Macroeconomics 1
Macroeconomics 1
Macroeconomics 1
Set of flashcards Details
| Flashcards | 99 |
|---|---|
| Language | English |
| Category | Macro-Economics |
| Level | University |
| Created / Updated | 06.01.2021 / 06.01.2021 |
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Velocity of Money
Ratio of nominal GDP to the money supply. It measures how many times the average dollar bill is spent each year in the country.
M x V = P x Y
M= Money Supply
V = Velocity
P = Aggregate Price Level
Y = Real GDP
New Classical Macroeconomics
assumes the SRAS is vertical after all. Contains two branches:
Rational Expectations Theory: The view that individuals and firms make decisions optimally, using all available information. They base their decisions on human rationality, available information and their past experience.
Real Business Cycle Theory: The idea that fluctuations in the rate of total factor productivity cause the business cycle.
The Great Moderation
Period from 1985 to 2007, when U.S. economy had relatively small fluctuations and low inflation.
Theory of Expansionary Austerity
Cutting government spending hoping it would lead confidence and growth to increase
Balance of Payments Accounts
Summary of the country’s transactions with other countries for a given year.
Current Account + Financial Account = 0
Current Account
The balance of payments on G&S plus net international transfer payments and factor income. If the amount it paid to foreigners was more than the amount received, a country runs a current account deficit. (opposite case: current account surplus). Responds only to the real exchange rate!
Payments on G&S: The difference between exports and imports during a given period
Trade Balance: The difference between a country’s exports and imports of goods (without services).
Financial Account
The difference between sales of assets to foreigners and purchases of assets from foreigners during a given period. If the value it sold to foreigners more than the value it bought from foreigners, a country runs a financial account surplus. (opposite case: financial account deficit).
Each account shows payments from foreigners and payments to foreigners.
GNP
Gross National Product
Difference to the GDP: It does include international factor income (e.g. funds immigrants send home to their families are not subtracted from GDP)
Capital Flows
from countries in which capital is cheap to countries in which capital is expensive. Reason: International differences in investment opportunities (à rapidly growing economy = higher possible returns for investors).
Foreign Exchange Market
International transactions require a foreign exchange market were currencies can be exchanged (because each country has another currency and you usually buy G&S in the domestic currency of that country and not your own currency)
Exchange Rate
The prices at which currencies are traded. The price of a country’s money in terms of another country’s money.
Equilibrium Exchange Rate
The rate at which the quantity of a currency demanded in the foreign exchange market is equal to the quantity supplied
Shifters of the Equilibrium Exchange Rate
1) Tastes: US tourists love Japan, so the demand for YEN increases while the supply for US$ increases as well (they offer more dollars to buy more Yen)
2) Price Level (Inflation): If the inflation rate in my country is higher than in another country, I wand to buy the other country’s currency so my money doesn’t lose it’s value that fast.
3) Income: If I have higher income (e.g. country cuts income taxes) I have more money to spend. I would buy other currencies.
4) Interest Rates: If I have more IR on another currency, I want to buy the other currency to benefit from the higher IR
Currency Appreciation
increasing value of one currency in terms of other currencies. It appreciates
Currency Depreciation
loss of value of one currency in terms of other currencies. It depreciates
Exchange Rate Regime
a rule governing policy for the exchange rate. There are two main types:
Fixed Exchange Rate: Rate is held at or near a particular target against some other currency
Floating Exchange Rate: Rate is allowed to go wherever the market takes it
Genovia is trying to keep its currency, the geno, fixed at $1.50.
How in a ER Surplus?
How in a ER Shortage?
Surplus: If it wants to fix ER above its equilibrium, it must buy genos and sell dollars
Shortage: If it wants to fix ER below its equilibrium, it must sell genos and buy dollars
Devaluation
A reduction in the value of a currency that previously had a fixed Exchange Rate
Revaluation
An increase in the value of a currency that previously had a fixed Exchange Rate
