ECON FINAL

Suppose that Bill, a resident of the U.S., buys software from a company in Japan. Explain why and in what directions this changes U.S. net exports and U.S. net capital outflow.

-Purchase is US import. Since Net Exports = Exports - Imports, net imports go down. US $ are used so Japan obtain more US assets. Increase of foreign holding = decrease US net capital outflow

Are the effects of an increase in aggregate demand in the aggregate demand and aggregate supply model consistent with the Phillips curve? Explain.

AD-AS shows that prices + output will rise if an increase in AD. Rising price = inflation. Rising output means falling unemployment. Thus they correspond

Explain the connection between the vertical long-run aggregate supply curve and the vertical long-run Phillips curve.

Both reflect classic dichotomy. Vertical LR AS says that in LR, economy will be at natural rate of output and this is same regardless of price level. Natural rate of output depends on natural rate of unemployment. Vertical Phillips curve says in LR economy will beat natural rate of employment and this is same regardless of inflation role. Both show real variables are not affected by nominal

Why are net exports and net capital outflow always equal?

Every international transaction is an exchange. When seller transfers good or service, buyer givers up some asset to pay for it. Value of asset = value of good or service, hence NX=NCO

If a county becomes more likely to default on its bonds, what happens to that country's interest rate and exchange rate? Explain.

Foreigner desire to buy fewer domestic bonds, domestic demand for loanable funds shift right, which drives interest up. Because NCO shifts right, NCO rises. This rise increases supply of dollars in the market for foreign currency exchange, so domestic real exchange rate depreciate

Why do higher real interest rates lead to lower net capital outflow?

Higher US interest rates make US assets look more attractive that foreign assets. US + foreign investors more likely to move funds into the US. US purchases of foreign assets down and foreign purchases of US assets up which reduce US net capital outflow

Suppose that the Fed unexpectedly pursues contractionary monetary policy. What will happen to unemployment in the short run? What will happen to unemployment in the long run? Justify your answer using the Phillips curves.

In SR, unemployment rises become contractionary policy reduces actual inflation so moves economy down the curve. In LR, economy will return to its natural rate of unemployment as a reduction in expected inflation shift the SR Phillip curve left.

Make a list of things that would shift the long-run aggregate supply curve to the right.

Increased immigration. decrease in minimum wage. increased in capital stock. advances in tech. removal of barriers

What do most economists believe concerning the relation between the price level and real output?

Most believe in LR, real variables are not affected by nominal variables. Most believe that nominal that variables do not change real variables in SR. In SR, prices + wages may be fixed based on the expected price level. If actual price level differs from expected, real variables are affected

Suppose that a country has $120 billion of national saving, and $80 billion of domestic investment. Is this possible? Where did the other $40 billion of national savings go?

Possible for open economy. Remaining 40 is for net capital outflow in form of foreign owned assets

What did Friedman and Phelps predict would happen if policymakers tried to move the economy upward along the Phillips curve? Did the behavior of the economy in the late 1960s and the 1970s prove them wrong?

Predicted that over time people would expect higher inflation, so SR Phillips would shift right. When this happened, unemployment would go back to its natural rate but inflation would be higher. Behavior was consistent: inflation rose but emplyment did not remain low

How are the identities S = NCO + I and NCO = NX related to the foreign currency exchange market and the loanable funds market?

S = natural saving, source of loanable funds. NCO+I is source of demand in the loanable funds market. NCO is source of supply in foreign currency exchange market. NX is source of demand in the foreign-currency exchange market

Derive the relation between savings, domestic investment, and net capital outflow using the national income accounting identity.

Starts with Y=C+I+G+NX. Rearrange Y-C-G=I+NX. S=Y-C-G. S=NX+I. S=I+NCO

Make a list of things that would shift the aggregate demand curve to the right.

Stock Market booms increases consumption. Tax cut increases consumption. Increased economic optimism leads to more investment. Investment tax credit. Increase in money supply.

Illustrate the classical analysis of growth and inflation with aggregate demand and long-run aggregate supply curves.

Tech advances shift LR AS right. Increases in money supply cause AD curve to shift right. Output growth puts downward pressure on price level, but money supply growth contributes to rising prices.

Suppose a bottle of wine costs 20 euros in France and 25 dollars in the United States. If the exchange rate is .80 euros per dollar, what is the real exchange rate?

real exchange =Nominal Exchange X (Domestic price/foreign price). .80x(25/20)=1