Owen Macro Final
Card Set Information
Owen Macro Final
Macro Economics Vanderbilt
Notecards for Parsley's Macro course
NIA for National Savings
Y C G = National Savings
Relationship between National Savings and budget deficits
Increase in G means a decrease in National Savings
Where does the government get resources for spending?
Taxes, selling assets, borrowing
Two tools the government can use to get out of recessions?
Increased spending, decreased taxes
What is the interest rate impact of the Fed tightening the money supply?
Short-term interest rates will increase. Long term, prices fall.
Tightening the money supply should have what impact on inflation?
How to get out of hyperinflation?
Reduce spending, peg the currency, currency board
Whats the cost of holding money?
What is the impact on the CA of an increase in the budget deficit?
The CA will fall.
S I or EX IM
Quantity Theory Equation:
Change in Money Supply + Change in Velocity = Change in Price Level + Change in Output
T/F: There would be no inflation if money grew at the rate of growth of the economy
F: it depends on V. If V is constant then there is no inflation.
In a fixed exchange system, what must happen if theres an excess supply of FX?
CB must clear the market, increasing the supply of domestic currency, lowering interest.
If there is unexpected inflation the bondholders (gain/lose)
Lose. Their future payments will be worth less.
Causes of FX Crisis in fixed regimes?
Loss of confidence, decreased demand for domestic goods/services, CA deficit
Causes of low national savings in US over last 15 years?
High G, Low T, low interest, increasing asset prices = higher portfolio value (perceived savings)
Two ways to describe GDP:
Total income of everyone in the economy. Total expenditure on the economys output.
Y = C + I + G + NX
What parts of the NIA are impacted by fiscal policy?
G and T
Change in G x Multipler = Change in Y
Why is the multipler hard to estimate?
Rational Expectations, Crowding Out, Offsetting Monetary Polciy
How do rational expectations impact estimations of the multipler?
Budget deficit eventually has to be offset by taxes, so save for future taxes
What is crowding out?
Deficit spending increases interest rates, undercutting private I and C
FA + CA = 0
What does the FA measure?
Cross-border trade in claims to capital
What happens to the CA if I is NOT financed domestically?
CA will fall because CA will decrease as I rises
What happens to the CA if I is financed domestically?
S and I increase in tandem, leaving CA unchanged.
Types of currency (most liquid first):
C, M1, M2, M3, L
Changes in money supply or interest by the CB
Problems with computing CPI:
Substitution, List Prices, Quality Change, New Goods
Government purchases made by printing money
Quantity Theory: If change in M > change in Y, what happens to P
Increase in P aka INFLATION
Nominal Interest = Real Interest + Expected Inflation
How to prevent seigniorage:
Currency board, currency peg, create institutions to promote good monetary policy
Tools of Monetary Policy:
Discount Rate, Reserve Requirements, Open Market Operations
Rate at which the Fed lends to banks
Federal Funds Rate:
Market rate at which banks lend to one another overnight to meet reserve requirements.
Purchasing non-traditional assets on the secondary market to get bad debt off private balance sheets
In Open Market Ops, how does the Fed pays for the bonds it buys?
It credits the sellers account with the Fed.
Why dont prices adjust faster?
Menu costs, impact on business relationships, contract restrictions o
In the short run, a reduction in the money supply leads to unemployment.
Why the Gold Standard is bad:
No discretionary monetary policy, supply changes when gold is found, possible better uses for gold
Why do countries peg exchange rates?
Signal of stability, encourages trade, restricts CBs power, gives government credibility
How does a peg rely on reserves?
The amount of money in circulation is a fixed proportion of the amount in reserves in the CB
In which FX system is hyperinflation impossible?
Disadvantages of pegging?
No monetary policy, direct impact of foreign events, large reserves to stop speculation, FX crisis
Does restricting capital flows work as monetary policy in with a pegged FX?
NO! If gov tires to slow inflation by requiring bond purchase, locals look elsewhere, increasing inflation
How to stop FX Crisis:
Borrow more FX, raise interest rates, freeze assets/capital flows, devalue and abandon the peg
What is the impact of abandoning the peg?
The currency devalues, making FX too costly for locals, ending the FX crisis
Interest Rate Parity Theory: Currency with lower interest rates will ___ in value.
Borrowing in a currency with a low interest rate to invest in a currency with high interest. Risky.
PPP Theory: Currency in the country with ___ inflation with appreciate.
When does PPP Theory work well?
Countries with high inflation rates, large differences in inflation rates, over the long-term
When does PPP Theory not work well?
Moderate differences in inflation, it takes into account local costs (which vary)
Real Exchange Rate:
Nominal exchange rate adjusted for relative prices at home and abroad
When is real exchange rate useful?
Determining expat salary, identifying undervaluation, where to travel
Fundamental Equilibrium Theory:
Currency in countries w/ unsustainable CA deficits will depreciate
Currencies of countries with CA Deficits > GDP Growth tend to ___
Best over short and medium term. Can be beaten over long-term and with very high inflation.
According to the Random Walk, whats the best indicator of tomorrows FX rate?
How do you get out of a liquidity trap?
Create an expectation of inflation
What creates money supply changes in systems of pegged FX?
Imbalances in the BOP accounts.
What three sources make output rise over time?
Increase in labor, increase in capital, increase in efficiency.
Nominal GPD will increase whenever Real GDP increases, except when
Why is deflation bad?
Inputs may cost more than final goods, debt burdens increase, unemployment rises
What are the three prices of money?
Price relative to time, price relative to foreign currency, price relative to goods and services