Macroeconomics T11-T16

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  1. DEFINE Classical Dicotomy
    theoretical separation of nominal and real variables
  2. DEFINE Fisher Effect
    the one-for-one adjustment of the nominal interest rate to the inflation rate
  3. DIFFERENCE between Short Run and Long Run
    • SR: prices are sticky which causes real value to drop (inflation)
    • LR: relative prices adjust to their nominal value
  4. DEFINE Market Basket
    the goods that a consumer buys
  5. DEFINE Consumer Price Index (CPI)
    a measure of all cost of goods and services used by a typical consumer
  6. DEFINE Sacrifice Ratio
    # of percentage points annual output lost (or unemployment gained) while reducing inflation by 1% point
  7. DEFINE Rational Expectations
    people use all info they have, including info regarding government policies, when forecasting the future
  8. EFFECTS of Unanticipated Inflation
    • 1) decrease ability to purchase goods (C)
    • 2) decreases foreigner's ability to purchase US goods (NX)
    • 3) makes lenders more cautious and/or charge higher interest rates (I)
  9. EFFECT of Anticipated Inflation
    people put their money in the bank to earn interest
  10. POINTS of the Quantity Theory of Money
    • 1) the quantity of money available determines price levels
    • 2) changes in money supply causes changes in prices (inflation)
  11. DEFINE Monetary Neutrality
    the proposition that changes in the money supply do not affect real variables in the long run
  12. DEFINE Phillips Curve
    the curve that shows the short-run tradeoff between inflation and unemployment
  13. DEFINE Natural Rate Hypothesis
    the claim that unemployment eventually returns to its natural rate
  14. Why should the US import goods?
    • 1) cheaper goods
    • 2) US can focus on more valuable goods
    • 3) no access to domestic goods
  15. Why shouldn't the US import goods?
    • 1) impact on local goods
    • 2) environmental concerns
    • 3) increasing unemployment
  16. Why limit import?
    • 1) Jobs- decrease in employment
    • 2) National Security- ie steel industry and the need for steel in the military
    • 3) Infant Industry- young industries need trade restrictions to limit competition
    • 4) Unfair Competition- not fair to have domestic firms compete w/ foreign firms that deal w/ less regulations
    • 5) Protection as a Bargaining Chip- threaten to limit foreign imports can draw fear into a foreign trader
    • 6) Efficiency vs Quality- trade widens the income gap
  17. ASSUMPTIONS about small countries
    • 1) whatever amt they demand can be supplied
    • 2) domestic demand doesn't affect world prices
    • 3) supply first comes from domestic firms, while the remainder comes from foreign firms
  18. BENEFITS of imports to consumers
    • 1) increased consumption
    • 2) increased variety of goods
    • 3) lower costs through economies of scale
    • 4) increased competition
    • 5) enhanced flow of ideas
  19. How do countries IMPLEMENT trade barriers?
    • 1) tariffs
    • 2) import quotas
    • 3) non-tariff barriers
  20. EFFECTS of trade barrier against imported goods
    • 1) decline in imports
    • 2) tariff revenue
    • 3) increased domestic production
    • 4) maybe decline in exports if foreign country increases tariffs too
    • 5) decreased consumption
  21. DEFINE Nominal Exchange Rate
    rate at which the currency of one nation can be changed for the currency of another nation
  22. DEFINE Real Exchange Rate
    the rate at which a person can trade the goods and services of one country for the goods and services of another country
  23. DEFINE Purchasing Power Parity
    an economic theory and a technique used to determine the relative value of currencies
  24. FORMULA Net Capital Outflow (NCO)
  25. FORMS of Capital Outflow
    • 1) foreign direct investment - American corporation expanding abroad
    • 2) foreign portfolio investment- Americans investing abroad (ie foreign stocks)
  26. FACTORS affecting NCO
    • 1) the RER paid on domestic and foreign assets
    • 2) the perceived risk of holding domestic and foreign assets
    • 3) Gov't policies that affect foreign ownership of domestic assets
  27. FORMS of Exchange Rate System
    • 1) Flexible Exchange Rate- supply and demand determines the exchange rate and the gov't does not intervene
    • 2) Fixed Exchange Rate- the gov't determines the exchange rates and then makes the necessary adjustments in the economy to maintain those rates
  28. CONTROLS of Fixed Exchange Rate
    • 1) Trade Policies- the gov't can control the flow of trade and finance directly by controlling imports, exports, and/or financial flows
    • 2) Exchange Controls and Rationing- the gov't becomes the sole foreign exchange market; it can then open or shut down the market as need be in order to control prices
    • 3) Domestic Macroeconomics Adjustments- changing fiscal or monetary policy to increase or decrease the demands for goods
    • 4) Currency Intervention- suppose the demand for the currency increases the gov't will increase the supply of the currency to offset demand
  29. DISADVANTAGES of Flexible Exchange Rates
    • 1) Uncertainty and Diminished Trade- when agents sign controls to trade across borders they can't perfectly predict exchange rates and this introduces and element of uncertainty in the transaction
    • 2) Terms of Trade Change- a change in the exchange rate could lead to the worsening in terms of trade; fluctuation in the international business environment¬†
    • 3) Domestic Instability- if a country is highly dependent on trade then wide¬†fluctuations in currency may cause a lot of business cycle fluctuations
  30. DISADVANTAGES of Fixed Exchange Rates
    • 1) no automatic adjustments in trade balance
    • 2) reduction in freedom over monetary and fiscal policy
  31. DEFINE Managed Exchange Rate Float
    current system; under this system the currency is allowed to change (float) as a result of changes in demand and supply, but is managed by the gov't via buying and selling of currency
  32. CONDITIONS of Impossible Trinity
    • at any given time a country can only have 2 of 3 conditions
    • 1) fixed exchanged rate
    • 2) free capital flow
    • 3) an independent monetary policy
Card Set:
Macroeconomics T11-T16
2013-05-15 02:05:31

Makiw Macroeconomics
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