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