Test 3 ECON LAST TEST Chapters 10, 17, 13 14

Ex of sacrifice ratio: Say that the economy is experiencing the high rate that Paul Volcker had to deal with at 10 percent. So if he wants to reduce inflation to 4 percent, what does this mean for output levels?

Since there is a difference of 6 percent between 4 and 10 this means that level of production lost is 5 percent times 6 because you take inflation difference-1 and then multiply them together to get 30 percent loss in output. -reducing inflation over a longer period of time is better.

How does the Aggregate Supply/Demand graph relate to the Phillips curve?

The Phillips curve shows the inverse relationship between unemployment and inflation while the Aggregate S/D graph shows the relationship between price and output. Therefore, when demand shifts to the right you know that unemployment is going to go down because production is going up. Likewise, because of the increased demand, the inflation rate will go up showing a leftward movement along your Phillip's Curve.

If the Federal Reserve increases the rate of money growth and maintains it at the new higher rate, eventually expected inflation will(blank) and the short run Phillips curve will (blank)

expected inflation will increase, and the short run Phillips curve will shift upward

holding other things constant, an appreciation of a nation's currency causes

exports to fall and imports to rise

According to the theory of efficiency wages

firms may find it more profitable to pay above equilibrium wages because this could mean more output per worker.

Economists usually oppose limiting trade policies why?

free trade allows countries to specialize in doing what they do best allowing everyone to benefit.

Trade policy

government policy that directly influences the quantity of goods and services that a country imports or exports Ex: tariffs, import quota -an import quota will reduce imports and exports but net exports will remain unchanged so trade policies do not affect the trade balance sooo... NX=NCO=Savings -Investment

When the Fed increases the money supply and expands AD it moves the economy along the Phillips curve to a point with (blank) inflation and (blank) unemployment.

high inflation and low unemployment

Phelps-Friedman analysis

in the short run unemployment and inflation have a trade-off but in the long run expectations will be adjusted to bring unemployment and inflation to a neutral level.

In a competitive labor market, when the government increases minimum wage, the result is an (blank) in the quantity of labor supplied and a (blank) in the quantity of labor demanded

increase, decrease

What's the natural percentage of unemployment around?

5%

real exchange rate

(exP)/P* or (nominal exchange rate x domestic price)/foreign price

labor force participation rate

(labor force/adult population)x100

expected inflation

-Since expected price level affects nominal wages, expected inflation affects the position of the short run aggregate supply curve. -when money supply changes, AD curve shifts moving along AS curve. -in the short run, monetary changes lead to lead to unexpected changes in output, prices, unemployment, and inflation -the Fed's ability to create unexpected inflation with increasing money supply only exists in the short run -in the long run, people expect whatever inflation rate the Fed chooses and nominal wages will adjust to keep pace with inflation

When NCO<0

-capital is flowing into the United States -capital resources are coming from abroad -reduces the demand for domestically generated loanable funds

The demand of loanable funds

-comes from domestic investment and net capital outflow

When a foreigner buys a U.S. asset(car, wine, etc..)

-demand for dollars increases, supply of dollars falls, reducing NCO

limitations of purchasing power parity (2 reasons)

-exchange rates do not always move to ensure that the dollar has the same purchasing power as other currencies in the world. 1. Many goods are not easily traded(ex haircuts in Paris are more expensive than haircuts in NYC so haircutters might move to Paris while visitors might avoid getting haircut in Paris) However, a dollar would still buy less of a haircut in Paris. 2. Tradable goods are not always perfect substitutes for when they are produced in different countries. >consumer tastes might change for ex(driving up prices for German cars over American cars if they like the German brand)

The Volcker Disinflation

-he successfully brought down inflation from 1979 to 1987 while bringing unemployment rate back to its natural level. -fiscal policy is to thank for this>he used tough anti-inflationary policies to bring down inflation by decreasing aggregate demand and people's expectations must have matched inflation rates for the future bringing unemployment back to a natural rate. -His disinflation policy at first caused one of the highest unemployments and reduction of output that the US had seen since 1930, which goes against the idea explained by the rational expectations theory because people did not believe he was going to get inflation down as quickly as he claimed he would.

movement along Phillips curve left when

-increase in unemployment

What does interest rate do for the supply of loanable funds?

-it brings the supply and demand into balance by adjusting -when supply is less than demand, a shortage of loanable funds would push the interest rate upward and vice versa(if the interest rate were below equilibrium, the surplus of loanable funds would push the interest rate downward)

chap 17-when expected inflation rate changes what happens to philips curve?

-it shifts>to match actual inflation

our trade deficit is not caused by foreign countries

-its our low saving and low productivity

The U.S. real exchange rate

-measures the quantity of foreign goods and services that trade for one unit of U.S. goods and services -E is the real value of the exchange rate

the expansionary monetary policy does what in the short run for the Phillips curve

-more output, the fed can restore back to point A in the short run

The real exchange rate

-moves to ensure equilibrium

The Greenspan Era

-named after Alan Greenspan who took over Fed chair for Volcker in 1987. -1986=OPEC cracked and needed to increase output levels so it reduced price by cutting it in half. Favorable supply shock led to lower unemployment and inflation(leftward shift of short run PC) -When unemployment fell and inflation rose in 1989 and 1990 the Fed raised interest rates and contracted AD. Therefore unemployment rose ad inflation fell. -This resulted in a prosperous 1990s with inflation lowering along with unemployment to a natural level. -he kept fluctuations in unemployment and inflation generally small

The supply of loanable funds

-national savings

Variables that affect NCO

-real interest rates paid on foreign assets -real interest rates paid on domestic assets -perceived economic risks of holding assets abroad -the government policies that affect foreign ownership of domestic assets -the higher a bonds real interest rate the more attractive it is

Government Budget Deficits

-represents negative public spending, so it reduces national saving(supply) -reduces supply(leftward shift), raising interest rates, and crowds out investment. -raise real interest rates, crowd out domestic investment, cause the currency to appreciate, and push trade balance toward deficit.

common reasons for policies that restrict imports

-save jobs in a domestic industry that has difficulty competing with imports -reduce the trade deficit

Public policy and the job search

-the internet helps match workers to firms more easily reducing unemployment -government programs=employment agencies and public training programs

What is NCO?

-the supply of dollars -U.S. residents sell dollars to obtain the foreign currency they need to buy foreign assets. -if you are buying dollars capital is flowing out -if you want capital flowing into the country you need to buy dollars

things that affect a country's imports, exports, and net exports

-the tastes of consumers -prices -exchange rates -incomes -cost of transportation -government policies

real exchange rate

-think about the real value of the good so it is the rate at which a person can trade the goods and services of one country for the goods and services of another.

Net Capital Outflow<0

-this means a country is experiencing a net inflow of capital -capital resources coming from abroad reduce the demand for domestically generated loanable funds

The Long Run Phillips Curve

-vertical and measures level of unemployment in the long run -shows the classical idea of money neutrality -shows that unemployment does not depend on money growth and inflation in the long run

Minimum wage affect on economy

-when it is above equilibrium it causes unemployment

How does real interest rate effect the the country's net capital outflow?

-when real interest rate rises in one country a bond would become more attractive in that country>encourages both foreigners and citizens to purchase from this country

the sacrifice ratio

-when the Fed contracts aggregate demand by slowing the rate at which money supply is growing, leads to fall in production leads to rise in unemployment. This would be movement along SRPC to the right because this would mean high unemployment and low inflation. Eventually it would shift left to be back on the LRPC because people would expect the prices so the inflation rate is still low, but back to NR of unemployment. -SO the sacrifice ratio is how much output is lost in the effort to reduce inflation by one percent.

import quota will/will not affect

-will not affect NCO or market for loanable funds -will affect currency by creating more of a demand for one currency(because net exports has increased-when a quota on cars from Japan is placed). Exchange rate rises to bring market back to equilibrium -will have no effect on the deficit -NX is only affected initially. Since exchange rate adjusts to bring market back to equilibrium. -this can save jobs in the U.S. auto industry because U.S. consumers buy more autos, so more workers are hired to produce extra cars, this might help workers but not consumers because quotas/tariffs limit competition for businesses so prices can be higher.

Chapter 14 equations

1. S=I+NCO or S-NCO=I 2. NX=NCO

Give four explanations why firms might find it profitable to pay wages above the level of equilibrium

1. Worker Health 2. Worker Effort 3. Worker Quality 4. Worker Turnover (HE-a-QT) (1) to ensure that workers are in good health so they will be more productive; (2) to reduce worker turnover because it is costly to hire new workers; (3) to make workers eager to keep their jobs, thus discouraging them from shirking; and (4) to attract a better pool of workers.

Why is some frictional unemployment inevitable?

1. because it is the result of the changes in labor among different firms. 2. Employment can rise in one region and fall in another because of different goods being produced in different parts of the country 3. Changing patterns of international trade. Since comparative advantage is not stable over time and countries change what goods they import and export workers can also be displaced for the time being until they can find a job to match the changing consumer preferences. 4. Frictional unemployment is inevitable because the economy is always changing -long-run result is higher productivity and higher living standards because workers will go to industries where they are most valuable

If a cup of coffee costs 2 euros in Paris and 6 dollars in NYC and purchasing parity holds, what is the exchange rate?

1/3 euros per dollar

Unionized workers are paid about (blank) percent more per year than nonunion workers

15 percent

The population of Ectenia is 100 people. 40 work full time 20 work half time 10 are looking for a job 10 would like to work but are discouraged so have given up looking 10 are students so they aren't interested in working 10 are retired What is the number of unemployment? What is the size of their labor force?

A. 10 C. 70

How would an increase in the world price of oil affect the amount of frictional unemployment? Is this unemployment undesirable? What public policies might affect the amount of unemployment caused by this price change?

An increase in the world price of oil increases the amount of frictional unemployment as oilproducing firms increase output and employment, but other firms, such as those in the auto industry, reduce output and employment. The sectoral shift from the auto industry to oil firms causes higher frictional unemployment for a time until workers have shifted from the auto industry to the oil industry. Although no increase in unemployment is really desirable, this type of frictional unemployment is a natural outcome of the reallocation of resources between different sectors. Public policies that might affect the unemployment caused by this change in the price of oil include government-run employment agencies, which can help autoworkers move into the oil industry, job-training programs to help workers adapt to a new industry, and unemployment insurance, which keeps workers from suffering economic hardship while changing from one industry to another.

How are the graphs connected

As market for loanable funds changes, the interest rate is determined which determines NCO graph>as interest rate goes up NCO interest rate will go up>then depending what happens to NCO, the exchange market is affected.

The main policy goal of unemployment insurance is to reduce the

B. income uncertainty that workers face

what will shift LRPC

Change in real variables(same thing that shifts LRAS. (factors of production)

What does savings equal in the supply and demand for loanable funds and for Foreign-Currency Exchange?

Savings=Domestic Investment+Net Capital Outflow

As foreigners acquire more domestic assets, the country's debt to the rest of the world increases why?

Due to many years of budget and trade deficits , the U.S. is now the worlds largest debtor nation.

Over the past 20 years, Mexico has had high inflation while Japan has had low inflation. What do you predict has happened to the number of Mexican pesos a person can buy with Japanese yen?

Exchange rate would be in favor of the Japanese yen so the Japanese yen has appreciated while the Mexican peso has depreciated.

Thomas Sargent's "The End of Four Big Inflations"

Firms and workers have come to expect high rates of inflation in the future and therefore they make inflationary bargains because of these high expectations -this idea has some flaws because it is easier to stop inflation than this idea gives credit for -HE believes that the sacrifice ratio(the amount of output given up to reduce inflation) could be much smaller.

Equations how savings and investment are linked to gdp formula

GDP forumula=Y=C+I+G+NX Y-C-G=national saving soo Saving=NCO so Y-C-G=I+NX S=I+NX

What does the increase of imports and exports (over the past 70 years) for the United States mean?

Increased trade relations with other countries means potential GDP growth -could be due to improvements in transportation(can now transport goods that were only available in the summer) and telecommunication(ability to talk to clients easier) -could be due to government trade policies NAFTA and GATT used to lower tariffs, import quotas, and other trade barriers.

How does a union in the auto industry affect wages and employment at General Motors and Ford? How does it affect wages and employment in other industries?

Increases wages so increases unemployment but there would be more production of workers feel like their rights are not being infringed. -A union in the auto industry raises the wages of workers employed by General Motors and Ford by threatening to strike. To prevent the costs of a strike, the firms generally pay higher wages than they would if there were no union. However, the higher wages reduce employment at General Motors and Ford. The unemployed autoworkers seek jobs elsewhere, reducing wages and increasing employment in the nonunion sector

Savings=

Investment+NCO

What happens to nominal exchange rate during a hyperinflation?

It decreases as money supply and prices go up because of the central bank printing too much money such as what happened with Germany in 1921-1924 -this shows how price level affects nominal exchange rate.

What does it mean if AD shifts to the right causing a moving along the SRPC which way?

It means SRPC will move along upwards because more demand, higher output, higher PL means less unemployment and higher inflation. -It means the economy has an inflationary gap

What does high aggregate demand mean for Phillips curve?

It means movement along Phillips curve to left so there is low unemployment and high inflation

What does expansionary policy do for the Phillips Curve?

It moves along the short run Phillips curve line to the left to match the higher inflation, however it will eventually some back to Natural rate of unemployment(the long run Phillips curve) to match by shifting to the right because expected inflation rises.

When the inflation rate is at 5 percent but the fed thinks it should be at 4 what will they do?

It will use expansionary monetary policy. -philips curve would shift upward increasing inflation, but in the long run it will stay the same.

Define net exports and net capital outflow and how they are related

NCO must always equal net exports so every transaction affects both sides of the equation by the same amount. For example an increase in net capital outflow exactly equals the increase in net exports.

In a closed economy NCO=

NCO=0 so savings=investment -an open economy has two uses for its saving domestic investment and net capital outflow

NCO

Net capital outflow (NCO) is the net flow of funds being invested abroad by a country during a certain period of time (usually a year). A positive NCO means that the country invests outside more than the world invests in it and vice versa -can be direct investment or portfoilio investment

Two equations that link the market for loanable funds and the market for foreign exhange

S=I+NCO NCO=NX

How is unemployment measured? How might the unemployment rate overstate the amount of joblessness? How might it understate the amount of joblessness?

The official unemployment rate is estimated and reported monthly by the Bureau of Labor Statistics(BLS) of the U.S labor department using data obtaining from the current population survey. -The unemployment rate is measured starting with a survey of about 60,000 households. The BLS categorizes individuals surveyed as employed, unemployed, and not in the labor force. Next, the BLS computes the labor force as the sum of the number of employed and the number of unemployed. Finally, the unemployment rate is (calculated as the number of unemployed divided by the labor force multiplied by 100). -The unemployment rate overstates the amount of joblessness because some of those who report being unemployed may not, in fact, be trying hard to find a job. But the unemployment rate may understate the amount of joblessness because discouraged workers are considered not in the labor force even though they are workers without jobs.

What is the sacrifice ratio and how might the credibility of the Fed's commitment to reduce inflation affect the sacrifice ratio?

The sacrifice ratio is the number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point. The credibility of the Fed's commitment to reduce inflation might affect the sacrifice ratio because it affects the speed at which expectations of inflation adjust. If the Fed's commitment to reduce inflation is credible, people will reduce their expectations of inflation quickly, the short-run Phillips curve will shift downward, and the cost of reducing inflation will be low in terms of lost output. But if the Fed is not credible, people will not reduce their expectations of inflation quickly, and the cost of reducing inflation will be high in terms of lost output. -if confused think about how unemployment related to output. Higher unemployment=less output

What options does the Fed have during a supply shock?

They can either lower inflation or lower unemployment, but not both>by either increasing AD(to increase inflation) or contracting AD(to lower inflation). -how people adjust their expectations for inflation helps them determine this decision -if people expect inflation to stay high, they are going to have to contract AD and raise unemployment, but if people expect the high inflation to be temporary then the PC will eventually return to the natural rate and they can focus on increasing AD to increase employment.

Possible causes of trade deficits and what they mean for the economy

They mean that domestic investment is up while domestic saving is low and NCO is low 1. Unbalanced Fiscal Policy-Regan proposes tax cuts and increased military spending(unbalanced) encourages people to save less, negative NCO, more capital flowing into economy so more imports than exports. 2. Investment boom-people are saving more and investment increased into USA and capital flowed into USA again. New technologies to increase production and NCO<0 3. Economic downturn and recovery-NCO still less than 0, capital inflow large in USA(from 2000 to 2015). Less savings(gov had a budget deficit to help recession of 2008) and investment (because recession brought down interest rates-making capital accumulation less profitable) -a trade deficit is not the problem itself for an economy, but a symptom of the problem

When there is a higher interest rate at home what does this mean for NCO?

This makes domestic assets more attractive meaning that NCO will slope downward because this reduces net capital outflow

What happened from 1970 to 1988 with USA's ability to purchase money from Germany and Italy?

USA was unable to purchase as much German money as Italian money because Germany was undergoing a less-inflationary policy than Italy. (Inflation was 5.3 percent in USA, 3.5 percent in Germany, and 9.6 percent in Italy)

What the trade-off for unemployment that doesn't hold in the long run?

Unemployment and inflation -showed by the Phillips curve

Equation for unemployment rate according to Friedman and Phelps

Unemployment rate=Natural rate of unemployment-(Actual inflation-Expected Inflation)

implications of the purchasing power parity

Using the real exchange rate equation 1=(e*P(domestic))/P(foreign) then we can see that if the purchasing power of the dollar is the same at home and abroad than the real exchange rate(the price of domestic and foreign goods and services) cannot change -therefore the purchasing power parity doesn't take into account when the central bank prints extra money to raise prices in a nation depreciating the value of money in said country.

Phillips curve

a curve that shows the short-run trade-off between inflation and unemployment -illustrates a negative relationship between unemployment and inflation

unemployment insurance

a government program that partially protects workers' incomes when they become unemployed

unemployment insurance

a government program that partially protects workers' incomes when they become unemployed -can increase unemployment level

capital flight

a large and sudden decrease in demand for assets in a country ex: When people pulled money out of Mexico in 1994 when political leader was killed and transferred it to safer countries called "safe heavens" -capital flight from mexico increases mexican interest rates and decreases the value of the Mexican peso in the market for foreign-currency exchange -As this happens, United States dollar appreciates and interest rates fall.

At a given interest rate you have

a set supply in the market place but as the interest rate rises the supply of capital outflow will fall because less people in the United States will want to invest aborad. HIgher interest rate means more money to make on bonds within the United States, But the demand stays the same.

purchasing power parity

a theory of exchange rates whereby a unit of any given currency should be able to buy the same quantity of goods in all countries -many economists believe that this should help determine exchange rates in the long run

Comparing the US economy today to that of 1950, one finds that today, as a percentage of GDP, what about exports and imports?

a. exports and imports are both higher because of our increased trade relations/foreign policies with other countries.

natural-rate hypothesis

the claim that unemployment eventually returns to its natural rate regardless of the inflation rate.

when the Fed increases the money supply quickly it leads to what? And what do changes in money policy affect/dont affect in general?

a. high inflation b. influences nominal variables(price level and inflation rate) but not real variables(output and unemployment) c. A negative relationship between unemployment and inflation exists in the short run which is where we get the dowanward sloping Phillip's curve -in the long run price level do not affect quantity supplied

supply shock

an event that directly alters firms' costs and prices shifting the economy's aggregate supply curve and its Phillip's curve -usually causes stagflation(high inflation and low levels of production/output)-shifts AS left-Phillips curve would shift to the right because unemployment and inflation would be going up at the same time.

If a nation's currency doubles in value on foreign exchange markets, the currency is said to (blank) reflecting a change in the (blank) exchange rate

appreciate, nominal

If business leaders in Great Britain become more confident in their economy, their optimism will induce them to increase investment causing the British pound to (blank) and pushing the British trade balance toward (blank)

appreciate, surplus

unemployed

available for work, not employed and actively looking, Includes those waiting to be recalled to a job from which they have been laid off.

What is NX?

the demand for dollars -foreigners need dollars to buy U.S. net exports

employed

both full time and part time workers are counted.

direct investment

building a factory-involves capital outlfow

cyclical unemployment

the deviation of unemployment from its normal rate

sectoral shifts

changes in the composition of demand against among industries or regions that causes frictional unemployment

The nation of Ectenia has long banned the export of its highly prized puka shells. A newly elected president, however, removes the export ban. This change in policy will cause the nation's currency to (blank) making the goods that this nation imports (blank) expensive

depreciate, more

The theory of purchasing-power parity says that higher inflation in a nation causes the nation's currency to (blank) leaving the (bank) exchange rate unchaged

depreciate, real

the import quota saves jobs in the auto industry, but

destroys jobs in the U.S. export industries.

trade policies

do not alter the trade balance because they do not change national savings or domestic investment

Holding other things constant, an increase in a nation's interest rate reduces

domestic investment and the net capital outflow -explanation: a higher interest rate makes investment spending more expensive reducing domestic investment, but it makes bonds and other asset yielding more profitable.It will discourage investment abroad and encourage foreigners to purchase more of the nations assets reducing net capital outflow.

In an open economy, national savings=

domestic investment+NCO

What does it mean if AD curve shifts to the left causing SRPC movement along where?

downward it means the economy is in recession

How much money goods can get you equation and what does little e stand for and P?

e=exchanged money into different currency so 1/P=how much a dollar can get you in your country e/P=how much that dollar exchanged can get you in a different country P=price of a basket of goods 1/P=e/P* e(exchange)=P*/P(price abroad/price domestic)

Higher domestic interest rates

encourages people to save and encourages foreigners to invest because of higher rates of return. -less demand(movement along to left) quantity of dollars demanded for foreign money, and therefore a leftward shift of supply.

investment tax incentive

increases investment which increases productivity growth and living standards in the long run

discouraged workers

individuals who would like to work but have given up looking for a job.

Quantity of Loanable Funds and Demand of Loanable funds depend on

interest rate -higher interest rate encourages people to save and therefore raises the quantity of loanable funds supplied and discourages investment because it makes borrowing more expensive/so quantity demand decreases

The government in an open economy cuts spending to reduce budget deficit. As a result, the interest rate (blank) leading to capital (blank) and a real exchange rate (blank)

interest rate falls, capital outflow, real exchange rate depreciation -Since the national savings is increasing interest rates will fall making bonds less attractive and encouraging spenders to spend on abroad assets. Also exchange rate will depreciate due to the capital outflow.

misery index

is an economic indicator, created by economist Arthur Okun. The index helps determine how the average citizen is doing economically -it is calculated by adding the seasonally adjusted unemployment rate to the annual inflation rate.

when aggregate supply shift what happens to SRPC

it will shift.

A civil war abroad causes foreign investors to seek a safe haven for their funds in the United States leading to (blank) U.S. interest rates and a (blank) U.S. dollar

lower U.S. interest rates and a weaker U.S. dollar. Civil war=less trade meaning a weaker U.S. dollar and the interest rates go down as more people invest.

questions for 14 mean for the future that there would be no change in trade deficit because ir eventually adjusts. So just state your assumption(in the long run..etc)

most of the questions for 14 are answered for the long run.

Is unemployment usually long or short term

most times unemployment is short, but when observed at any given time is long-term

when aggregate demand shifts on supply/demand curve what happens to SRPC

movement along short run pc

Effects of a budget deficit?

national savings fall, real interest rate rises, domestic investment and net capital outflow both fall(since interest rate rises less people will want to invest abroad-less capital flowing out), the real exchange rate appreciates(less supply more demand), and net exports fall(since real exchange rate increases so people will not want to buy as many goods in the country where the dollar is appreciating), .

If the value of a nation's imports exceeds the value of its exports what is true?

net exports are negative, GDP(output) is less than the sum of consumption, investment, and government purchases, and domestic investment is greater than national saving. (people are saving less to buy more imports)

From one year to the next inflation rises from 4 to 5 percent while unemployment also rises from 6 to 7 percent.

the appointment of a new Fed chair raises expected inflation.

labor force=

number of employed+number of unemployed

net exports and the budget deficit

often are inversely related

in the long run, inflation depends..

on the money supply growth rate.

strike

organized withdrawal of labor from a firm by a union.

national saving

public+private saving

portfolio investment

purchase of bonds and stocks in a foreign country-involves capital outflow

Define nominal exchange rate and real exchange rate and explain how they are related. If the nominal exchange rate goes from 100 to 120 yen per dollar, has the dollar appreciated or depreciated?

real exchange rate=(nominal exchange rate x domestic price level/foreign price level) so real takes into consideration the inflation. If exchange rate for one U.S. dollar for yen were to go up from 100 yen per dollar to 120 yen per dollar this would mean that the USD has appreciated.

real interest rate vs. real exchange rate

real interest rate-determines the price of goods and services present compared to the future real exchange rate-determines prices of domestic goods and services compared to foreign goods and services.

exchange rates(real and nominal)

real- nominal-

budget deficit

reduces investment which reduces productivity growth and living standards

the main policy goal of the unemployment insurance system is to reduce the

role of unions in wage setting

The SRPC mostly reflects what?

shifts in AS

When an adverse supply shock shifts the short-run aggregate supply curve to the left, it also

shifts the short run PC curve to the right. (high inflation and unemployment)

When a U.S. resident buys French wine what happens to supply and demand of foreign exchange market?

supply of dollars increases or demand for dollars decreases

question 7 chap 14

supply shifted left because the gov is taking money out of savings to fund subsidizing. demand for U.S. dollars increases because the intention of U.S. gov was to get people to buy more goods. NCO moved along left because of supply(savings) shifting left.

In the supply/demand for dollars what do they stand for?

supply=NCO-vertical line NX=demand-sloping downward

In the market for foreign-currency exchange supply and demand comes from

supply>determined by what happens to NCO demand>determined by what happens to NX *don't get confused because NCO follows what happens to demand on Quantity for loanable funds graph*

trade policy

tariff(tax on imports), import quota(a limit on the quantity of imports), voluntary export restrictions(the government pressures another country to restrict its exports-essentially to the same as the import quota)

From one year to the next, inflation falls from 5 percent to 4 percent, while unemployment rises from 6 to 7 percent. What event could be responsible for this change?

the government reduces spending and raises taxes to reduce the budget deficit. (reduction in spending makes inflation fall, but raising taxes lowers production making unemployment rise)

law of one price

the law that a good must sell for the same price in all locations

natural rate of unemployment

the normal rate of unemployment around which the unemployment rate fluctuates(4-6%)

collective bargaining

the process by which unions and firms agree on the terms of employment

nominal exchange rate

the rate at which a person can exchange the currency of one country for the currency of another country. equation= (Domestic/foreign currency)

Advocates of the theory of rational expectations believe that

the sacrifice ratio can be much smaller if policymakers make a credible commitment to low inflation

parity

the state or condition of being equal

Rational expectations theory

the theory that people use all the information they have including government policies to forecast the future.

When NCO>0

this means capital is flowing out of the United States -adds to demand for domestically generated loanable funds

The real interest rate and the real exchange rate adjust...

to at the same time to balance supply and demand in these two markets -they determine national saving, domestic investment, NCO, and NX

subsidize

to pay a portion of (help finance the production)

labor force

unemployed +employed

frictional unemployment

unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills

structural unemployment

unemployment that results because the number of jobs available in some labor markets is insufficient

misery index

used to predict the health of the economy with the inflation rate and the unemployment rate

why the purchasing power parity makes sense

when one currency is worth more than another than more goods can be sold for less money in one country, however when the demand for the goods in said country goes up then so will the price balancing the prices for the same good between two different countries.

How do NCO and NX equal each other

when the government is running a trade surplus NX<0 and when more capital is flowing into the United States NCO<0 it shows that when the United States has more imports it is also selling more bonds in order to purchase these imports -on the other hand when NX>0 and NCO>0 it shows that when the United States is exporting more it also has more capital flowing out to purchase assets abroad.

the theory of efficiency wages

when workers are paid(above equilibrium wages) more they will be more productive

union

worker group that bargains with employers over wages, benefits, and working conditions