CIE AS Economics - The Macroeconomy

Potential Benefits of Inflation

-stimulating output -reduce burden of debt -prevent unemployment

Methods of Protectionism

-tariffs -quota -exchange control -export subsidies -embargoes -voluntary export restraints -red tape -keeping exchange rate below market value

Terms of Trade

Numerical measure of the relationship between imports and exports

Trade Weighted Exchange Rate

Price of one currency vs a basket of other currencies

Causes of a Shift in the Aggregate Demand Curve

-Consumption -Investment -Government Spending -Net Exports

Capital Account

-capital transfers -aquition and disposal of non-produced, non-financial assets

Financial Account

-direct investment -portfolio investment -other investments -reserve assets

Shifts in the LRAS Curve

Change in quantity and or quality of factors of resources/factors of productivity

Bad Deflation

Decrease in aggregate demand

Customs Union

Free trade between members, common external tariffs on imports from non-members

Exchange Rate

The price of one currency, in terms of another currency

Terms of Trade Index

index of export prices ------------------------ X 100 index of import prices - increase is a favorable movement -decrease is an unfavorable movement

Real Effective Exchange Rate

nominal exchange rate X domestic price index ---------------------------------------------------- foreign exchange rate

Cost Push Inflation

-bad inflation -caused by increased cost of production, associated with decreased output

Causes and Consequences of Deflation

-burden of debt increases -benefits savers

Demand Pull Inflation

-caused by and increase in AD, not matched by an increase in AS -associated with increased output

Shifts in the SRAS Curve

-change in price of factors of production -change in taxes on firms -change in factors of productivity/quality of resources -change in quantity of resources

Increase in Exchange Rate

-decreased price competitiveness of exports -increased price competitiveness of imports

Causes of a Current Account Deficit

-growing domestic economy -declining economic activity in trading partners -structural problems *allows residents to consume more than it produces *countries will have to finance the deficit *increased deficit: reduce aggregate demand, reduce economic growth, increase unemployment rate

Decrease in Exchange Rate

-increased price competitiveness of exports -decreased price competitiveness of imports

Current Account Surplus

-not always beneficial -implies that residents could be living at a higher standard -may cause inflationary pressure in an economy

Arguments in Favor of Protectionism

-protect infant industries -protect declining industries -protect strategic industries -prevent dumping -improve terms of trade -improve balance of payments -provide protection from cheap labour

Consequences of Inflation

-reduction in net exports -unplanned redistribution of income -menu costs -shoe leather costs -fiscal drag -discouragement of investment -inflationary noise -inflation causing inflation

Current Account

-trade in goods -trade in services -income -current transfers

Aggregate Demand

C + I + G + (X-M)

Floating Exchange Rate

Exchange rate allowed to move freely

Managed Float

Exchange rate is allowed to fluctuate within a specific set of values

Fixed Exchange Rate

Exchange rate is fixed at a value

Disinflation

Fall in the inflation rate (eg. 8% to 6%)

Net Errors and Omissions

Figure included to ensure that the balance of payments balances

Economic Union

Free trade between members, common external tariffs and some common economic policies which may include a common currency

Good Deflation

Increase in aggregate supply

Long Run Aggregate Supply

Keynesians: government intervention required to achieve full employment New-Classical: long run will result in production at full capacity without govt. intervention

Interaction of AS and AD

Macroeconomic equilibrium -where AD = AS

Free Trade

Removed trade restrictions

Deflation

Sustained fall int he price level (negative inflation rate)

Inflation

Sustained increase in an economy's price level

Short Run Aggregate Supply

Total output supplied -not enough time for factors of production to change