# Shared Flashcard Set

EC 202 final
study guide
200
Economics
Undergraduate 2
05/03/2011

## Cards Return to Set Details

Term
 What is GDP?
Definition
 Gross Domestic Product- defined as the market value of all final goods and services produced within a country in a year.
Term
 What is the formula for GDP growth rate?
Definition
 GDP( year 2) - GDP ( year 1)/ GDP year 1 x 100
Term
 What is nominal GDP? and why is it misleading?
Definition
 Nominal GDP is calculated using prices at the time of the sale, it is misleading because inflation causes prices to rise, which some might mistake for an increase in production
Term
 What is a real variable? How do you calculate real GDP.
Definition
 variables that have been adjusted for inflation. If you want to find real GDP, multiply both quantities by the base year prices, and plug into the formula.
Term
 What does GDP of 14 million tell you? what is a better way to measure economic success?
Definition
 GDP of 14 million doesnt tell you much if you have 14 million people in your country. GDP per capita is a better measure of the standard of living.
Term
 What is the formula for calculating GDP via national spending approach?
Definition
 Y= C + I + G + NXGDP= Consumption + Investment + Government Spending + ( Exports - Imports)
Term
 What is the Factor Income approach to calculating GDP
Definition
 Y = Wages + Rent + Interest + Profit
Term
 What are some problems with GDP as a measure of output and Welfare?
Definition
 GDP doesnt count underground economy ( Drugs)GDP doesnt count Non market production ( your son mowing your lawn)GDP doesnt count LeisureGDP doesnt count enviromental costsGDP doesnt calculate distribution of income ( you can have very rich or poor outliers that throw off GDP.)
Term
 What are some key facts about GDP, the wealth of nations, and Economic Growth
Definition
 GDP varies enormously among countries ( most the world is poor compared to U.S.)Everyone used to be poor- it wasnt until industrial revolution till GDP grew a lot)
Term
 What is the formula for calculating GDP growth rate?
Definition
 Year 2 growth - Year 1 growth / Year 1 growth x 100.
Term
 What is the rule of 70 and what does it tell you.
Definition
 The rule of 70 is used to see how long it will take for your GDP to double given a certain growth rate. Ex: GDP of 2 percent growth will take ( 70/2)= 35 years to double
Term
 What is physical capital?
Definition
 stock of tools including machines, structures, and equipment.
Term
 What is Human Capital?
Definition
 Tools of the mind- Productive knowledge and skills that workers acquire through education, training, and experience.
Term
 What is technological knowledge?
Definition
 Knowledge of how the world works. It is increased through research and development
Term
 What do economists mean by organization?
Definition
 They mean how you organize human, physical, and technological capital to produce goods.
Term
 What are institutions?
Definition
 the rules of the game that structure economic incentives. they include laws and regulations, customs, practices, etc, that shape human interaction and structure economic incentives.
Term
 What are the 5 key institutions that influence economic growth?
Definition
 Property rights, honest government, political stability, a dependable legal system, and competetive and open markets.
Term
 If a country has a lot of capital, but poor institutions, what will happen?
Definition
 Money will be wasted and GDP will not grow.
Term
 What is the formula for the Solow growth curve and what does it tell you?
Definition
 Solow growth curve is a production function that expresses the relationship between output and the factors of production. the formula is Y = F(A,K,eL) where A= ideas, K = physical captial, L = Labor, and e = natural resources.
Term
 If you only had K, what would your solow growth curve look like?
Definition
 It would increase but at a decreasing rate, the formula is Y = K^1/2
Term
 What is the marginal product of capital
Definition
 It is the increase in output caused by the addition of one more unit of capital. THe marginal product of capital diminishes as more and more capital is added.
Term
 Why does bombing a country sometimes lead to higher growth rates?
Definition
 Because the marginal product of capital is higher, there small investments go further.
Term
 What is investment and depreciation? What is it called when they equal one another?
Definition
 Investment are the goods that you do not consume, Depreciation is the goods that wear out. When they equal eachother it is called the steady state, where gdp does not grow. If I > d than GDP will grow, and vice versa. the formula for I is ( investment rate ) x K^1/2. Formula for deprecation is ( depreciation rate ) x K.
Term
 What does the curve for investment look like, and what does the curve for depreciation look like. How do you solve for steady state value?
Definition
 Investment curve is curved, it increases at a decreasing rate, Depreciation is a straight line. To solve for steady state, set them equal to one another.
Term
 Why cant human or physical capital be the key to economic growth?
Definition
 Because they are diminishing, after a certain point, GDP will not grow.
Term
 What is the key to economic growth?
Definition
 A, or ideas aka technical knowledge
Term
 What is the Solow formula with A involved?
Definition
 Y= A x K^ 1/2
Term
 What do better ideas do?
Definition
 they increase the amount of capital needed to hit the steady state value, and therefore increase GDP.
Term
 When will a country grow the fastest?
Definition
 when it is far below the steady state value.
Term
 What is conditional convergence?
Definition
 the tendency among countries with similar steady state levels of output for poorer countries to grow faster than richer countries.
Term
 How is one classified as unemployed?
Definition
 Workers who are adults who do not have a job but are looking for work. Additionally, they must be over 16, non institutionalized, a civilian, and looking for work.
Term
 What does it mean to be counted as employed?
Definition
 to be an adult, non institutionalized with a job.
Term
 What makes up the labor force?
Definition
 All workers employed plus unemployed.
Term
 What is the unemployment rate formula?
Definition
 Unemployed / Labor Force x 100
Term
 What is the labor force participation rate?
Definition
 the percentage of adults in the labor force.
Term
 What are discouraged workers?
Definition
 Workers who have given up looking for work, but who would still like a job.
Term
 What is frictional unemployment?
Definition
 short term unemployment caused by the diffuculty of matching employer to employee
Term
 What is structural unemployment?
Definition
 Long term unemployment caused by long lasting shcks or permanent features of an economy that make it more difficult for some workers to find jobs.
Term
 What are some reasons why stuctural unemployment is higher in other countries than in the U.S.
Definition
 Unemployment benefits, higher minimum wages, unions, and employment protection doctrines.
Term
 What are some ways to reduce structural unemployment?
Definition
 Job retraining, Job- search assistance, Work tests, and early employment bonuses.
Term
 What is cyclical unemployment?
Definition
 Unemployment correlated with the ups and downs of the business cycle.
Term
 What is the natural unemployment rate?
Definition
 the rate of structural unemployment plus frictional unemployment.
Term
 What is the formula for the labor force participation rate?
Definition
 Labor force / Adult Population x 100
Term
 What is inflation and how do we calculate it?
Definition
 Inflation is an increase in the average level of prices. We measure it with an index, or the average price from a large basket of goods.
Term
 What is the inflation rate?
Definition
 percent change in the average level of prices over a period of time. the formula is P2-P1/P1
Term
 What is the CPI, the GDP deflator, and the PPI
Definition
 CPI- measures average price for a basket of goods bought by the typical american.GDP deflator- Includes goods that make up GDP, not ones just bought by consumers.PPI- Measure average price recieved by producers.
Term
 What is a real price?
Definition
 It is one that has been adjusted for inflation. Example: Gas price has doubled from 1.25, to 2.50. Was gas price twice as expensive? no since the CPI was 100, and now is 202.
Term
 What is the quanitity theory of money, and what is the formula?
Definition
 The QToM shows the relationship between inflation, money, real output, and prices. the formula isMv = PY
Term
 What do you hold fixed in the QToM?
Definition
 Y ( real gdp because those are fixed by factors of production ) and v because people generally spend there money because this factor changes slowly over time.
Term
 According the the QToM, what will an increase in Money supply cause.
Definition
 Since you hold Y and v fixed, increase in money supply shows up in inflation.
Term
 According the the QToM, what will an increase in Money supply cause.
Definition
 Since you hold Y and v fixed, increase in money supply shows up in inflation.
Term
 In the long run, money is what?
Definition
 Money is neutral, in the short term in might have an effect on GDP, but not in the long run.
Term
 What does the fisher effect say?
Definition
 the tendency of nominal interest rates to rise with expected inflation rates.
Term
 What is the formula for the actual rate of return?
Definition
 r-actual = i - pii= nominal interest rate, pi = inflation rate
Term
 Who benefits from unexpected inflation?
Definition
 Borrowers benefit, harms lenders
Term
 Who benefits from unexpected disinflation?
Definition
 Benefits lenders, harms borrowers.
Term
 The dynamic AD - AS has what what curves, and what do they look like?
Definition
 3 curves, the solow, the Aggregate demand curve, and the short run aggregate supply. The solow curve is a vertical line, the AD curve is a straight, downward sloping line, and the SRAS is a curve that slopes, but not in a straight line.
Term
 what do real shocks do, and what is an example of a real shock?
Definition
 real shocks shift the solow curve. and example would be a technological advance or sudden changes in the supply of oil.
Term
 What does the AD curve tell you?
Definition
 shows all the combinations of inflation and real growth that are consistent with a specified rate of spending growth. it is derived from the QToM.
Term
 What are some of the reasons why AD curve might shift
Definition
 Increasing money supply or velocity of money.
Term
 What does a positive solow shock do to inflation and real GDP on the AD solow model?
Definition
 it would decrease inflation and increase real GDP
Term
 What would a positive AD shock do?
Definition
 Increase inflation, but have no effect on real growth.
Term
 What is the short run aggregate supply curve?
Definition
 It shows the positive relationship between inflation and real growth during the period when prices are sticky
Term
 What shifts the SRAS curve?
Definition
 your expectation of inflation
Term
 If you have UNexpected inflation what happens to real growth according the the SRAS curve?
Definition
 you have higher real growth in the short run, then in the long run it goes back to normal as the expectation for inflation changes.
Term
 IF the solow curve moves, what else has to move?
Definition
 the SRAS curve moves with the solow curve, but if the SRAS curve moves, than the solow curve doesnt have to move.
Term
 What happens if you have an increase in M in the short run, and what happens in the long run?
Definition
 If you have an increase in M, your AD curve will shift increasing inflation and GDP. In the long run, wages become unstuck, and you go back to your normal rate of growth, but with higher inflation.
Term
 What is the difference between the new business cycle, and the New keynesian model?
Definition
 the real business cycle only has the AD and solow curve, it assumes that everything is perfectly flexible, the new keynesian model adds the SRAS curve because of sticky prices and wages. If prices are perfectly flexible, than the economy will always be growing at its potential
Term
 What are sticky prices and sticky wages and why are they so important
Definition
 Sticky prices and wages are when wages and prices do not respond very quickly to changes in economic conditions. They are important because since wages and prices are slow to move in the downward direction, it causes a lot of unemployment as wages are kept fixed.
Term
 What are some factors that shift the AD curve?
Definition
 A faster money growth rate, confidence, increased wealth, lower taxes, greater govt spending, increased export growth, decreased import growth.
Term
 What are transmission mechanisms?
Definition
 economic forces that can amplify shocks by transmitting them across time and sectors of the economy.
Term
 what are shocks?
Definition
 rapid changes in economic conditions that have large effects on the productivity of capital and labor.
Term
 What is the difference between expected and unexpected shocks?
Definition
 unexpected shocks have a bigger effect on the economy since no one has time to prepare. If someone expects a shock to happen, it wont do nearly as much damage.
Term
 What is intertemporal subsitution, and how can it make a shock worse?
Definition
 Intertemporal substitution is how people choose to allocate consumption of goods, work, and leisure over time to maximize well being. It can make a shock worse if in a depression, people are less likely to work because they dont get paid, so no one works at all.
Term
 What are irreversible investments and how do they make shocks worse?
Definition
 they have high value only under specific conditions- they cannot be easily moved, adjusted, or reversed if conditions change. they make shocks worse because investors are unlikely to invest, and a lot of money is idle and not being put to good use.
Term
 What are labor adjustment costs, and how do they make the economy worse?
Definition
 they are the costs of shifting workers from declining sectors of the economy to growing sectors, they make shocks worse because it causes a lot of unemployment, and workers are slow to retrain or move to another job.
Term
 What is time bunching and how do they make shocks worse.
Definition
 time bunching is the tendency for economic activities to be co ordinated at common points in time. they make shocks worse because if everyone is being unproductive, you are more likely to unproductive too.
Term
 How are sticky wages and sticky prices transmission mechanisms?
Definition
 they are transmission mechanisms because if a negative shock happens, workers do not respond well to a decrease in wages, so wages are kept the same and after a while the company cant afford it and has to unemploy a lot of people.
Term
 what is the major point about transmission mechanisms?
Definition
 a medium sized negative shock can be made much worse than it has to be. sort of like the great depression
Term
 In the market of loanable funds, who supplies and who demands?
Definition
 suppliers are savers, demanders are investors.
Term
 How are the interest rate and supply of savings correlated?
Definition
 Higher interest rates calls forth more savings.
Term
 How is the interest rate and the demand to borrow correlated?
Definition
 the lower the interest rate, the more demand there is for borrowing.
Term
 What is the difference between saving and investment?
Definition
 saving is the income that is not spent on consumption goods, investment is the purchase of new capital goods.
Term
 What is consumption smoothing?
Definition
 The lifecycle theory of savings says that over time an individual wants to borrow and save equally throughout different stages in their life. you tend to borrow in college, save when you work, and spend when you retire.
Term
 What are financial institutions?
Definition
 they are things like banks, bond markets, and stock markets that reduce the costs of moving savings from savers to borrowers and investors.
Term
 How do financial insitutions generate revenue?
Definition
 By the difference in the interest rate that they pay you, and the interest rate that they charge to loan.
Term
 How do you determine the price of a bond.
Definition
 Divide the amount of money you need to raise, by how many bonds you are issuing.
Term
 How do you determine face value of a bond?
Definition
 divide the amount of money the bond will pay in the future, by how many bonds you are issuing.
Term
 What is the formula to determine the rate of return on a bond?
Definition
 FV-P/P x 100 = R.o.R
Term
 How are bond prices and interest rates correlated?
Definition
 Bond prices and interest rates move in opposite directions, if bond prices go up, interest goes down, and vice versa.
Term
 What is arbitrage and why does it matter?
Definition
 arbitrage is the buying and selling of equally risky assets, ensures that equally risky assets earn equal returns. it matters because no one is gonna invest in something if it means they lose money.
Term
 What are the functions of money?
Definition
 Medium of exchange, standard of value, store of value
Term
 Why was the Fed created?
Definition
 to influence AD, loan out funds to banks when necessary, create money, store money, protect financial insitutions and consumers.
Term
 What does the Fed do?
Definition
 It controls the money supply via open market operations, discount rate lending and the term auction facility, and changing the required reserves ratio. It helps keep the economy stable, helps bail out banks when they need it. Overall they try to make the economy as stable as possible.
Term
 What is the reserve ratio, and what is it's formula?
Definition
 the RR is the ratio of reserves to deposits. ex: if you deposit 10 dollars, and 1 dollar is saved in cash, the RR is 1/10
Term
 What is the money multiplier, and what is the formula?
Definition
 the MM is the amount the money supply expands with each dollar increase in reserves. MM = 1/RR
Term
 What are open market operations, and how do they control the money supply?
Definition
 Open market operations are the buying and selling of U.S. govt bonds. They increase money supply through multiplier process.
Term
 When the fed buys bonds, what happens to the interest rates?
Definition
 the demand for bonds increase, which pushes the price of bonds up, and lowers the interest rate.
Term
 Why does the Fed only have influence on AD and interest rates in the short run?
Definition
 Because in the long run, money is neutral, so an AD shock is only effective in short run.
Term
 the Fed's operations are most effective at doing what?
Definition
 stopping a negative AD shock.
Term
 If the fed is faced with a positive or negative solow shock, what should they do?
Definition
 Nothing, an increase in money supply will show up in inflation
Term
 Who controls the Fed?
Definition
 No branches of the government, there is a seven member board, 12 different banks, and overall it is fairly independant.
Term
 What does monetary policy relate to?
Definition
 It relates to how the fed should use open market operations, lending to banks, and changing the reserve requirment to stimulate AD.
Term
 What is the best case scenario for Monetary policy?
Definition
 If there is a negative AD shock, or the money supply falls.
Term
 What makes it hard for the Fed to shift the AD curve?
Definition
 they must operate on real time data where signs and signal are unclear, and they are subject to certain lags.
Term
 What do the terms rules and discretion mean?
Definition
 the term rules means that people believe the Fed should set specific target for inflation or money, they also believe the Fed makes a lot of mistakes. Discretion means people believe that even though the Fed makes mistakes, they still push the economy in the right direction
Term
 A reduction in M, or a decrease in AD goes best when:
Definition
 It is credible: the bank will stick with it's policy
Term
 When is monetary policy not a good idea?
Definition
 When there is a real shock, because a shift in the AD curve will show up mostly in inflation.
Term
 What are the dynamics of monetary policy in the short run and the long run?
Definition
 Monetary Policy is only effective in the short run, then the economy adjusts and the growth rate goes back to normal in the long run.
Term
 What is the marginal tax rate?
Definition
 the tax rate paid on an additional dollar of income.
Term
 What is the average tax rate?
Definition
 the total tax payment divided by total income.
Term
 If your income was 50,000 dollars, and your tax payment was 6718 dollars, what would be your average tax rate?
Definition
 13.4 percent
Term
 As your income rises what happens to the amount of tax you pay on a progressive tax rate?
Definition
 Average tax rate increases smoothely, marginal tax rate increases in steps.
Term
 What are progressive, flat, and regressive taxes?
Definition
 progressive: higher tax rates on people with higher incomes.flat- constant tax rateregressive- higher tax rate on people with lower incomes.
Term
 Who pays most of the Social Security tax?
Definition
 the employees, your wages would be higher if employers did not have to pay SS.
Term
 Where does the money go when you pay Social Security taxes?
Definition
 to beneficiaries, not to an account with your name on it
Term
 Whats the difference between the deficit, and debt?
Definition
 the deficit is a year by year difference between federal spending and revenues, debt is the total amount owed.
Term
 What is fiscal policy?
Definition
 federal government policy on taxes, spending, and borrowing that is designed to influence business fluctuations.
Term
 What are the tools of fiscal policy?
Definition
 taxes, government spending, and government borrowing.
Term
 what does fiscal policy influence?
Definition
 Aggregate Demand
Term
 What is the best case scenario for fiscal policy?
Definition
 If consumers cut back on consumption, AD curve suffers a negative shock. The government can increase its spending to combat this, and return AD to normal.
Term
 What does the Multiplier say about government spending?
Definition
 That the increase in government spending does not have to be as big as the fall of consumer spending.
Term
 What is the multiplier effect?
Definition
 it is the increase in AD caused when expansionary fiscal policy increases income and thus consumer spending.
Term
 What are four limits to fiscal policy?
Definition
 Crowding out- When govt spending causes less private spending, the increase in AD is neutralized.A drop in the Bucket- the economy is so large, a govt can rarely increase spending enough to have an impact.A matter of timing- it is difficult to time fiscal policy so that the AD curve shifts at the right moment.real shocks- Shifting AD doesnt help
Term
 What is the Ricardian equivalence?
Definition
 when people see that lower taxes today means higher taxes in the future, so instead of spending money, they hold onto it.
Term
 What are automatic stabilizers?
Definition
 changes in fiscal policy that stimulate AD in a recession without the need for explicit action by policy makers. ex: proggressive tax system, welfare and transfer programs
Term
 What are some lags fiscal policy has?
Definition
 recognition, leglislative, implementation, effectivness, and evaluation and adjustment lags.
Term
 When is fiscal policy a good idea?
Definition
 when there is an emergency such as war, when there is an AD shock, or when there are many unemployed resources.
Term
 How does fiscal policy differ from monetary policy
Definition
 fiscal policy is based on the government spending, borrowing, and taxes. Monetary policy is implemented by the fed and uses the banks, lending, discount rates, etc to control AD.
Term
 A producer has a comparative advantage over other producers if his production of the good involves:
Definition
 A lower opportunity cost
Term
 A tariff is a:
Definition
 Tax on imports
Term
 Imposing a restrictive quota on the import of sugar will likely:
Definition
 Increase the price of sugar and decrease the quantity consumed
Term
 In terms of economics, international trade is very similiar to trade between two people in a small local neighborhood, except:
Definition
 For political considerations, for example country country borders
Term
 What is absolute advantage?
Definition
 The ability of one producer to produce one good or service using fewer inputs than another producer.
Term
 The benefits of trade include:
Definition
 Higher output due to specializationLower unit costs due to economies of scalelower prices due to competition
Term
 The real cost of producing a good is:
Definition
 the opportunity cost of producing the good
Term
 A decrease in the value of the domestic currency in terms of other currencies is called what?
Definition
 a depreciation
Term
 An exchange rate is the cost, or price, of:
Definition
 one currency in terms of another
Term
 What does knowing that 1.25 buys one euro tell you?
Definition
 the exchange rate
Term
 when the exchange rate is written as dollars per yen, the exchange rate represents the:
Definition
 price of 1 yen in dollars
Term
 What do you tax in order to have the least amount of dead weight loss?
Definition
 A good with a highly inelastic demand
Term
 According to public choice theory, those who can do what are considered interest groups?
Definition
 those who can organize for less than 1 dollar, in order to gain 1 dollar
Term
 What best represents an optimal strategy in an all pay auction with many bidders?
Definition
 do not bid at all
Term
 A decrease in consumption growth will cause the Solow growth curve to:
Definition
 remain unchanged
Term
 As the government builds new schools, the construction workers and material vendors employed on the project spend more in the community where they work. What is the economic term for this effect?
Definition
 the multiplier
Term
 Consumers are more likely to spend tax rebated that they believe are:
Definition
 Permanent
Term
 When the government spending increases, and private spending falls, what is it called?
Definition
 the crowding out effect
Term
 If the government experienced a federal budget surplus, what is true?
Definition
 the national debt held by the public decreased
Term
 Debt held outside the U.S. government is called the:
Definition
 publically held national debt
Term
 If a worker gets a massive raise in salary, and works less hours than before, what does that mean?
Definition
 the income effect dominates the substitution effect
Term
 How can the Fed offset a positive shock to aggregate demand?
Definition
 decrease the growth rate of the money supply
Term
 if businesses react to a pessimistic outlook and decrease spending, the Fed can counteract this by:
Definition
 increasing money supply, which will lower real interest rates and encourage borrowing
Term
 When a negative shock to AD occurs, the inflation rate will:
Definition
 decrease
Term
 If the required reserve ratio is 4%, the money multiplier is?
Definition
 25
Term
 When the Fed buys bonds, the demand curve for bonds:
Definition
 shifts outwards
Term
 Who is the chairman of the fed?
Definition
 ben bernanke
Term
 A increase in government borrowing will cause what?
Definition
 the demand for borrowing to shift outward
Term
 An increase in the supply of savings will cause the interest rate
Definition
 to be lower
Term
 An investment tax credit will cause the interest rate to
Definition
 increase, and borrowing to increase
Term
 A temporary decrease in consumer spending causes:
Definition
 A decrease in growth rate of velocity of money
Term
 A negative solow shock causes what to happen to inflation and growth rate?
Definition
 higher inflation, and lower real growth
Term
 An increase in the rate of expected inflation causes:
Definition
 a shift of the SRAS curve up and to the left
Term
 To experience an increase in growth along a short-run aggregate supply curve with expected inflation of 5%, the actual inflation rate would need to be:
Definition
 higher than 5 percent
Term
 What is vertical equity?
Definition
 a tax that satifies vertical equity would be if it takes into account a persons ability to pay. ie: they dont fall onto a group of people with low income.
Term
 What is horizontal equity?
Definition
 refers to fairness at a given level.
Term
 If the fed wants to decrease the money supply, what will it do?
Definition
 open market sales
Term
 if the fed wants to increase the money supply, what will it do?
Definition
 open market purchases
Term
 What is absolute convergence, and what is conditional convergence, what is the difference between the two?
Definition
 Absolute convergence predicts that poor countries will grow more quickly regardless of their eventual steady state level of output. Conditional convergence predicts this pattern only if the countries have similar steady state levels of output.
Term
 What are economies of scale?
Definition
 it means that costs per unit fall with increases in production.
Term
 If a country has an absolute advantage in producing two goods, does it mean that they have the comparative advantage?
Definition
 no
Term
 How do you calculate tariff revenue?
Definition
 tariff x the quantity of imports.
Term
 What are some arguments against international trade?
Definition
 trade reduces the number of jobs in the U.S.Child laborWe need to keep jobs at home for national securityWe can increase U.S. well being with strategic protectionism.
Term
 What is a trade deficit?
Definition
 when the value of a country's imports exceeds the value of its exports.
Term
 Is a trade deficit always bad?
Definition
 no, because it can be balanced with a trade surplus.
Term
 what is a balance of payments?
Definition
 yearly summary of all the economic transactions between residents of one country, and residents of the rest of the world.
Term
 what is the formula to determine trade deficit or trade surplus?
Definition
 Earning - Spending = Changes in debt + Changes in ownership + changes in your cash reserve.
Term
 What is the current account?
Definition
 the sum of the balance of trade, net income on capital held abroad, and net transfer payments.
Term
 What is the formula for the current account?
Definition
 current account = (-) Capital account + change in official reserves.
Term
 When you are analyzing the supply and demand for yen, what goes on the vertical and horizontal axis? what about dollars?
Definition
 the dollars per yen goes on the y axis, the quanitity of yen goes on the x axis.
Term
 An increase in the supply of a currency does what to the exchange rate?
Definition
 it reduces the exchange rate
Term
 What is the difference between the nominal exchange rate, and the real exchange rate?
Definition
 the nominal exchange rate will tell you the rate you can exchange one currency for another, the real exchange rate is the rate you can exchange goods and services of one country for the goods and services of another.
Term
 What is the purchasing power parity theorum?
Definition
 it says that the real purchasing power of a money should be the same, whether it is spent at home or converted into another currency and spent abroad.
Term
 what is the law of one price?
Definition
 it says that if trade were free, then identical goods should sell for about the same price throughout the world.
Term
 Since money is neutral in the long run, what does that mean for exchange rates?
Definition
 neither the supply of either currency can change the real exchange rate in the long run.
Term
 What are three constraints that prevent prices from being fully equalized across borders?
Definition
 transportation costs ( if it were cheaper to make cement in japan, it wouldnt be economical to ship it to the U.S.)Some goods cant be shipped ( you cant ship the experience of drinking coffee under the eifel tower.)Tariffs and quotas
Term
 How does monetary policy affect the exchange rate in the short run?
Definition
 the increase in M shifts the supply curve for dollars down and to the right, which will result in a lower exchange rate ( a depreciation )
Term
 What will a depreciation of the U.S. dollar do to AD?
Definition
 it will increase U.S. exports, which will boost AD, and the economy in the short run.
Term
 What happens in the long run to the real exchange rate when there is a reduction in M?
Definition
 the exchange rate returns to its fundamental value determined by the PPP
Term
 What will expansionary fiscal policy do to domestic interest rates?
Definition
 it will increase domestic interest rates, and the demand for loanable funds shifts outwards and the interest rate goes up.
Term
 What will higher interest rates in the U.S., cause other countries to do?
Definition
 More foreigners will invest in the U.S. to take advantage of those high interest rates. the greater demand to invest will cause an appreciation of the U.S. dollar. it makes exports more expensive, thus reducing U.S. exports.
Term
 What is a floating exchange rate?
Definition
 it is one determined primarily by market forces.
Term
 what is a fixed or pegged exchange rate?
Definition
 it means that the government or central bank has promised to convert its currency into another currency at a fixed rate.
Term
 what is dollarization?
Definition
 it occurs when a foreign country uses the dollar as its currency.
Term
 What is a dirty or managed float?
Definition
 it is a currency whose value is not pegged, but govts will intervene extensivley in the market to keep the value within a certain range.
Term
 what is the IMF and what does it do?
Definition
 the international monetary fund serves as an international lender of last resort. When countries experience financial trouble, the IMF steps int to organize a rescue package, lend money, etc.
Term
 Where is the IMF located, and who runs it?
Definition
 it is located in Washington D.C., and is independant of any single govt.
Term
 What do defenders of the IMF say?
Definition
 that tough fiscal reforms are sometimes needed, or that borrowing countries do not in fact follow the advice of the IMF regardless of whether or not it is good advice.
Term
 What was the world bank designed to do?
Definition
 it was designed to facilitate the flow of capital to poor countries, especially those parts of the world not being served by private capital markets.
Term
 What do defenders of the world bank say?
Definition
 some countries like china, still remain poor, and the chinese loans turn a profit and help the Bank carry out its mission in poorer places like africa.
Term
 what do critics of the world bank say?
Definition
 the bank does not pay enough attention to results. the bank benefits those with commercial interests in the countries that control the bank.
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