in person test

shift in the supply of U.S. dollars due to

-shifts in imports into the united states -shifts in financial outflows -DOES NOT SHIFT because of exchange rate

what is stagflation

A combination of economic stagnation (falling output and rising unemployment) and high inflation (rising prices) -can lower output by lowering potential output even if output gap remains unaffected

the state of the economy is determined by the intersection of what

IS curve and MP curve

what are the safest investment?

U.S. government bonds (treasuries)

what is a peak

a high point in economic activity

how do banks make more money

charging higher interest rates than they pay

interest rates rise with

default risk

what is the second cause of inflation?

demand-pull inflation: the output gap drives inflation to rise above or fall below inflation expectations (increase output gap, increase inflation) -as output gap increases, inflation (relative to inflation expectations) increases

inflation is equal to

expected inflation + demand-pull inflation + cost-pull inflation

what is risk premium

extra premium that lenders charge to account for risk

financial flows are large and include investment in

foreign physical assets, financial assests, loans

what are imports?

goods and services produced in a foreign country and purchased by domestic buyers

what are exports?

goods produced domestically and purchased by foreign buyers

what does the IS curve do

illustrates how lower real interest rates raise spendings and hence GDP, leading to a positive output gap

the current account balance tallies what up?

income flows into and out of the country -track ALL income flows (broader measure than net exports)

expected inflation is characterized by

increased inflation expectation, increased inflation

demand-pull inflation is characterized by

increased output gap, increased inflation

cost-push inflation is characterized by

increased production cost, increased inflation

risk-free interest rate

interest rate on a loan that involves no risk. set by fed

what do banks do?

life without banks: -individuals can only finance purchase by hitting up friends and family -price bank pays to borrow money, is INTEREST you recieve

step 2: find the output gap

look at the intersection between the MP and IS curve to the find the equilibrium output gap and real interest rate

the business cycle reflect the

tendency for actual output to deviate from potential output. deviation measured using output gap

shifts in IS curve (spending times multiplier)

-(C)consumption rises people feel more prosperous -(I)planned investment rises if it's more profitable to expand production -(G) government spending rises in response to expansionary fiscal policy -(NX) net exports rise in response to global factors

what is the chain of borrowing

-GDP (output, production) requires investment -investment requires borrowing -borrowing requires savings -loanable funds market makes process efficient

what are financial outflows?

-americans investing their money in other countries -funds flow OUT of the United States

what is a bond?

-an IOU -promise to pay back a loan with interest

supply shock

-an unexpected change in production that shifts the phillips curve -philips curve shifts in response to changes in input prices, productivity, exchange rates

what are supply shocks

-any change in production costs that lead suppliers to change the price they charge at any given level of output will shift the philips curve. -common supply shocks include changes in input prices, productivity, and exchange rate

describing higher price of the dollar

-appreciation of the dollar -depreciation of other currency -stronger dollar -higher exchange rate -imports are cheaper -exports are more expensive for foreign buyers -japanese goods are relatively cheaper for US consumers (US consumers buy more japanese goods)

why do banks hold reserves?

-banks need to accommodate customer withdraws -federal reserve requires banks to hold a fraction of their deposits on reserve =>fraction called required reserve ratio(rr) => current is 10%

features of business cycles

-business cycles are not cycles -recession vary in causes, duration, and depth -some variables lead recessions, some lag -is persistent -typical business cycle involves short, sharp recession followed by long, gradual expansion -many economic variables move up and down together over business cycle

what happens when there's a decrease in demand for dollars

-causes a decrease in demand for u.s. dollars, shifting demand curve to the left -leads price of u.s. dollar to fall, exchange rate depreciation

what does a bond market do?

-channels funds directly from savers to borrowers -funds government (or corporate) debt -spreads risk -creates liquidity

appreciation makes imports _____ and exports more _____ depreciation makes imports _____and exports more___

-cheaper; more expensive -more expensive; cheaper

(supply shifter: financial outflows): financial outflows increase, increasing the supply of dollars due to

-decrease in U.S> interest rates relative to foreign interest rates -decrease in U.S. business profitability relative to foreign business -reduction in foreign political risk relative to U.S. political risk -reduction in expected future value of the dollar

what 3 types of risks are associated with bonds?

-default risk (risk your loan won't be repaid, companies given credit rating to help investors assess risk) -term risk (risk that arises from uncertainty about future interest rates, tying up money involved opp cost, risk connected to length of loan) -liquidity risk (risk that if you need to sell asset quickly you might not get good price)

lower price of a dollar description

-depreciation of the dollar -appreciation of the other currency -weaker dollar -lower exchange rate -imports are more expensive -exports are cheaper for foreign buyers

what is the output gap

-difference between actual and potential output, measured as percentage of potential output = (actual-potential output)/potential output times 100

demand for dollars

-downward sloping as dollar depreciates, exports of american goods become cheaper for japanese people. More exports, demand more dollars in exchange for yen -reflects foreigners buying American exports and investing in the United States

what are shadow banks?

-financial firms that are similar to banks but are not regulated like banks -if forced to sell assets quickly, may lead to shadow bank run

okun's rule of thumb

-for every percentage point that actual output falls below potential output, unemployment rate is half a percentage point higher ex: project output rate decline from 0 to -2%, unemployment rate rise by 1% from 5-6% ex: real gdp,

what are financial inflows?

-foreigners investing in the united states -funds flow INTO the united states

what do financial linkages do?

-help diversity risk around the world

phillips curve

-illustrates the link between output gap and unexpected inflation -upward sloping -when there's excess demand, inflation rises above expected inflation -when there's insufficient demand, inflation falls below expected inflation -output equal to potential output, inflation equal to expected inflation -unexpected inflation (vertical/straight axis), output gap (horizontal axis) -predicts how far inflation will diverge from expected inflation

(demand shifter: financial inflows): financial inflows will increase, thereby increase the demand for dollars due to

-increase in U.S. interest rate relative to foreign interest rates -increase in U.S. business profitability relative to foreign businesses -increase in foreign political risk relative to U.S. political risk -increase in expected future value of the dollar

(supply shifter: imports into U.S): imports increase, thereby increasing supply of dollars due to

-increase in U.S> GDP -decrease in barriers protecting domestic producers -increase in foreign innovation and marketing -increase in domestic prices -decrease in foreign prices

what does an increase in the demand for dollars causes

-increase in exports or financial inflows causes an increase in demand for U.S dollars, shifting demand curve to the right -leads price of U.S. dollar to rise, exchange rate appreciates

(demand shifter: exports)an increase in the demand for exports will increase the demand for dollars due to

-increase in world GDP -decrease in barriers to foreign markets -increase in domestic innovation and marketing -increase in foreign prices -decrease in domestic prices

what is cost-push inflation

-inflation that results from an unexpected rise in production costs -unexpected boosts in production costs push sellers to raise their prices -lead to more inflation at any given level of output gap ex: outback steakhouse raises prices due to marginal costs and so does many other places

three types of supply shock shift the phillips curve

-input prices -productivity -exchange rates

what are the effects of macroeconomic shocks?

-is there a spending shock (shift IS curve) or financial shock (shift MP curve) -where does this shift IS or MP curve? -what happens to GDP in new equilibrium

what is a deposit insurance?

-makes bank runs much less likely -guarantee that you won't lose the money you deposit in the bank

what is financial account balance?

-measures the difference between financial inflows and outflows (financial inflows - financial outflows) -tallies up changes in the ownership of assets

5 functions of banks

-pool savings from many savers (lends to borrower) -spread the risk of lending money across many borrowers (more diverse, less risky) -solve information problems (doesn't lend money to anyone, good credit score) -provide payment services -create long-term loans from short-term deposits (maturity transformation)

shifts in MP curve lead to

-risk premium rises if lending becomes riskier -risk-free rate rises in response to monetary policy

what causes shifts in the demand for U.S. dollars

-shifts in exports from the United States -shifts in financial inflows into the United States (people want us dollars to buy financial goods) -DOES NOT SHIFT due to exchange rate

what are three ways to track inflation expectation?

-surveys, economist's forecasts, financial markets

what is the real exchange rate?

-the domestic price of a product divided by the foreign price (after converting that price into domestic currency) -domestic price/(foreign price/nominal exchange rate) -drives imports and exports

inflation expectations

-the rate at which average prices are anticipated to rise next year -businesses set prices taking into consideration expected increases in input costs and competitor's prices ex: output's managers expect prices to rise 2%, they raise next year's price by 2% -measured using surveys, economists' forecasts, financial market data

supply for U.S. Dollars graph

-upward sloping as dollar appreciates, buys more yen, imports cheaper for americans -more spending on imports

what is a bank run?

-when many depositors try to withdraw funds from a bank at one time -could result from word spreading that a bank is having trouble meeting withdraw requests -may end with bank in default -can be contagious

excess demand

-when the quantity demanded at the prevailing price exceeds the quantity supplied ex: going to wagayu and not waiting due to long wait, quantity demanded of prevailing price is greater than quantity wagayu can supply

what is the three step recipe to analyze macroeconomic shocks

1. identify the shock and shift the curve 2. find the output gap 3. assess inflation

what is the first cause of inflation?

1. inflation expections: higher inflation expectations create higher inflation (increase expectations, increase inflation) -inflation expectation (the rate at which you expect prices to rise, on average, across the whole economy over the next year) is a key driver to long-run inflation -monetary policy tries to shape inflation expectation

5 rules to track economy

1. track many indicators 2. broad indicators beat narrow indicators 3. seek just-in time data 4. find the signal amid the noise 5. adjust your outlook when data differ from expectations

top 10 economic indicators

1.real GDP growth 2.real GDI growth 3.change in nonfarm payrolls 4.unemployment rate 5. initial unemployment claims 6. business confidence 7. consumer confidence 8. inflation rate 9. employment cost index 10. stock market

the fed model (IS-MP-PC)

a complete model of business cycles that puts together the IS curve, the MP curve, and the philips curve

wage-price spiral

a cycle where higher prices lead to higher nominal wages, which lead to higher prices -workers respond to inflation by demanding higher nominal wages to maintain their spending power, leading businesses to respond to higher wages by raising prices

what is a trough

a low point in economic activity

what is a recession

a period of temporary economic decline -fall from peak

labor market phillips curve

a phillips curve linking unexpected inflation to unemployment rate (decrease unemployment rate, increase unexpected inflation) -instead of using output gap, use unemployment -summarize exact same ideas as phillips curve but relies on different measures of excess demand -shows higher unemployment leads to lower unexpected inflation, lower unemployment leads to higher unexpected inflation -downward sloping -at equilibrium unemployment rate, unexpected inflation is zero

what is classical dichotomy

a purely nominal change- like a change in average price level- won't have any effect on real variables in the long run ex: in the long run, adding an extra zero at the end of each price tag wouldn't change how much stuff gets made

what are spending shocks

any change in aggregate expenditure at a given interest rate and level of income- whether due to consumption, planned investment, government expenditure, or net exports- will shift the IS curve

what are financial shocks

any change in borrowing conditions that affects the real interest rate- due to federal reserve shifting federal funds rate, or changes in financial markets shifting the risk premium- will shift the MP curve -change the real interest rate at which people can borrow

what is the third cause of inflation?

cost-push inflation: unexpected rise in production costs cause higher inflation (increase production costs, increase inflation) -cost-push inflation causes philips curve to shift

what is the annualized rate

data converted to the rate that would occur if the same growth rate had occurred throughout the year

what is seasonally adjusted

data stripped of predicted seasonal pattern

demand-pull inflation

inflation resulting from excess demand -is driven by output gap -leads inflation to diverge from inflation expectations -arises when demand exceeds the economy's productive capacity, pulling prices up

what is the current account balance

measures the difference between the incomes americans receive from abroad versus the incomes americans pay to people abroad

demand-pull inflation is driven by

output gap (measures actual output relative to potential output). leads inflation to diverge from inflation expectations

demand-pull inflation creates a link between

output gap and unexpected inflation. Phillips curve is the result when you graph this link.

excess demand is when

output greater than potential output -inflation rises above expected inflation

insufficient demand is when

output is less than potential output -inflation falls below expected inflation

where is the equilibrium exchange rate?

point where demand is equal to supply

interest rate is equal to

risk-free interest rate (monetary policy) + risk premium (financial markets)

what is the business cycle?

short-term fluctuations in economic activity -annual average 2% in GDP growth

the MC curve illustrates

the current real interest rate which is sloped by monetary policy and the risk premium

unexpected inflation

the difference between inflation and inflation expectations (inflation- inflation expectations)

what are net exports?

the difference between spending on exports and spending on imports

what is the fed model?

the framework that uses the IS curve, the MP curve, and the philips curve to link interest rates, output gap, and inflation rate -framework that policy makers at federal reserve use to analyze, forecast, and tweak the economy

what is the potential output

the level of output that occurs when all resources are fully employed -long run economic growth reflects growth in economy's potential output

what is the foreign exchange market?

the market in which currencies are bought and sold -exchange one currency for another

what is the nominal exchange rate?

the price of one currency in terms of another currency -number of units of a foreign currency/number of dollars -currency values are constantly fluctuating -describes price of country's currency

what are revisions

updates to earlier estimates -can be substantial as initial estimates can be based on incomplete data

step 3: assess inflation

use philips curve to find the inflationary implications of this output gap

what are lagging indicators

variables that tend to follow business cycle movements with a bit of a delay ex: unemployment bec managers who have invested in developing staff are reluctant to make cutbacks until convinced it's necessary

what are leading indicators

variables that tend to predict the future path of the economy (tend to change first, help you get better sense where economy is going) ex: business confidence, consumer confidence, stock market

what is expansion

when economic activity is increasing

what is depreciation

when the price of currency falls

insufficient demand

when the quantity demanded is below what is supplied ex: quantity demanded of restaurant meals is below the quantity wagayu wish to supply