Economics 8% - 12%

Explain: - Expansionary fiscal & monetary policy: - Contractionary fiscal & monetary policy: - Expansionary fiscal policy + contractionary monetary policy: - Contractionary fiscal policy + expansionary monetary policy: - Discretionary fiscal policy: - Tax polices are efficient if: - Transfer payments: - Capital spending: - Direct taxes: - Indirect taxes:

↑ in a rev item (ie sales tax) = contractionary fiscal ↓ in a rev item = expansionary fiscal ↑ in a spending item (construction of highway) = expansionary fiscal ↓ in a spending item = contractionary fiscal fiscal policy ↑ in budget deficit = expansionary Expansionary fiscal & Monetary policy: Highly expansionary. Interest rates↓ (monetary policy). Private & public sectors expand. Contractionary fiscal & Monetary policy: AD↓, GDP↓, Interest rates↑ (monetary policy). Private & public sectors contract. Expansionary fiscal policy + Contractionary monetary policy: AD↑ (fiscal policy), Interest rates↑ (from ↑gov't borrowing & tight monetary policy). Gov't spending↑, ↑Output Contractionary fiscal policy + Expansionary monetary policy: Interest rates↓ from ↓Gov't borrowing & money supply expansion. ↑Private consumption & output. Gov't spending↓ (contractionary fiscal policy). Private sector↑ from low interest rates. Discretionary fiscal policy: The spending & taxing decisions of the nat'l gov't to stabilize economy. ↑s budget deficit during a recession (expansionary) & ↓s budget deficit during an economic boom (contractionary) Tax policies are efficient: If they causes minimal interference w/ market forces & work incentives Transfer payments: Cash payments by gov't to redistribute wealth (UE, food stamps, etc) Capital spending: Gov't spending on infrastructure. Expected to ↑ future economic productivity Direct taxes: Taxes on income. Takes time to implement Indirect taxes: Levied on goods, services, & food. Quick implementation to raise revenue or promote social goals. Ex) Tobacco tax

Explain: - Factors that ↑SRAS: - Factors that ↑LRAS: - ↑Human Capital outcome: - ↑SRAD: - ↓SRAD: - ↑SRAS: - ↓SRAS: - ↑ AS in very short run: - ↑ AS in short run: - ↑ in LRAS: - ↑ in AD: - ↑ in LRAD: - ↓ in AD: - ↓ in SRAD: - ↓LRAD:

↑Human Capital = ↑s Potential GDP in SRAS & LRAS - ↑SRAD: ↑Real GDP, ↓UE, ↑Ps - ↓SRAD: ↓Real GDP, ↑UE, ↓Ps - ↑SRAS: ↑Real GDP, ↓UE, ↓Ps - ↓SRAS: ↓Real GDP, ↑UE, ↑Ps, ↓Int rates (to stimulate supply) Both ↑AD & ↑AS: Real GDP↑. Price either ↑ or ↓ Both ↓AD & ↓AS: Real GDP↓. Price either ↑ or ↓ ↑AD & ↓AS: Prices↑, Real GDP either ↑ or ↓ ↓AD & ↑AS: Prices↓, Real GDP either ↑ or ↓ - ↑s VSAS: Perfectly elastic (horizontal). Firms adjust output (w/o changing Ps) by adjusting labor hours & use PP&E. Input & output Ps are fixed. SRAS: Slopes upwards bc output Ps change as production ↑s or ↓s. Input Ps are fixed. - Shifts that ↑ SRAS: Firms ↑ output/production as the result of: ↑s in labor productivity, currency appreciation (↓s cost of imports), when businesses expect ↑er future output Ps, ↓s in wages/input Ps (which ↓ production costs), + either ↓s in business taxes or ↑s in gov't subsidies. The opposite in any of these will ↓ SRAS. LRAS (Full Employment, Potential GDP): Perfectly inelastic (vertical). Input Ps (ie wages) change w/proportionally to Ps - Shifts that ↑ LRAS: ↑s in supply & quality of labor, ↑s in availability of natural resources, ↑sd stock in physical capital, Advances in tech. The opposite in any of these will ↓ LRAS. ↑ in SRAD: Moves above Full Employment GDP. The demand↑ creates upward pressure on Ps (an Inflationary Gap: diff b/w current GDP & Full Employment). Firms compete for employees (↑ing wages), raw materials & energy which shifts SRAS left, but Ps are still high. To get back to Full Employment GDP, the gov't steps in by: ↓ing gov't spending, ↓ing money supply growth rate and/or ↑ing taxes ↑ in LRAD: Only ↑Ps. Returns to full employment ( vertical). No effect on real GDP. ↓s in AD: Falls to left. Downward movement along SRAS. From ↓s in: the money supply growth rate, Gov't spending, house Ps, future economic growth expectations, &/or ↑ing taxes - ↓ in SRAD: Recessionary gap (Below Full Employment GDP). UE↑, workers compete for jobs, wages↓, ↓er output & ↓er P levels. To get back to Full Employment GDP, gov't uses expansionary fiscal or expansionary monetary policies. - ↓ in LRAD: Only ↓Ps. No effect on real GDP.

Explain: - Recognition lag: - Action lag: - Impact lag: - Effect of time lags: - Inflation effect from fiscal stimulus at & below full employment: - Stagflation: - Automatic stabilizers:

- Recognition lag: Time it takes to identify the need for fiscal policy change - Action lag: Time gov't takes to discuss, vote, & enact legislation - Impact lag: Time for policy change to have the intended effect Time Lags: Come from Action lag. They reduce Fiscal policy effectiveness. △s can to be destabilizing (vs stabilizing) if taken too long to implement. It might kick in right when economy is turning around, making things worse instead of better. Fiscal stimulus at Full Employment: ↑Inflation Fiscal stimulus below Full Employment bc of supply shortages: Creates inflation, not GDP growth. Supply shortages ↓SRAS, ↑Prices = Stagflation. - Ex of hindered usefulness of fiscal policy Gov't can help one, not both: Inflation or recession, high UE + high inflation or stagflation Stagflation: Stagnant economy operating at < Full Employment & w/ high inflation. From declining economic output combined w/ ↑sd Ps. Created if the ↓SRAS (due to fixing an inflationary gap) causes raw materials or energy Ps to ↑. - ↑s UE. Invest in commodities bc commodityP↑ w/ ↑inflation. - Supply shock: Sharp price↑, ↓SRAS (lower output) - Inflation: When monetary authorities keep ↑ing money supply to stimulate economy - If gov't ↑GDP to stimulate AD, it will ↑Ps & inflation - If gov't ↓AD to fight inflation, it will ↓Real GDP Automatic Stabilizers: Built in fiscal devices automatically triggered, w/o need for government action, to stabilize economic cycles. ↑s budget deficit during a recession (expansionary) & ↓s budget deficit during an economic boom (contractionary) Ex) Transfer pmts, personal/corporate tax - ↑Deficit during recessions & ↓deficits during expansions

Explain: - Aggregate demand curve: What is it? - Goods market in equilibrium: - Money market in equilibrium: - Aggregate demand curve movements: - Aggregate demand curve shifts: - Wealth effect: - Interest rate effect: - Real exchange rate effect:

AD Curve: Negative relationship b/w price & real output demanded. Inverse relationship b/w aggregate income & price. In ADSR, input prices are fixed. ↑Input prices ↓production. AD = C + I + G + netX - Goods market in equilibrium: Aggregate income = aggregate expenditure - Money market in equilibrium: Individuals & businesses hold the real money supply (nominal money supply adjusted for price). W/ ↓Prices: AD↓ & AS↑ AD Curve Movements: △s in Price Levels (wealth, interest & real exchange rate effects. All are downward sloping) - Wealth effect: How price level △s effect consumer purchasing. W/ low price levels, consumer real wealth↑ (can buy more) Purchasing power of nominal wealth↑ which ↑Demand (consumption↑) - Interest rate effect: Demand for money. When prices↑, consumers demand more money. Interest rates must ↑ to restore money market equilibrium, which ↓consumer spending & business investments. - Real exchange rate effect: How ↑domestic prices effects net exports. If domestic price↑, our goods real prices to foreigners↑, so exports↓. The real prices of foreign goods to us is now cheaper, so imports↑. - Net exports (low exp - high imprts) ↓AD at high prices AD Curve Shifts: = C + I + G + netX ~ ↑ in wealth ↑C, shifting it up ~ ↑ in expectations for economic growth ↑C (tomorrow will be better, so you don't save) ~ Capacity utilization, ↑I (when businesses reach capacity, investments fuel growth) ~ ↑ in tax rates ↓disposable income. ↓C. ~ ↑Gov't spending. G↑ ~ ↑ in money supply reduce real rates. ↑I & ↑C ~ Depreciation of currency. ↑NetX (Import↑, Export↓) ~ Growth of foreign GDP. ↑exports & ↑netX (if Italy gets richer, UK exports more to them)

Explain: - Average variable cost (AVC): - Fixed cost: - Shut down in the short run: - Shut down in the long run: - Stay in business in both short & long run? - Economies of scale: - Diseconomies of scale: - Price searchers: Economies & diseconomies of scale : - Short run cost curve: - Long run cost curve:

AVC: Costs that ↑ or ↓ depending on a company's production, sales volume, etc (employee costs, raw materials, shipping fees, etc) Fixed cost: Costs don't change w/ an↑ or ↓ in amount of goods/services produced or sold (ie rent) - SR cost curve: Some quantity factors are fixed (how big the company is, ie scalability) - LR cost curve: All input quantities are variable - SR Shutdown: If AR is < AVC - LR Shutdown: If AR is > AVC. In SR: Continue operating, even w/ losses In LR: Shut down, if AR is < ATC - Stay in business in SR & LR: If P > AVC. AVC is the breakeven point (output is sold for more than VCs) - Economies of Scale: As a company grows, their ATC↓. The more you produce, the lower your cost. Results: Labor specialization, discounts on inputs - Diseconomies of Scale: ATC continues to rise Results from: bureaucracy, rising input costs - LR economic profits are possible: W/ high barriers to entry like monopoly & oligopoly

How is GDP effected in: - Expansion cycle: - Peak cycle: - Contraction cycle: - Trough cycle: Explain: - Inflationary phase: - Full employment: - Beginning of contraction: - Top of economic cycle: - Leading factors: - Lagging factors: - Coincident factors: - Credit cycle:

Business Peak (Real GDP stops ↑ing & starts ↓ing) is the start of decline into a contraction/recession → begins declining into contraction (Real GDP & inflation are both ↓ing) → ending of contraction/recession into trough → in trough (Real GDP stops ↓ing & starts ↑ing again) while expansion is just starting → begin moving up into expansion (Real GDP is ↑ing) → moving up towards top of expansion which is the business peak → Cycle starts over At Peak of Business Cycle & Beginning of Contraction: Inventory to sales ratio is high bc demand falls, sales begin to slow, & inventory builds up. Firms slow production & reduce output, decreasing their utilization of labor & capital. When sales trends persist, then firms adjust their labor & physical capital over time. At bottom of contraction/recession & declining into trough: Sales start picking up again & our inventory is drawn down. Firms must increase production (but slow to makes changes) & start more intensely utilizing their current labor & capital, until trends persist. In trough/starting up into expansion: Economic growth becomes positive again & inflation is moderate. But, employment growth doesn't start increasing again until the expansion is in full hold. Firms are slow to hire/fire & slow to increase/decrease capital. Slow to make changes (in case the economy turns out not to be so bad) bc frequent adjustments are costly. When sales trends persist, then firms adjust labor & physical capital over time Leading Indicators: △s direction before Peaks/Troughs: - Manufacturing hours & new orders - Building Permits: Builders get in anticipation of an expansion - Consumer expectations, △s in UE claims - S&P 500 equity index, Credit index, 10yr treasury to fed interest rate spread Lagging Indicators: △s after Expansions/Contractions are already underway: - Inventory to sales ratio, Commercial/industrial loans - Consumer price index △s, Consumer debt to income ratio; Labor cost △s, avg lending rate - UE Rate/Duration: Bc more discouraged workers begin seeking work than new jobs available, ↑ing UE. Also, high costs to employers of frequently hiring or firing employees causes lag. Coincident Indicators: When GDP Peaks /Troughs - Real personal income, Nonfarm payroll employees - Industrial production index; Manufacturing & trade sales Credit Cycle: Loose, widely available private credit (loans). - In expansion: Low interest rates & easy to borrow - In contraction: Economy is slowing. Harder to borrow & high interest rates. Credit cycle peaks before a recession, creating bubbles. Historically, contractions are longer lasting when coincided w/ credit cycles. But, credit cycles don't always coincide w/ economic cycles & have been longer in duration than business cycles.

Explain: - What CPI measure: - CPI overstates: - CPI (Paasche): Formula? What does this reduce? - CPI (Laspeyres): Formula? What country uses this? - Fisher index:

CPI: Avg cost for a basket of goods & services, representing urban houseful purchasing patterns - △s in CPI: Measure inflation, but CPI overstates true inflation bc it doesn't account structural △s like consumer shifts to lower priced goods, product substitutes, new goods replace old, Price↑ due to product quality improvements CPI (Laspeyres): US inflation measures = (Base year basket at current year prices) / (Base year basket at base year prices) x 100 - Laspeyres price index tends to overstate the inflation rate because it uses fixed market basket weights from a base period CPI (Paasche): Reduces substitution bias = (Current year basket at current prices ) / (Current year basket at base year prices) x 100 Fisher index: Geometric mean of Laspeyres & Paasche indexes

Explain: - 4 capital restriction objectives: - BOP Current account: - BOP Capital account: - BOP Financial account:

Capital Restrictions: When a country stops the flow of financial capital into its country. Decreases economic welfare. Capital Restriction objectives: - Reduces volatility of domestic asset prices due to large inflows and outflows of capital - Maintains exchange rate target while using monetary & fiscal policy for domestic goals - Keeps domestic interest rates low by restricting capital outflows to higher yielding foreign investments - Protects strategic industries from foreign ownership BOP Current Account: Think "goods & services" Similar to IS: - Merchandise: Raw materials, manufactured goods/commodities bought, sold or given away - Services: Tourism, transportation, business, patents/copyrights fees - Income receipts: Foreign divs & interest - Unilateral/One way transfers of assets: Money received from those working abroad & foreign aid BOP Capital Account: Think "physical/intangible assets" - Capital transfers: Debt forgiveness, Gift/Inheritance tax, Death duties - Bought/sold not produced assets, Fixed/Intangible assets, Natural resources, Non financial assets, Goods/Financial assets brought into/taken from country BOP Financial Account: Think "financial assets" - Gov't owned assets abroad: Gold, Foreign currencies/securities, IMF reserves, Long term assets, Direct foreign investment, Foreign bank claims, Foreign owned domestic financial assets

Explain: - Central banks: - Central bank goals: - Central banks expansionary: - Central banks contractionary: - At low market interest rates: - At high market interest rates: - Transaction demand: - Precautionary demand: - Speculative demand: - Open market operations: - Quantitative easing: - Inflation targeting: - Real price:

Central banks: Controls the money supply & conducts monetary policy. Two objectives are control inflation (target of 2-3%) & promote price stability. Federal Reserves is US Central Bank. - Other Central Bank Goals: Maintain Full employment, stable exchange rates, moderate LT int rates & sustainable economic growth (labor & productivity growth) Expansionary Monetary Policy: CB ↑s the Q of money & credit in the economy by ↑ing the money supply. CB puts cash into the market by buying securities from member banks. - ↑s AD, ↑s Real GDP, ↑s Employment, ↑s Inflation - ↓s ST & LT int rates - ↑s Business investments & Consumer purchasing - ↑s exports bc our domestic currency depreciates - Interbank lending rate (fed funds rate) ↓s bc banks are more willing to lend their reserves - Asset Ps ↑ bc of ↓er rates used to value assets - Citizens expect CB to continue ↓ing int rates - Expansionary = ↓s required reserve ratio which ↑s the money supply Contractionary Monetary Policy: CB ↓s the Q of money & credit in the economy by ↓ing the money supply. CB sells their securities to member banks which ↓s member banks' reserves - Contractionary: ↑s Required reserve ratio which ↓s money supply (banks must hold more money & loan less) Inflation targeting policy CB Qualities: - Independence: Free from political interference. CB independently decides the policy rate & defines how inflation is computed (operational independence), and sets the target inflation level (target independence) - Credibility: To be effective & maintain the public's trust, CB should follow through on their statements - Transparency: Aids to CB's credibility. CB's disclose the state of the economy by issuing inflation reports. Inflation targeting: Specifying inflation rate strategy & adjusting monetary policy to achieve that rate. Target band of 1% - 3% (2% inflation rate target w/ permitted deviations of +/- 1 ). Most used CB tool, but it doesn't address current inflation, but instead the inflation two years in the future. Pegging: Monetary authorities choose their currency's exchange rate w/ that of another country (let's say USD). When their currency appreciates, they sell reserves for USD, which ↓s their exchange rate. - For LT exchange rate stability, int rates & economic activity must be managed, ↑ing their volatility of their money supply & int rates. - The pegging country's policy makes their inflation rate equal to the pegged country's inflation rate. n conclusion, pegging stabilizes exchange rates b/w countries. Exchange Rate Targeting: CB chooses a target ForEx rate b/w their currency & another. CB then actively manages their currency's ForEx rate by buying or selling domestic currency above or below their target ForEx rate. Used by developed countries instead of inflation targeting. - CB must use monetary policies & int rates consistent w/ making their inflation rate equal to the target country's inflation rate, despite their domestic country's economic conditions (CB can't react) Demand for Money: Why households/firms hold money: - Transaction demand: Money held to meet the need to undertake transactions. Determined by level of economic activity. As ↑Real GDP , Transactions↑ & the money demand to carry out transactions↑ - Precautionary demand: Money held for unforeseen future needs. ↑s w/ the size of the economy - Speculative demand: Money held to take advantage of future investment opportunities. Inversely related to returns in the market currently & positively related to perceived risk. Relationship b/w ST int rates & demand for money: - At low int rates: Speculative demand ↑s. Consumers sell their int bearing securities in order to hold/save more money. - At high int rates: Speculative demand ↓s bc the opportunity cost of holding money ↑s. Consumers switch from holding to buying int bearing securities. Quantitative easing: In response to the 2008 financial crisis, CB started buying a range of securities through open market operations to introduce new money into the money supply & stimulate the economy Real price: Your currency compared to others.

Explain: - Concentration measures: - N-firm concentration ratio: Lower vs higher ratio? - Herfindahl-Hirschman Index (HHI): - Gross Domestic Product (GDP): - Everything included in GDP: - GDP vs GNP:

Concentration measures: Indicate market power. Used as alternative to estimating elasticity of demand. N-firm Concentration Ratio: Sum of market shares (% of sales) of N largest firms in an industry. Simple, but it ignores barriers to entry & mergers. Concentration measure. - Lower ratios: Competitive market. - Higher ratio: Oligopoly. Herfindahl-Hirschman Index: Concentration measure. Sum of squares of market shares of N largest firms in an industry. Sensitive to mergers (unlike N-firm) Widely used by regulators. - Limitations: Ignores barriers to entry & demand elasticity GDP: Market value of all final goods & services produced in a country/economy - Produced during a period. ie this quarter's GDP - Only goods valued in the market - Only Final goods & services only (not intermediate goods like steel. Steel is used to create final goods like a washing machine) - Rental value for owner occupied housing - Gov't services at cost (roads, police). Not transfers (social security payments, UE benefits) GDP: Total value of goods and services produced within a country's borders. Includes capital owned by foreigners & foreigner earnings working in the country GNP: total value of goods & services produced by a country's citizens & their capital. Includes earning of citizens working abroad & earnings on citizens' capital outside the country. Doesn't include any foreigners within your country. - Ex) From UK & work in the US. Your income will be counted towards America's GDP, but towards UK's GNP

Explain: - Countries w/o sovereign currency: - Countries w/ sovereign currency: - Dollarization: - Crawling peg: - Active crawling peg: - Passive crawling peg: - Managed floating: - Independent floating: - Target zone: - Conventional fixed peg: - Currency board: - Pegging a currency outcome:

Countries w/o Sovereign Currency: - Dollarization: Adopts another country's currency as your own - Monetary union: Downside: country can't have its own monetary policy Countries w/ Sovereign Currency: - Crawling Peg: Central Bank targets exchange rate for home country, relative to another currency & adjusts periodically for inflation - Active Crawling Peg: Exchange rate adjustments are announced & implemented over time - Passive Crawling Peg: Market guides exchange rates - Managed Floating: Monetary authorities directly or indirectly influence exchange rates - Independent Floating: Market determines exchange rate - Target Zone: Conventional fixed peg w/ wider range. The permitted currency fluctuation relative to another Conventional Fixed Peg: Country's home currency is pegged w/ tight band (+/- 1%) relative to another currency. Rates maintained through direct (buying/selling currency in market) or indirect (monetary policy △s) intervention Currency Board: Commitment to exchange domestic currency at a fixed rate for foreign currency

Explain: - How economic welfare improved & set up: - Trading blocs: - Free trade area (FTA): - Custom union (CU): - Common market (CM): - Economic union: - Monetary union:

Economic Welfare: Decreased from capital restrictions. Improved by reducing or eliminating trade restrictions. Set up through trading blocs, common markets & economic unions Trading Blocs: One ways economic welfare is set up. Includes: Trading blocs are everything below. Free Trade Area (FTA): Removes all barriers to imports & exports of goods & services among member countries. Free movement/flow of goods & services (imported & exported). Ex) NAFTA Customs Union (CU): FTA + All countries adopt a common set of trade restrictions/policy w/ non members. Free movement of production factors w/ members. Common Market (CM): FTA + CU + Removes all barriers to movement of labor & capital goods amongst member countries Economic Union: FTA + CU + CM + Member countries establish common institutions & economic policy for the union. Monetary Union: FTA + CU + CM + Member countries adopt a single common currency

Explain: - Elastic vs inelastic demand: - Unitary elasticity: - Slope: - Price elasticity of demand (PED): Both formulas - Slope coefficient of -90: - Cross price elasticity: Formula? - Cross price elasticity > or < 0 means: - ↑Price of related good = ↑Qd of good: - ↑Price of a related good = ↓Qd of a good: - Income elasticity: Formula - Normal vs inferior good: - Income effect vs substitution effect: - Giffen good vs Veblen good:

Elastic: Qd is very responsive to %△s in price. Absolute value of elasticity > 1 ; Price↑, ↓total revenue Inelastic: Qd isn't effected by %△s in price. Absolute value of elasticity < 1 ; Price↑, ↑Revenue Unitary Elasticity: (is - 1) Revenue maximizing point. Straight demand curve. TR is maximized. As price↑, we move towards elastic region (%↓Qd > %↑P = ↓TR). A ↓P moves us into inelastic region (%↓P > %↑Qd = ↓TR) Slope: Dependent upon units of price & quantity (units of measurement). Price demand slope ≠ Price elasticity Price Elasticity of Demand: PED = (△Qd / △P) x (Pₑ/Qₑ) or = [P / Qd x Slope coefficient] Slope coefficient = △P / △Qd) Qd = a + slope coefficient(Price) ; Yᵢ = b₀ + b₁(Xᵢ) Ex) Given slope coefficient of -90. Interpretation: Every time price↑ by 1, Qd↓ by 90 Cross Price Elasticity: %△Qd of a good in response to %△Price of a related good Formula = (△Qd /△P other good)•(Pₑother good /Qdₑ) - Substitutes: ↑Price of a related good causes ↑Qd of good. If answer is > 0: Substitutes - Compliments: ↑Price of a related good causes ↓Qd good. If answer is < 0: Complements Income Elasticity: %△Qd / %△Income Formula = (△Qd / △Income)•(Income / Qe) or (Icurrent / QDcurrent) • Slope coefficient - Normal good: I↑ leads to ↑Qd. Elasticity > 0. Pos - Inferior good: I↑ leads to ↓Qd. Elasticity < 0. Neg Ex) Bus travel: W/ more money, you stop riding the bus Income Effect: P↓ of good, ↑Qd. W/ lower prices, you have more money to spend (extra income) - Positive for a normal good & negative for an inferior good - Normal goods: When P↓ the Qd↑ (due to both Substitution & Income Effect) - Inferior goods: When P↓ the Qd↑ bc Substitution Effect outweighs Income Effect, except for Giffen goods (as P↓ the Qd↓ bc Income Effect (ie is neg & > sub which is always pos for P↓s) outweighs Substitution Effect) Substitution Effect: When the P↓, the Substitution Effect always ↑ consumption of that good (is always positive) - When P ↓, Qd always ↑. Consumers purchase more of that good & less of others - Giffen good: Inferior good. Low income, poverty good (white bread). P↑ = ↑Qd. Income↑ = ↓Qd. Positively sloped demand curve. - Veblen good: Normal good. Luxury, high end good. Income↑ = ↑Qd. Positively sloped demand curve.

Explain: - Base currency vs price currency: - Increase in real exchange rate for JPY/EU: - Forward quote > Spot price outcome: - Forward quote < Spot price: outcome: - Foreign interest rate > Domestic interest rate:

Ex) 0.5440 GBP/USD: It takes 0.5440€. to buy $1 USD Price currency: 1st one. Domestic currency. It takes X of my country's currency to buy 1 of another currency - Direct quote: Domestic investor's point of view Base currency: 2nd one. Foreign currency - Indirect quote: Foreign investor's point of view Increase in real exchange rate for JPY/EUR means: JPY depreciated Forward quote > Spot: Positive forward quote/points - Base currency: Trades at forward premium, base demand↑ - Price currency: Trades forward discount, price currency interest rates↑ more than base Forward quote < Spot price: - Base currency: Trading at forward discount (forward quote is negative) - Price currency is trading at forward premium Foreign interest rate > Domestic interest rate: Base currency will depreciate. Price currency will appreciate.

Explain: - Fiscal multiplier: How it works - Marginal propensity to consume (MPC): - Ricardian equivalence: - When does Ricardian equivalence theory not hold: - Crowding out effect: - Budget deficit reasons of concern: - Budget deficit reasons not to be concerned:

Fiscal Multiplier: Determines the potential ↑ in AD to due to an ↑ in Gov't spending. Inversely related to the tax rate (↑er tax rate, ↓er multiplier) & directly related MPC (↑er MPC, ↑er the multiplier) = { 1 /[ 1 - MPC(1-T)]} - marginal propensity to consume (MPC) = The portion of each dollar a consumer will actually spend Balanced Budget Multiplier: To balance the budget (when tax revs = gov't expenditures), gov't ↑s taxes to offset their ↑ in spending. - Ex) MPC is 80%. Gov't ↑s spending by $100B & then finance/offset it by ↑ing taxes by $100B = Balanced budget. This reduces MPC by only 80% (consumption is hit by $80B, not full $100B). - $100B↑ in spending & taxes = Positive balanced budget, ↑consumption. MPC quantifies ↑s in consumer spending, compared to savings, from ↑s income Ricardian Equivalence: ↑s in Gov't spending (ie financed from issuing debt) to stimulate the economy is not effective. Result: Consumers will save more bc they anticipate higher future taxes.The AD↑ from ↑Gov't spending cancel each other out, causing no effect on AD. - Ricardian Theory doesn't t hold: If ↑Gov't spending (funded from issuing debt) ↑Spending & ↑AD bc consumers underestimate future taxes. Budget Deficit Concerns: - Higher future taxes ↓GDP growth - Crowding out effect: Gov't borrowing ↑interest rates which ↓private investments (hinders usefulness of fiscal policy) - Money creation ↑inflation - Debt is risky. If interest rates↑, the country default or expand money supply, causing inflation Budget Deficit: Don't Be Concerned: - Debt is owned internally by its citizens - If money is used to finance capital investment, it'll ↑future GDP - If Ricardian equivalence holds, deficit don't matter - Spending ↓UE

Explain: - Headline inflation: - Core inflation: - Hedonic pricing: - Chained weighted price index: - Cost push inflation: - Demand pull inflation: - Hyperinflation: - Disinflation: - Deflation: What's present in this economy? - Recessionary gap: - Inflationary gap:

Headline Inflation: Price index includes all goods & services. Change in CPI. Core Inflation: Price index includes all goods, but excludes volatile goods (food & energy) Hedonic Pricing: Adjusts price index for improvements in quality of goods. Chain weighted price index: Adjusts for substitution bias. Ex) Fischer index which is the geometric mean of Laspeyres index & Paasche index Cost (wage) push inflation: AS ↓s due to an ↑ in production Ps (such ↑s as raw materials, labor/wages, input Ps, & energy) causing P levels to ↑. Output is reduced to below Full GDP. Demand pull inflation: AD is ↑sd due to persistent ↑s in the money supply, exports, gov't spending. When Central Banks ↑ the money supply (↑ing AD) w/o there being a change in AS, output & Ps will ↑, which causes GDP to ↑ above Full Employment. - Outcome: UE ↓s below its natural rate & wage pressure ↑s, causing a ↓ in SRAS. - Demand Pull will continue until the Central Bank ↓s the money supply growth rate. Wage pressure reflects employees' inflation expectations. When employees expect inflation, they demand ↑er wages. Hyperinflation: Inflation that accelerates out of control Disinflation: Inflation rate ↓ over time, but remains > 0. Ie Inflation rate is ↓, but prices are still ↑ Deflation: Constant decline in prices. Negative inflation rate. 0% inflation leads to deflation. - Liquidity trap condition: In deflation economy, people hold high money balances w/ no ↓ in short term rates, making money balance real returns positive Recessionary gap: Real GDP is below Full Employment Inflationary gap: Real GDP above Full Employment ; Output level > LRAS

Explain: - Income approach formula: - Expenditures approach: Formula? - Value of final output method: - Sum of value added method: - Statistical discrepancy: - Fundamental relationship formula: - Trade surplus: - Capital vs current account: Which creates surplus & deficit? - Gov't deficit: - NetX: - Surplus: - What is done w/ savings: - Trade deficit: - Budget deficit: - Relationship b/w saving, investment & the trade deficit can be expressed as: - Capital consumption allowance: - National income: - Personal income: - Quantity theory of money:

Income Approach: Earnings of all households + Businesses + Gov't Expenditures Approach: GDP = C + I + G + (X - M) - Value of final output method: Sum of all final goods & services produced in an economy. - Sum of value added method: Sums increase in value added at each stage of the production & distribution process - Both methods calculate GDP based on expenditures. Except for a statistical discrepancy, the Income & Expenditure approaches to calculating GDP result in the same value of economic output. Statistical Discrepancy: Adjusting GDP in income approach to accounts for data differences used when calculating GDP w/ Expenditure Approach. Trade Balance = (X - M) = (S - I) + (G - T) Trade surplus: Exports > Imports Positive net exports. (X - M) is pos #. When Private savings + Gov't surplus > Investments BOP Financial Account: Gov't-owned assets abroad. - Includes Foreign (F): F currencies, F securities & F direct investments, claims against F banks. Also gold & reserve position in IMF, credits & LT assets. (not direct F aid, it's in Current Account) - F-owned assets includes Domestic (D): D Gov't & corporate securities, D direct investment, D currency & D liabilities to foreigners reported by domestic banks. BOP Capital Account: Flow of money b/w a nation & its foreign partners. Non-financial assets & capital transfers. - Capital transfers includes goods/financial assets migrants bring/take to/from a country, gift/inheritance taxes, death duties, debt forgiveness. Also fixed asset (FA) title transfer, purch/sale FA funds, FA uninsured damage - Bought/Sold non-financial asset: Includes leases & the rights to natural resources & intangible assets - Capital Account Deficit: When Exports > Imports ; (X-M is pos # so there's a gov't budget surplus). From a Current Account (Trade) Surplus (X-M is pos #) - Capital Account Surplus: When Imports > Exports; (X-M is neg # ie gov't budget deficit): The inflow of foreign investment/capital (from a current account trade deficit) into a country as the result of their gov't borrowing (which creates a budget deficit) BOP Current Account: The actual transactions (imports & exports) b/w a nation & their foreign partners - Merchandise (Raw materials, manufactured goods bought/sold) & Services (tourism, transportation, business, patents/copyrights fees) - Income receipts (foreign divs & debt securities int) - Unilateral/One way transfers of assets: Money received from those working abroad & foreign aid - Current Account (Trade) Surplus: When Exports > Imports; (X-M is pos #): Offset by purchasing physical or financial assets from foreign countries (creating a Capital Account Deficit ie gov't budget surplus) - Current Account (Trade) Deficit: When Imports > Exports; (X-M is neg #): When domestic capital investment (I) is > combined gov't & private savings, it must be offset by selling assets or incurring debt to foreign entities. So the deficit is financed by foreign borrowing (which flows into the capital account as a surplus, ie gov't budget deficit) Trade deficits are ↑sd by: Low private saving, ↑Gov't deficits (G-T is pos #, T-G is neg #), or high investments in domestic capital (as I ↑s, X-M ↓s) (X - M) = Private Savings + Gov't Savings - Investment (X - M) = [S + (T-G) - I] or [S - (G-T) - I] - Gov't Savings = pos # for (T-G) or neg # for (G-T) - Balance of trade (X-M) is improves by: ↑s in savings, - Trade Deficit is due to: ↓Private savings or a ↓gov't savings (causing a gov't budget deficit) - Any deficit in the current account, must be made up from a surplus in the combined capital accounts NetX = (X - M) = Shows strength of currency. If your currency is depreciating, your export↑ & import↓ Surplus: Rev > Spending; (G - T) ; Gov't spends < they earn from tax rev Savings are: Invested or fund gov't deficit & trade surplus, when both exist; S = I + (G - T) + (X - M) Trade deficit: Imports > Exports. (X - M) is neg #. When (Private savings - Investments) < Budget deficit Budget deficit: Gov't spends more than they collect in tax revenue. Negative net exports; Imports > Exports - For Budget Deficit to ↑, there must be a: ↓Net exports or ↑Private savings or ↓Private investments Capital consumption allowance: Replaces worn out physical capital. Estimates depreciation during the period. GDP in Income Approach: National income capital consumption allowance, & a statistical adjustment for differences from the expenditure approach National Income: Sum of all income earned by factors of production going into the creation of final output. - Employees wages & benefits + Interest + Corporate/gov't profits pretax + Unincorporated business owners' income + Rent + Indirect business taxes - subsidies Personal Income: All pretax income received by a household (National income) + Transfer payments - Business (income) taxes - Undistributed corporate profits Quantity theory of money: Nominal GDP = Money Supply × Velocity = Price × Real Output Money × Velocity = Money Supply × Velocity in the SR we affect real output & price levels in the LR we get back LR AS (full employment, GDP) & the only thing that's affected is price Growing the money supply can stimulate the economy in the SR, but not in the LR. In the LR, money supply growth doesn't affect real variables, it only affects nominal/monetary variables

Explain: - International monetary fund (IMF): - World bank: - World Trade Organization (WTO): - What World Bank & IMF both do: - What WTO & IMF both do:

International Monetary Fund: - Promotes international monetary cooperation - Facilitates the expansion & balanced growth of international trade - Promotes exchange rate stability - Assists in establishing multilateral system of payments - Offers resources to members w/ temporary BOP difficulties World Bank: - Fight poverty - Development & assistance to other member nations World Trade Organization: - Enforces global rules of trade - Ensures trade flows smoothly & freely - Disputes settlement process - Multilateral trading system agreements World Bank & IMF both: Provide funds to member nations, World Bank for development & IMF when member nations experience BOP difficulties WTO & IMF both: Work to expand international trade

Explain: - International trade benefits & costs: - Ricardian model: - Heckscher-Ohlin model: - Absolute factor: - Comparative advantage: - Comparative advantage outcome:

International trade: - Benefits: Lower cost to consumers of imports. Higher employment, wages & profits in export industries - Costs: Displacement of workers. Lost profits in industries competing w/ imported goods Ricardian Model: Labor is the only factor of production. (Ricardo is one name, ie one factor). The diffs in labor productivity are due to diffs in tech are the reason for diff production costs. Country w/ highest labor productivity has comparative advantage Heckscher-Ohlin Model: Two factors of production: Capital & Labor (Two names, two factors). Export what you most efficiently & plentifully produce. Country w/ the more abundant factor has comparative advantage. Absolute Advantage: Producing a good only bc you can at a lower cost vs another country Comparative Advantage: Produce the good w/ the lowest opportunity cost vs another good - Trade make all countries better despite absolute advantage. Specialize & produce goods w/ comparative advantage. Then trades w/ other countries - Outcome: ↑Worldwide output & wealth. No country is worse off

Explain: - Diminishing marginal returns: - Economic cost: - Opportuntiy cost: - Economic profit: - Total revenue (TR): Formula - Accounting profit: What does it cover? - Maximum economic profit is when: - Breakeven point is when: - Normal profit is: - Marginal cost: - Marginal revenue: - Marginal product:

Law of diminishing (marginal) returns: Output↑ at a ↓rate from each added unit/factor (labor, capital, etc). In SR: Quantity↑ & costs↑ at an increasing rate. In LR: Output↑ at a ↓rate. Economic cost: Total opportunity costs of all the production factors Opportunity cost: Cost from foregoing alternative Economic profit: Total rev - total economic costs (P > ATC) Total revenue = Price x Quantity Breakeven point: Quantity where TR = TC, Price = ATC Normal profit: Zero economic profit Formulas for Econ: - ATC is the same as Avg Cost - Economic Profit = [(P - ATC)⋅Q] - At a profit maximizing Price: MR = MC - MR = P⋅[1 - (1/Ped)] Accounting profit: Implicit costs only = TR - total accounting costs Producing where MC = MR, Maximizes economic profits (not reve) for all firms (monopoly, perfect competition, oligopoly & monopolistic) - Marginal cost: Cost of producing an additional unit - Marginal revenue: The increase in revenue from selling one additional unit - Marginal benefit: Maximum amount consumers will pay for an additional good or service. - Marginal product: The increase in output from producing one additional unit

Explain these trade restrictions: - Tariff: - Quota: - Export subsidies: - Minimum domestic content: - Voluntary export restraint (VER): - Trade restriction goals: - Dumping:

Minimum domestic content: Required amount that must be domestically sourced Trade restrictions goals: Project domestic jobs & domestic industries. Dumping: Country w/ excess supply (can't sell goods at any price) domestically dumps them on another country

Explain: - Monetary policy: - Fiscal policy: - Money multiplier formula: - Total money amount that can be created formula: - Money supply maximum↑ from new excess reserves formula: - Fisher effect formula: - Risk premium: - Structural budget deficit:

Monetary Policy: The Central Bank's actions that affect the quantity of money & credit to influence economic activity. Monetary controls the money supply& interest rates. Fiscal Policy: Govt's use of spending & taxing to meet macro goals. A budget is balanced when tax revs = gov't expenditures. - Fiscal Policy objectives: Influencing levels of economic activity & AD and Allocating resources & redistributing wealth 3 Functions of Money: Medium of exchange (means of pmt), Unit of account (all goods & services are expressed in units of money) & Store of value (money received can be saved to use later) Narrow Money: Amount of notes (currency) & coins in the economy plus checking account balances Broad Money: Includes all narrow money + liquid assets Fractional Reserve Banking: Bank holds a required minimum % of their deposits in reserve (% rarely changes). The excess reserves are loaned out to earn interest (originally, promissory notes were the medium of exchange, but later bankers realized all deposits would never be withdrawn at the same time) Bank 1 has $1K in excess reserves w/ a required reserve ratio of 25%. It can lend 75% ($750) to Bank 2. Bank 2 can lend $563 (.75 x $750) of that excess reserve to Bank 3, & so on. - Total amount of money that can be created = (New deposit / Required reserve %) - W/ a 25% deposit held as reserves, the original $1K deposit can create deposits 4x. Money multiplier = (1 / Required reserve %) - Money supply maximum↑ from new excess reserves = (1 / Reserve requirement)•(New excess amount) Fisher Effect: Says (nominal) int rate is (real int rate + expected inflation). Real int rates are stable over time. Therefore △s in rates are driven by △s in expected inflation (consistent w/ money neutrality) - Rf Nominal int rate = Real int rate + Expected Inflation + Risk premium Policy Rate (Interbank Lending Rate): The int rate CB charges other banks to borrow reserves. Key to monetary authorities. The rate at which other banks can borrow is the discount rate. Monetary authorities use Δs in the policy rate to effect ST int rates, asset values, currency exchange rates & consumer expectations. - Federal Funds Rate: The interest rate that banks charge each other for ST loans of reserves (thru repo agreements). US Fed sets this rate. Open Market Operations: To regulate the money supply (outside of the policy rate), the Central Bank buys & sells securities through open market operations. Most often used & helps achieve the federal funds target rate. Contraction (Recession) Cycle: Policy rate > Neutral rate. Real GDP < Potential Real GDP. Trough Cycle: Real GDP stops ↓ing & starts ↑ing again Expansion Cycle: Policy rate < Neutral rate. Real GDP is ↑ing (Business) Peak Cycle: Real GDP stops ↑ing & starts ↓ing Inflationary Phase: Real GDP > Potential Real GDP Full Employment: Real GDP = Potential Real GDP (Real) Trend Rate: Economy's LT sustainable real growth rate. Not observable & must be estimated. Neutral Interest Rate: The growth rate of the money supply that neither ↑s or ↓s economic growth. It's the int rate that supports Full Employment, while keeping inflation constant. - Policy Rate > Neutral Rate: Contractionary Monetary policy - Policy Rate < Neutral Rate: Expansionary Monetary policy - ↑Policy Rate: ↓Bank lending, ↓Money supply, ↓Domestic inflation, ↓Prices - ↓Policy Rate,: ↑Bank lending, ↑Money supply, ↑Prices, ↑AD. ↑Net exports Structural (Cyclically Adjusted) Budget Deficit: Indicator of fiscal policy. The deficit that would occur if the economy was at full employment

All About Monopolistic: - Monopolistic: - Where do they produce: - Competition efficiency: - In common w/ oligopoly & monopoly: Explain: - Sell side participants: - Buy side participants:

Monopolistic: Ex) Toothpaste - Many firms. Each firm has a small market share - Low barriers to entry. - Compete on price, marketing, quality, & features. Collusion is not possible. - Some price power (from brand loyalty). Not all units sell for the same P. - Dc is quite elastic bc the products look like close substitutes, even tho they're differentiated (like toothpaste) - Price searchers: P determined by downward sloping Dc (P is > MR), no well defined Sc & have imperfect info regarding the market - Less output & slightly ↑er Ps than perfect competition In monopolistic competition: - To maximize profits, firms produces were MR = MC, at maximizing output Q. (zero economic profit) - In SR: When D↑s, firms earn positive economic profits bc P exceeds ATC. But, due to low barriers of entry, new firms enter (at P > ATC) & ↑ supply until P = ATC again making LR economic profit zero Monopolistic competition efficiency - Brand names provide quality signals & brand awareness is big (Nike) - Product innovation& differentiation have value - Advertising gives customers valuable information - If high advertising expenditures increased sales enough, ATC & avg fixed costs decrease Sell Side Participants: Dealers (multinational banks) that originate transactions & contracts Buy Side Participants: Firms managing risk

All About Monopoly: - Monopoly: - If regulated: - If unregulated: - Marginal cost pricing: - Average cost pricing: - How is price determined: - Barriers to entry: - Single-price monopolist: - Price discriminator: - Natural monopoly:

Monopoly: 1-2 firms. - Very high barriers to entry: from Economies of scale (Huge start up costs, very low var costs & MC. The more you produce, the more your ATC↓s. Ex. Utilities or Natural monopoly), Government licensing & legal barriers (Patents), & Resources control - No good substitutes. - Competes on advertising - Significant pricing power - Regulated monopolies w/ large economies of scale are economically efficient (in theory) - Price searchers: P determined by downward sloping Dc (P is > MR), no well defined Sc & have imperfect info regarding the market To maximize profit, firms expand production until MC = MR, profit maximizing output Q. Monopolies gain economic profits by having P > ATC & keep it due to high barriers to entry. - Monopolies only care about maximizing profits (not P) & therefore never charge the ↑est possible P Unregulated monopolies must defend their position in the market in to continue earning economic profits Avg Cost Pricing (Efficient regulation): Regulators try setting P = ATC, by forcing monopolies to ↓ Ps until their ATC intersect w/ Market Dc. This ↑s output & allocative efficiency (social welfare), making economic profit zero. Marginal Cost Pricing : Regulators forces monopolies to ↓ P until it = MC, as a way of ↑ing output & maximizing surplus. But, if the firm's MC is < ATC, they'll require a subsidy to continue operating Two pricing strategies: - Single price monopolist: Charges everyone in market the same P. In order to sell more, the monopolist must reduce the P, making MR < P & MR is < Dc - Price discrimination: ↑s economic profit by charging different Ps to different customers. Seller identifies at least two customer groups, each w/ different P elasticities of demand & unable to resell the products. Then, ,monopolist charges the max P each consumer is willing to pay. This strategy ↑s economic efficiency bc they produce more overall, there's no dead weight loss (it's squeezed out) & no consumer surplus; entire surplus goes to producer. Ex) Adult & student ticket Ps at movie theatre

All About Perfect Competition: - Perfect competition: - Price takers: - Homogeneous products: - Barriers to entry: - Market's SR supply curve: - In LR, perfect competition: - Firm's SR supply curve: - Short run in perfect competition:

Perfect competition: Many firms - Very low barriers to entry & exit (can't sustain LR economic profits) - Homogenous products (perfect substitutes). Buyers perceive no diff b/w products) - Firms only compete on price - Firms are price takers meaning & faces a perfectly elastic (horizontal) Dc - No influence over price. No pricing power. Can only sell at the market price & will sell nothing if they charge more. Supply & demand determine the market price - In perfect comp only, MR is equivalent to P Market Supply Curve: The sum (Qs from all firms, at each price level) of each firms' MC curve (since we assume they're all identical) in the industry. - Bc firms' Dc is perfectly elastic, the market Sc is well defined. (vs the other structures having a downward sloping Dc for each firm) - Each firms' Sc is their MC curve that's above their AVC - When P > AVC: All costs are covered - When P < AVC: Can't cover FixedC or VariableC - When P is b/w AVC & ATC (AVC ≤ P < ATC): Can cover VariableC, but can't cover FixedC - When MR < MC, or output is above were MR = MC, economic loss. Scale back to MR = MC In equilibrium, to maximize profits, every firm produces Q for which P = MR = MC = ATC = AC. This just covers their ATC & ensures zero economic profits. - But, when D↑s, the market P ↑s. This creates a new equilibrium w/ ↑er Q & Ps (that firms will supply) causing SR market Sc to slope upwards right. - To keep maximizing profits, all firms must produce were MR = P = MC. So, they ↑ production which ↑s P to above ATC/AC. Bc of this, in the SR, firms make economic profits, but it doesn't last. New firms enter the market (at P > ATC), which ↑s supply, competing away all economic profits until P = ATC again

Explain: - Neoclassical (Solow) model: Formula? - Growth in per capita potential GDP: Formula? - Per capita growth in developed countries: - Per capita growth in less developed countries: - Neoclassical theory: - Keynesian theory: - New Keynesian theory: - Monetarist theory: - Austrian theory: - New classical theory:

Neoclassical (Solow) Growth Model: Potential GDP growth = Total factor productivity growth + Wc•(Capital growth) + Wl•(Labor growth) Wc = Weight in capital ; Wl = Weight in labor Weights are each factor's share of national income Per Capita Potential GDP Growth = Growth in tech + Wc(growth in capital to labor ratio) - In developed countries: Capital to labor ratio is already high so they rely on growth & tech advancements to increase the ratio - Less developed countries: Have a low capital-to-labor ratio. Have less money, so an increase in capital per worker majorly boosts output Business Cycle Theories: Neoclassicial: △s in tech cause cycles. Allow wages & prices to work themself out. Gov't shouldn't intervene. New Classical (Real business cycle): Applies utility theory & budget constraints to macroeconomics. Responses to external shocks from △s in tech cause cycles. Don't intervene or counteract. Let cycles happen. Keynesian: △s in business expectations cause cycles. We can't get back to full employment bc downward wages are sticky. Gov't must step in. Use fiscal/policy to stabilize economy back to full employment. ↑AD to combat recessions or ↓AD to combat inflation - New Keynesian: Is exactly the same, but says downward wages & input prices are sticky. Monetarist: Gov'ts inappropriate △s in money supply cause cycles. Messing w/ the supply causes problems. Policy: Steady, predictable money supply growth rate (Believes Keynesian dampens economic cycles) Austrian: Gov't intervention causes cycles. Don't force interest rates to artificially low levels

Explain: - Nominal GDP: - Real GDP: - Real output: - Potential GDP: - GDP deflator: Formula? - GDP deflator >100 & <100 meaning:

Nominal GDP: Sum of all current year goods/services at current year prices. Current Yr output at current Yr prices Real GDP: Sum of all current year goods/services at base year prices. Current year output at base year prices. Measures increased output b/w periods. Real output: Output quantity independent of price level Potential GDP: Full employment level. If everyone that can work does work, this is the quantity of goods & services our economy has the potential to produce GDP Deflator: Measures inflation. Removes the price change components of nominal GDP by converting nominal GDP into real GDP. GDP deflator = [Nominal GDP / Real GDP ] x 100 > 100 Prices↑. < 100 Prices↓. Deflation. Real GDP is > Nominal GDP

Explain: - Classic Marshall Lerner condition: Formula? - Elasticities approach in trade: - Absorption approach: - Absorption approach in long term: - J curve: - Normal outcome of currency depreciation: - How to restrict financial capital flow into a country: - Reason for capital restrictions pros & cons:

Normally, if domestic currency devalues, exports↑ & imports↓. Elasticity is % imports/exports will ↑or↓ Classic Marshall Lerner Condition: Domestic currency depreciation improves balance of trade. If domestic demand for imports & foreign demand for a country's exports are elastic enough currency depreciation: In SR: ↓ or ↑ trade deficit (J curve could happen) In LR: ↓Trade deficit, moving you towards surplus | Elasticity exports | + | Elasticity imports | > 1 Elasticities Approach: Only considers good flows. Ignores capital flows. Domestic currency depr leads to a greater reduction in a trade deficit when export/import demands are more elastic. Demand for luxury goods is elastic, while demand for goods w/o substitutes are inelastic, therefore exporting/importing luxury goods will reduce trade deficit more than something inelastic. - The greater the effects on balance of trade is from currency depreciation, depends on imports/exports demand elasticity. Demand elasticity moves your balance of payments from trade deficit towards surplus. Absorption Approach: Considers both capital flows & trade flows in domestic currency depr. Domestic currency depr is only a temporary improvement on a country's trade deficit. It will reverse. It will only improve balance of trade if it ↑domestic savings (i.e., ↑Nat'l income relative to expenditures). - Long term: Trade deficit improvements require fiscal deficit improvement or more domestic savings vs domestic investments J Curve (Elasticities Approach): Bc of existing contracts, export/import demand is inelastic. W/ domestic currency depr, the same imports now costs more & same exports are worth less. Appreciation of foreign currency will initially increase trade deficit, but will decrease the trade deficit in LR. - In SR: Currency devaluation ↑trade deficit - In LR: Improves/↓trade deficit. Elasticities increase (bc we end contracts, ↓Imports, ↑Exports) How to restrict financial capital into a country: - Outright prohibition - Punitive taxation (huge taxation at border) - Restrictions on repatriation (restricts sending money to home country) - Domestic country Pros: Short term benefit, reduces volatility of asset prices, protects industries, maintains fixed exchange rates & keeps interest rates low. - Domestic Country Cons: ↓Economic welfare & are isolated from global markets in LR

All about Oligopoly: - Oligopoly: - Collusion: How's it more successful? - Kinked demand curve: - Cournot model: What is market price here? - Stackelberg model: - Nash equilibrium:

Oligopoly: Few firms. - Price searchers: Downward sloping Dc, no well defined Sc & have imperfect info regarding the market - Good substitutes, but less elastic than monopolistic - Competes on price, marketing & features. Some to significant pricing power. - High barriers to entry. Large economies of scale. - Interdependence among competitors: One firm's decisions affects their competitors decisions) - Optimal pricing strategy depends on how other firms respond to output/pricing decisions (game theory) Oligopoly collusion: Firms fix industry output at monopoly quantities to avoid competitive prices & earn greater profits/share profits. Prices↑ & Output↓. - Firms can cheat to: ↑Profits by ↑ing output (ie agrees to one price, then sells at different price). This violates collusion agreement, but you earn higher profits. Collusion is more successful w/: Fewer firms, similar cost structures, homogeneous products, severe cheating retaliation, & little competition from firms outside the agreement Kinked Demand Curve: Competitors match P↓, but not P↑. Each firm believes at some P, demand is more elastic for a P↑ than for a P↓ Cournot (Duopoly) Model: 2 or 3 firms, w/ the same product, identical costs & simultaneous decision, agree to split the market equally & charge the same P (produce same Q). P is ↓er than monopoly, but ↑er than perfect competition Stackelberg Dominant Firm Model: One firm ("leader") has significant cost advantage over competitors & sets market price. Competitors base their price from leader's. Leader captures most of the market. Nash equilibrium: No choice makes any firm better off (↑profits, ↓losses). Firm choose whatever is best for them, regardless of competitors.

Explain: ↑AD & ↑AS: ↓AD & ↓AS: ↑AD & ↓AS: ↓AD & ↑AS: Formula for: - Potential GDP: - Potential GDP growth: - Output per worker: Explain: - Production function: - Total factor productivity: - Aggregate output:

Potential GDP (LRAS) = Hours worked x Labor productivity Potential GDP Growth = Growth in labor force + Growth in labor productivity Production Function Model/Approach: Relationship of output to size of labor force, capital stock & productivity. Economic output is the amount of labor & capital + productivity, which depends on available tech. - Physical capital exhibits diminishing marginal productivity. Needs tech. - Total Factor Productivity: Output growth not from ↑labor growth & ↑capital growth (advances in tech). Ie Real GDP growth in excess of both of these. - Aggregate Output: Country's economic output in response to their inputs of capital, labor & levels of productivity Output Per Worker (labor productivity) = A x f(K/L) A = Total factor productivity f = Some function of () (K/L) = Capital per worker Economic output can be stated as a production function of the form Y = A × ƒ(L, K), where Y is economic output, L is the size of the labor force, K is the amount of capital available, and A is total factor productivity.

Explain: - Spot exchange rate: - Forward contract: - Long term investors in forward contracts: - Given spot & forward %. Asked: Forward exchange rate? - Given spot & points. Asked: Forward exchange rate? - Given spot & forward quote in points. Asked Forward %

Spot Exchange Rate: Exchange rates for immediate delivery Forward contract: Agreement to buy/sell specific amount of foreign currency, on future date at the quoted forward exchange rate. - Long term investors: Don't use forward contracts. Short term investors do (arbitrageurs, hedgers, traders) Given spot & forward %. Forward exchange rate? = Spot (1 - forward quote w/ point rate) if the spot is 1.6135 then point is 0.0001 ex) Spot 1.6135 $/€. 90 day forward quote is -0.29%. 90 day forward = 1.6135 x (1 - 0.0029) = $1.6088 USD/€ Given spot & points. Asked: Forward exchange rate? = Spot + (Points given x Point rate) ex) Spot 1.3050 CHF/GBP. 180 day forward market is -42.5 points. What is the 180-day forward CHF/GBP exchange rate? 1.3050 - (42.5)(.0001) = 1.30075 Given spot & forward quote in points. Asked Forward % = (Points w/ point rate) / Spot Ex) Spot 1.6135 $/€. Forward quote is -47 points. % forward quote = -0.0047 / 1.6135 = -.0.0029 = -.0.29%

Explain: - A point (in spot rates: - Forward points: - Forward quote: - Cross rates: - Nominal exchange rate: - Real exchange rate: - Forward rate formula: - Forward discount/premium formula: - No arbitrage forward exchange formula

Spot to Forward Formula & Back: = [(X Days Forward Exchange RateP)/(SpotP)] - 1 = Forward quote/discount in % or points - Answer: If pos, base is a forward premium. If neg, base is forward discount ***Note: Move formula around to fit every question type Point: Last digit of the spot rate quote = Spot x Point - Ex) Spot is 1.4320. Point is 0.0001 Forward Points: Basis points added to or subtracted from the spot rate - Ex) Spot 1.4320 $/€. Forward quote + 22.1 points Forward = 1.4320 + 22.1(0.0001) = 1.43421 $/€ 8/11: ; 1.4320 + .00221 = 1.43421 $/€ Forward Quote: Future currency exchange rate Ex) Spot 0.7313 AUD/EUR. 120 day forward quote is -0.062%. What's the forward quote? - Forward = 0.7313 (1 - 0.00062) = 0.7308 AUD/EUR 8/11 ; 0.7313 (1 - 0.00062) = 0.7308 AUD/EUR Ex) Spot is 1.1 CAD/CHF. Forward is 1.2 CAD/CHF. Forward quote > Spot price, what's the forward quote? - Forward quote is a premium of 0.100 points (1.2 - 1.1). CAD is trading at forward discount to CHF CHF is trading at a forward premium Cross Rates: Set up quotes so the currency in common cross cancels out Nominal Exchange Rate: Current market price. The quoted rate at any point in time; Spot rate Real Exchange Rate: Nominal rate adjusted for each country's inflation, compared to a base period. Amount given up in our currency to buy in another country = (Nominal Rate)•(CPIbase,foreign)/(CPIprice,domestic) Forward Rate = (Price Currency / Base Currency) Forward Discount/Premium = (ForwardP/SpotP) - 1 ; Answer is in terms of the base currency. If positive, base is a forward premium. If neg, base is a forward discount. No Arbitrage (Arbitrage Free) Forward Rate = SpotR• [(1 + PriceR)/(1 + BaseR)] To Prevent Arbitrage = ExchangeR • [(1 + PriceR)/(1 + BaseR)]¹ᐟⁿ - For 180 day forward rate, N = 2. For 90 day, N = 4. Interest Rate Parity: Requires the currency with the higher interest rate to sell at a discount in the forward market.

Explain outcomes for Domestic Gov't, Foreign exporters, Domestic producers & Domestic consumers: - Tariff - Quota - Voluntary export restraint - Export subsidy

Tariff: Taxes on imported goods, collected by the domestic Gov't. Domestic Gov't gains from collecting tariff rev. Foreign exporters lose. Domestic producers gains. Domestic consumer loses. Quota: Restricts imports. Limits the quantity of imported goods allowed. Domestic producers gain & domestic consumers lose (from the increase in domestic P). - If import licenses (the right to export to the domestic country, granted their domestic gov't) are sold, the domestic Gov't gains rent quota rev. If Gov't doesn't charge rent quota, the foreign exporter gains (saves by not paying for import license). Quota Rent: Gains for foreign exporters, if they receive an import license under a quota, from the domestic Gov't, but the domestic Gov't didn't charge them for the import license. Voluntary Export Restraint: One country decides to limit their exports to another country (to avoid tariffs or quotas). Restricting exports. Foreign exporter & domestic producers gain. Domestic consumers lose. N/A for domestic Gov't Export subsidies: Pmts by domestic Gov't to their country's domestic exporters. Domestic Gov't loses due to subsidizing exports. Domestic producers gain. Domestic consumers lose. Domestic Gov't outcome from: - Tariff: Gains. Collects tariff rev - Quota: Gains if they collect rent quota. If they don't, rent quota gain goes to foreign exporter - VER: N/A - Export subsidy: Loses. Gov't is subsidizing exports Foreign Exporter's outcome from: - Tariff: Loses - Quota: Gains, if domestic gov't didn't set up rent quota - VER: Gains - Export subsidy: N/A Domestic Producers outcome: Gains in all 4 Domestic Consumers outcome: Loose in all 4.

Explain: - Unemployed: - UE rate formula: - Natural rate of UE: - Discouraged worker: - Labor force: - Participation ratio: - Frictional UE: - Structural UE: - Cyclical UE: - Underemployed UE:

Unemployed: Must be available for work & actively looking for a job UE Rate = # of unemployed / Labor force Natural UE Rate: Cyclical UE might be positive bc some sectors have trouble finding qualified workers, even during a contraction. Discouraged work: Not employed or seeking employment. Not counted in labor force. ↓UE rate bc they're no longer looking for work so they can't be counted in the labor force Labor force: All people of working age (16+) who are either employed or seeking employment (unemployed) Participation ration = Labor force / Working age population (> 16) Frictional UE: The time is takes employers & employees to find each other & start employment Structural UE: Long term △s in the economy, requiring workers to learn new skills to fill new jobs Cyclical UE: △s in economic growth or economic downturn. Equals zero at full employment Underemployed UE: Part time worker who prefers to be full time. Or employed at low paying job, despite being qualified for a higher paying one