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35 Cards in this Set
- Front
- Back
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What is a Bubble |
-herd behavior by investors -buying as others are buying -price is higher than fundamental value -positive and reinforcing -Price rises, demand rises, price rises more -accompanied by rise in debt - borrow to buy |
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Subprime mortgage crisis |
-a set borrowers more likely to default on debt/mortgage -mortgages worth less -value assets fall risk of bankrupcy |
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GDP |
Market value of all final goods and services in a country at a given time. |
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Real GDP |
constant prices from a base price comparison over time |
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Nominal GDP |
GDP using current prices |
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Benefits on unemployment |
-Enables reallocation of resources -Allows better matching of skills to jobs -Boost other activities not captured in GDP |
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Inflation |
Rising price of goods and services Price level rises when inflation above 0 Price level falls when inflation below 0 |
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Inflation = |
price index for current yr - previous yr ________________________________________ x 100 price index for previous yr |
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Unexpected high inflation |
-redistribution of wealth from lenders to borrowers -shoe leather costs -menu costs -confusion and uncertainty -misallocation of resources as price signalling ineffective -tax distortion as income changing |
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Costs of deflation |
-Price level falling -Redistribution of wealth from borrowers to lenders -shoe leather costs -menu costs -confusion and uncertainty -misallocation of resources as price signalling ineffective -tax distortion as income changing |
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Nominal Interest rate |
is interest rate specified for a loan contract or savings account |
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Real interest rate |
is adjusted for inflation |
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Fisher Equation |
real interest (r) = nominal i.r (i) - inflation rate |
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New money is created when... |
Bank credits a borrowers account with a loan |
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Base Money |
Bank reserves (R) and total currency held by bank |
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Money Multiplier |
= 1/R How much money the banking system might generate with the unit of reserves |
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Velocity of Money |
how quickly money changes hands during spending |
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Velocity of Money Equation |
V= PY/M p= price level m =quantity of money y = output |
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Theory of money demand |
Md = PY/V |
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Motives for holding money |
Transaction Precautionary Speculative |
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Md depends... |
-Positively on income -Negatively on interest rate |
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In equilibrium |
Planned Spending = Actual Spending demand = supply AD = Y |
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Out of equilibrium |
If AD>Y: firms produce more so Y increases, C increases so AD increases until AD = Y |
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Multiplier Effect (no gov. no trade) |
1 ___________________________ 1 - MPC |
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Multiplier Effect (With trade and gov) |
1 __________________________ 1 - MPC + MPM + MPT |
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Path Dependancy |
Path of economy in short run could potentially affect economy in long run i.e unemployment scarring Keynes - adjustment |
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Automatic Adjustment |
AD-AD Model says adjustment is automatic Classical monetarists argues that adjustment is fast and necessary so long run growth of the economy is preserved |
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Need for AD management |
Keynesian cross model says economy could get stuck in equilibriumAdjustment is slow and may cause long term damage |
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LR effect of recession |
Could effect supply in LR Via lower investment, deskilling of workforce due to high unemployment So economy may not return to original equilibrium |
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Trade account |
Value of goods and services bought/sold between a country and row |
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Financial Account |
Value of financial assests bought/sold between a country and row |
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Net Capital Outflow |
the flow of funds being invested abroad by a country usually in a given time period |
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NCO depends on |
domestic and foreign interest rates risk if real interest rate rises, NCO falls |
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Nominal exchange rate |
Rate at which a currency can be corrected for another |
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Real Exchange rate |
rate at which a basket of goods and services can be exchanged for a basket in another country = nominal exchange rate x domestic price index / foreign price index |
