Foreign direct investment:
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When a domestic resident buys and controls capital in a foreign country
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Foreign portfolio investment:
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When a domestic resident buys stock in a foreign corporation (is an owner) but has no direct control of the company
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Nominal exchange rate:
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The rate at which people can trade one currency for another.
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Purchasing Power Parity:
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A unit of any given currency should buy the same quantity of goods in all countries. This is the purpose of exchange rates.
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Logic of PPP is based on 'law of one price'-what is the law of one price?
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A good must sell for the same price in all locations because, if there were different prices for the same good, people would buy the good where it is cheap and sell it where it is expensive.
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If PPP is true, then the nominal exchange rate between 2 countries' currencies___:
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depends on the price levels in those countries.
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If the PPP holds true, then the nominal exchange rate is the ratio of the ___price level to the ____ price level:
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Foreign price level, domestic price level
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The nominal exchange rate must ____ if the price levels in foreign countries rises:
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Rise
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The nominal exchange rate must _____ if the domestic price levels rise:
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Decrease
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A country's price level depends on how much money its central bank creates. If a central bank creates more money, its currency will buy ____ goods and services and _____ units of other currencies. Currencies will _____.
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Fewer g&s, Fewer units of other currencies, currencies will Depreciate.
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Economic fluctuations (business cycles) are _______ and _______.
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Irregular and Unpredictable.
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We use the model of __________ and ___________ to explain economic fluctuations.
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Aggregate supply, aggregate demand.
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To draw a graph of aggregate supply and aggregate demand, draw ________ on the vertical axis and __________ on the horizontal axis.
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Price level (measured by CPI or GDP deflator) on the vertical axis, Real GDP (real output) on the horizontal axis.
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Aggregate demand slopes ______, long-run aggregate supply is _________, and short-run aggregate supply is ___________.
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AD slopes Down, LR AS is Vertical, and SR AS is Positive.
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Aggregate demand slopes ______.
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Negatively
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GDP=___+___+___+____
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C(consumption)+I(investment)+G(government spending)+NX(net exports)
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A decrease in the price level increases ______, _______, and ________.
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increases Consumption, Investment, and Net Exports.
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Wealth Effect:
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At a lower price level, the amount of money in consumers' pockets increases in value. Consumers feel wealthier and spend more.
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Interest rate Effect:
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A lower price level causes lower interest rates. At a lower price level, households need to hold less money to buy the same products, things are cheaper, more money is deposited into banks, lowering interest rates.
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Exchange-rate effect:
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Lower prices causes the dollar to depreciate in value. Lower prices=US goods are cheaper than foreign foods. Foreign goods are more expensive, so exports go up and imports go down. Net Exports will go up.
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Shifts in Aggregate demand: A shift to the right ________ GDP, a shift to the left _______ GDP.
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Shift to the right Increases GDP, shift to the left Decreases GDP
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Consumers save more and spend less--shifts Demand to the ____.
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Left
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Stock prices fall--consumers spend less because they feel poor, shifts Demand to the ____.
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Left
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If people feel wealthier, Demand shifts to the _____.
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Right
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Taxes increase--Spend less, shifts Demand ____.
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Left
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Firms become optimistic about future, decide to buy new equipment to improve business--Demand shifts _____
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Right
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Investment tax credit increases investment--Demand shifts _____
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Right
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Fed increases money supply, reduces interest rates, increases investment, Demand shifts _____
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Right
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Investment spending _________ when the price level and interest rates rise.
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decreases
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If government spending increases purchases, demand shifts _____.
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Right
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Foreign countries have a recession and buy fewer goods from the US--net exports decrease, Demand shifts _____
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Left
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value of the dollar rises in foreign exchange markets--net exports decrease, Demand shifts _____.
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Left
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Lower inflation makes domestic goods sold abroad _____ expensive, and hence _______es short-run equilibrium output.
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Domestic goods Less Expensive, Increases SR equilibrium output.
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Aggregate supply:
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The quantity of goods and services that firms produce and sell at each price level.
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In the long run, aggregate supply is _______.
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Vertical
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Short-run aggregate supply curve slopes _____.
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Upward.
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Aggregate supply curve theories' common theme: Output rises above the natural rate when the ______ price level exceeds the _______ price level.
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Actual price level exceeds the Expected price level.
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Sticky wage theory:
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If prices decrease and firms are still paying their workers the same wages because of a contract, supply is going to go down because firms are losing money.
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When the price level is lower than expected, production is _____ profitable and _____, and employment _____.
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Less profitable and falls, and employment falls.
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Misperceptions theory:
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When the price level unexpectedly falls, suppliers only notice that the price of their particular product has fallen. They mistakenly believe that there has been a fall in the relative price of their product, causing them to reduce the quantity of goods supplied.
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When expected prices exceed actual prices, quantity supplied goes ____.
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Down
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When actual prices exceed expected prices, quantity supplied goes ____.
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Up
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Other things the same, if workers and firms expected prices to rise by 4 percent but instead they rise by 6 percent, then employment _____ and production ______.
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Employment rises and production rises.
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shifts in Short-run aggregate supply are:
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Anything that alters the natural rate of output shifts the curve.
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Immigration from abroad--shifts Supply ____
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Right (more people, more output)
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Increase in physical or human capital--productivity rises and Supply shifts ____
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Right
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Things that cause an increase in the cost of production (an increase in wages) shift Supply to the _____.
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Left
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things that cause a decrease in the cost of production shift supply to the _____.
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Right
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If people and firms expected higher prices, they set wages higher, reducing the profitability of production--Supply shifts
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Left
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A lower expected price level shifts the supply curve to the ___.
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Right
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If there is a discovery of new resources--Supply shifts ____.
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Right.
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New inventions are employed--Supply shifts ___.
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Right
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International trade opens up (less harsh trade restrictions) -- Supply shifts ____.
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Right
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Recession:
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A business cycle contradiction, a temporary slowdown in economic activity.
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As recessions begin, output ____ and unemployment _____.
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Output falls and unemployment rises.
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Depression:
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A longer sustained recession.
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Monetary policy (conducted by the Federal reserve) affects _______.
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Aggregate demand.
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Supply and demand for money: _____ on Y axis. _____on X-axis.
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Interest rate on y axis, Quantity of money on X axis.
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Money supply is a ______ line because it is ______ by _____.
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Money supply is a vertical line because it is fixed by the Fed.
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Money supply: if interest rate goes up or down, the money supply _____.
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Stays the same.
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The demand for money slopes _______.
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Negatively
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When the interest rate is high, the quantity of money demanded ____.
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decreases.
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A higher price level shifts money demand to the _____.
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Right.
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If the Fed wants to increase the money supply in the economy, they _____ bonds to put more money out there.
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Buy
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When the government buys bonds, money supply shifts to the ______.
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Right
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the Fed can decrease the money supply by selling bonds to the public. The interest rate will go _______.
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Up
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If the Federal Reserve decided to lower interest rates, it could ____ bonds to raise the money supply.
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Raise
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If the stock market crashes, aggregate demand decreases, which the Fed could offset by _________ the money supply.
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Increasing
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Fiscal Policy:
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The government's choices of the levels of government purchases and taxes; can influence aggregate demand in the short run.
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A fiscal policy action designed to bring the economy out of a recession would be to ______ government purchases.
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Increase
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The Multiplier Effect:
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The multiplied impact on aggregate demand from a given increase in government expenditures.
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Crowding-out effect:
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Works in the opposite direction of the multiplier.
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An increase government purchases ______ income, which also shifts demand for money to the right.
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Raises
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An increase in government purchases _____ interest rate and "crowds out" investment.
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Increases
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Taxation: A decrease in taxes shifts aggregate demand to the ______ and an increase in taxes shifts it to the _______.
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Decrease shifts AD to the right and an increase shifts AD to the left.
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Opportunity cost:
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The opportunity cost of any item is whatever must be given up to obtain it.
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the law of supply:
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states that the supply increases as prices increase and decreases as prices decrease
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the law of supply:
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states that the supply increases as prices increase and decreases as prices decrease
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the law of supply:
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states that the supply increases as prices increase and decreases as prices decrease
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The law of demand:
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states that at a lower price, more people can afford to buy more goods and more of an item more frequently, than they can at a higher price
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How does the Fed change the money supply?
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By buying and selling bonds.
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How is the GDP (Y) calculated?
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Y=C(consumption)+I(investments)+G(government spending)+NX (net exports)
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Inflation:
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Increases in the general level of prices.
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Net Exports:
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Exports-imports
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Surplus:
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When quantity supplied is greater than the quantity demanded
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Deficit:
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When the quantity supplied is less than the quantity demanded
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Net Exports:
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Exports-imports
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Surplus:
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When quantity supplied is greater than the quantity demanded
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Deficit:
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When the quantity supplied is less than the quantity demanded
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Productivity:
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The average quantity of goods and services produced per unit of labor output.
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Marginal Product of Labor:
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Slope of the total product curve.
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Nominal vs. Real GDP:
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Nominal: Output using current prices. Real: Output using prices of a base year.
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Nominal vs. Real Interest rates:
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Nominal: Not adjusted for inflation. Real: Adjusted for inflation.
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Nominal vs. Real exchange rates:
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Nominal: The rate at which currency can be exchanged. Real: How much g&s in a country can be exchanged for g&s in a foreign country
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Nominal vs. Real wages:
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Nominal: Price level of wages. Real wages: Amount your money can buy. ex. Inflation occurs but price level increase exceeds inflation rate.
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Unemployment:
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People not working but have looked for work in the last 4 weeks
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