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40 Cards in this Set
- Front
- Back
Describe the association - prices, money people hold, price level, money demanded
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higher prices, more money in wallets, higher price level, great quantity of money demanded
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Quantity theory of money
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Quantity of money determines the price level and that the growth rate in the quantity of money available determines the inflation rate
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Monetary neutrality
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Change in monetary variables are irrelevant to change in real variables
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Velocity / Quantity Equation
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M x V = P x Y
M = quantity of money V = velocity of money P = price of output Y = amount of output |
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What government raises revenue by printing money...
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inflation tax
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Who does the inflation tax, tax?
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everyone who holds money
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Fisher Effect
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One to one adjustment of the nominal interest rate and inflation rate
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Shoeleather costs
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Resources wasted when inflation encourages people to reduce their money holdings
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Menu costs
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Costs of price adjustments
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What are the six costs of inflation?
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shoeleather costs
menu costs variability of relative prices changes due to unindexed tax codes confusion / inconvenience redistribution of wealth between creditors/debts |
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FDI
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McDonalds opening a fast fook restaurant in Russia
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FPI
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American buys stock in Russian firm
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What is the relationship between national savings, investment and NX
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S = I + NX (NCO)
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Appreciation
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exchange rate changes so that one dollar buy more of a foreign currency
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How to calculate real exchange rate?
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Real exchange rate = (Nominal exchange rate X domestic price)/ foreign price
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How to calculate nominal exchange rate using foreign and domestic price levels?
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nominal exchange rate = foreign price / domestic price
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What are two reasons PPP doesn't hold up?
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Goods are not easily traded (trasportation costs)
Not everything has a perfect substitute |
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Where do the supply and demand of loanable funds come from?
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S = I + NCO
S = supply I + NCO = demand |
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What is the key determinant of NCO?
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real interest rates
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Relate - budget deficit, loanable funds, interest rate, investment, currency
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large budget deficit, reduces supply of loanable funds, drives up interest rate, crowds out investment, appreciates currency (because NCO drops, less dollars abroad, they become more valuable)
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What connects the markets for loanable funds and the foreign currency exchange markets?
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NCO - leads to demand for loanable funds and supply for foreie
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The Wealth Effect
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Decrease in price level raises the real value of money and make consumers wealthier, which in turn encourage them to spend more. The increase in consumer spending means a larger quantity of goods and services demanded
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Interest Rate Effect
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Lowest price level, reduces interest rate, encourage spending, increases quantity of goods and services demanded
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Exchange Rate Effect
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US price level falls, US interest rates fall, real value of dollar declines, depreciation stimulates US net exports, increase quantity of goods and services demanded
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Three reasons aggregate demand curve slopes down?
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Wealth Effect
Interest Rate effect Exchange rate effect |
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What could cause a shift in the aggregate supply curve?
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Change in Labor - immigration
Change in Capital Change in Natural Resources - new discovery Change in Tech Knowledge - inventions |
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Why is the short run supply curve sloped whereas the long run is vertical?
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1. sticky wage theory
2. sticky price theory 3. |
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How does the expected price level affect the aggregate supply long run curve?
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Increase in expected price level reduces the quantity of goods and services supplied and shifts the short run aggregate supply curve to the left
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Why is the aggregate supply curve vertical?
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In the long run, quantity of goods and services supplied depends on the economy's labor, capital, natural resources, and te
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Liquidity preference theory
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Interest rate adjusts to bring money supply and money demand into balance
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Multiplier
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1/ (1-MPC)
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Crowding out effect
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offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending
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Affect of government spending on aggregate demand depends on ...
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size of multiplier versus crowding out a
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Phillips Curve
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Shows the negative relation between inflation and u in the s
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Why is the phillips curve vertical in the long run?
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monetary neutrality, in the long run nominal variables won't matter (inflation does not affect u)
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What does natural mean in the context of unemployment?
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When the unemployment is beyond the influence of monetary policy
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How can a supply shock shift the phillips curve?
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shift ag supply left, lower output, raises price, shifts phillips curve right (worse tradeoff between inflation/u)
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Sacrifice ratio
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number of % points of annual output lost int he process of reducing inflation by 1 % point
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What is the formula that sums up all components of GDP?
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Y = C + I + G + NX(NCO)
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If domestic i goes up, then NCO goes
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down
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