Econ 212 Final

Selling US bonds

Money supply- decreases

Net Inflow of Capital

NCO < 0 capital resources coming from abroad reduce the demand for domestically generated loanable funds

NCO in loanable funds market and foreign exchange market

NCO links the two markets - LF NCO is a piece of demand - FE NCO is a source of supply

Trade Deficit

NX < 0 ex < 0 Y < C + I + G saving < investment NCO < 0

Trade Surplus

NX > 0 ex > im Y > C + I + G saving > investment NCO > 0

When Political Stability increases

NX decreases, NCO decreases

When P increases

Nx decreases, NCO decreases

when S < I

Nx decreases, NCO decreases

long run equilibrium Increase in Money Supply Decrease in taxes P? Y? U? I? C?

P increase Y increase U decrease I increase C increase

Political Stability and Capital Flight

Political stability -> capital flight CO increases, CI decreases -> NCO increases Real interest rate -> Real exchange rate decreases -> ex increase -> imp decrease -> NX increase

Key terms

Y= GDP C= consumption I= Investment G= Government Spending NX= net exports (ex-im)

Short Run Aggregate Supple (SRAS)

Yn + α(P-Pe) Shifters -technology (A) -labor (L) -capital (K) -natural resources (N) - human capital (H) A decrease in the price level reduces the quantity of goods and services supplied in the short run

Purchasing Power Parity

a theory of exchange whereby a unit of any given currency should be able to buy the same quantity of goods in all countries

Which of the following sequences shows the logic of the interest rate effect? a. 1, 2, 3, 4 b. 1, 4, 3, 2 c. 3, 4, 2, 1 d. 3, 2, 1, 4

d. 3, 2, 1, 4

Policy makers reaction to improve economy

increase in G expansionary monetary policy

When interest rates are high, money demand is

low; high opportunity cost mD curve has neg slope

Loanable Funds Market

supply is national savings and demand is investment + net capital outflow coordinates economys savings, investments, and flow of loanable funds abroad increase in money supply causes a decrease in interest rates

Real Exchange rate

(Nominal exchange rate X price) / foreign price (e x P)/P*

Stock Boom

1. C increases 2. AD increases 3. P increases 4. Y increases 5. U decreases

NCO

Ex-Im= CO - CI CO-CI= NCO NCO= NX Relationships: -interest rate Increases, CO decreases, CI increases, NCO decreases - Y increases, stocks increase, CI increase, NCO decrease - political stability decreases, CO decreases, CI increases, NCO decreases

Expansionary Fiscal Policy (Gov spending and taxes)

Fiscal increases 1. gov starts spending money -> G increases -> AD increases -> Y increases -> P increases 2. Money demand increases -> interest rate increases -> investment decreases 3. crowing out -> AD decreases

Import Quotas

Import quotas -> im decrease NX increase -> real exchange rate increase EX decrease -> Constant NX Constant NCO, constant real interest rate

The Money Market and AD Curve

Interest increases, Demand decreases 1. Price increases 2. Demand for money increases 3. Interest rates increase 4. Investments decrease 5. Decrease in Y = C + I decrease + C + NX

Contractionary Monetary Policy (Open market sells by Fed)

1. Savings decrease 2. Interest increases 3. Investments decrease 4. AD decreases 5. Price decreases 6. GDP decreases - Y = natural rate of output- equilibrium in economy if to left of natural rate of output economy = bad if to right of natural rate of output economy = good Fed is selling us bonds AD decreases slightly so inflation is under control

How do open market sales impact AD, P, Y, U?

AD decreases P decreases Y decreases U decreases

long run equilibrium, optimism

AD increases GDP increase P increases U decreases

Aggregate Demand

AD=Y=C+I+G+NX a decrease in the price level increases the quantity of goods and services demanded

The shift of the short run aggregate supply curve from AS1 to AS2 A. Could be caused by an outbreak of war in the Middle East B. Could be caused by a decrease in the expected price level C. Causes the economy to experience an increase in the unemployment rate D. Causes the economy to experience stagflation

B. Could be caused by a decrease in the expected price level

Budget Deficit

Budget Deficit -> Public savings decrease -National Savings -> interest rate increases, Loanable funds quantity decrease - CO decrease -> CI increase -> NCO decrease -Real exchange rate increases -> ex decrease, im increase, NX decrease

Stock Market Crash

Consumption decreases, Investment decreases, AD decreases, price decreases, GDP decreases, Unemployment increases 1. C decreases 2. AD decreases 3. Price decreases 4. Y decreases 5. U increases

The Stock Market Boom of 2014: Imagine that in 2014 the economy is in long run equilibrium. then stock prices rise more than expected and stay high for some time. Which curve shifts and in which direction? a. aggregate demand shifts right b. aggregate demand shifts left c. aggregate supply shifts right d. aggregate supply shifts left

a. aggregate demand shifts right

Optimism Imagine that the economy is in long-run equilibrium. Then, perhaps because of improved international relations and increased confidence in policy makers, people become more optimistic about the future and stay this way for some time. Refer to Optimism. Which curve shifts and in which direction? a. aggregate demand shifts right. b. aggregate demand shifts left. c. aggregate supply shifts right. d. aggregate supply shifts left.

a. aggregate demand shifts right.

The Stock Market Boom of 2014: Imagine that in 2014 the economy is in long run equilibrium. then stock prices rise more than expected and stay high for some time. In the short run what happens to the price level and real GDP? a. both price level and real GDP rise b. both price level and real GDP fall c. price level rises and real GDP falls d. price level falls and real GDP rises

a. both price level and real GDP rise

Optimism Imagine that the economy is in long-run equilibrium. Then, perhaps because of improved international relations and increased confidence in policy makers, people become more optimistic about the future and stay this way for some time. In the short run what happens to the price level and real GDP? a. both the price level and real GDP rise b. both the price level and real GDP fall c. the price level rises and real GDP falls d. the price level falls and real GDP rises

a. both the price level and real GDP rise

What quantity is represented by the vertical line on the left hand graph? a. supply of money b. demand for money c. rate of inflation d. quantity of bonds that was most recently sold or purchased by the federal reserve

a. supply of money

Closed Economy

an economy that does not interact with other economies in the world

Open Economy

an economy that interacts freely with other economies around the world

Point B represents a. a short run equilibrium and a long run equilibrium b. a short run equilibrium but not a long run equilibrium c. a long run equilibrium but not a short run equilibrium d. neither a short run equilibrium nor a long run equilibrium

b. a short run equilibrium but not a long run equilibrium

If the graphs apply to an economy such as the U.S. economy, then the slope of the AD curve is primarily attributable to the a. wealth effect b. interest rate effect c. exchange rate effect d. Fisher effect

b. interest rate effect

The appearance of the long run aggregate supply curve (LRAS) curve A. Is inconsistent with the concept of monetary neutrality B. Is consistent with the idea that point A represents a long run equilibrium but not a short run equilibrium when the relevant short run aggregate supply curve is AS1 C. Indicated that Y1 is that natural rate of output D. All of the above are correct

c. Indicated that Y1 is that natural rate of output

What does Y represent on the horizontal axis of the right hand graph? a. quantity of money b. rate of inflation c. real output d. nominal output

c. real output

Optimism Imagine that the economy is in long-run equilibrium. Then, perhaps because of improved international relations and increased confidence in policy makers, people become more optimistic about the future and stay this way for some time. What happens to the expected price level and whats the result for wage bargaining? a. the expected price level falls and bargains are struck for higher wages b. the expected price level falls and bargains are struck for lower wages c. the expected price level rises and bargains are struck for higher wages d. the expected price level rises and bargains are struck for lower wages

c. the expected price level rises and bargains are struck for higher wages

The Stock Market Boom of 2014: Imagine that in 2014 the economy is in long run equilibrium. then stock prices rise more than expected and stay high for some time. What happens to the expected price level and what impact does this have on wage bargaining? a. expected price level falls and bargains are struck for higher wages b. expected price level falls and bargains are struck for lower wages c. the expected price level rises and bargains are struck for higher wages d. the expected price level rises and bargains are struck for lower wages

c. the expected price level rises and bargains are struck for higher wages

The Stock Market Boom of 2014: Imagine that in 2014 the economy is in long run equilibrium. then stock prices rise more than expected and stay high for some time. How is the new long run equilibrium different from the original one? a. the price level and real GDP are higher b. the price level and real GDP are lower c. the price level is higher and real GDP is the same d. the price level is the same and real GDP is higher

c. the price level is higher and real GDP is the same

Foreign currency exchange market

coordinates people who want to exchange the domestic currency for the currency of other countries

Optimism Imagine that the economy is in long-run equilibrium. Then, perhaps because of improved international relations and increased confidence in policy makers, people become more optimistic about the future and stay this way for some time. In the long run, the change in price expectations created by optimism shifts a. long run aggregate supply right b. long run aggregate supply left c. short run aggregate supply right d. short run aggregate supply left

d. short run aggregate supply left

The Stock Market Boom of 2014: Imagine that in 2014 the economy is in long run equilibrium. then stock prices rise more than expected and stay high for some time. in the long run, the change in price expectations created by the stock market boom shifts a. long run aggregate supply right b. long run aggregate supply left c. short run aggregate supply right d. short run aggregate supply left

d. short run aggregate supply left

Optimism Imagine that the economy is in long-run equilibrium. Then, perhaps because of improved international relations and increased confidence in policy makers, people become more optimistic about the future and stay this way for some time. How is the new long run equilibrium different from the original one? a. both price and real GDP are higher b. both price and real GDP are lower c. the price level is the same and GDP is higher d. the price level is higher and real GDP is the same

d. the price level is higher and real GDP is the same

What is measured along the horizontal axis of the left hand graph? a. nominal output b. real output c. the opportunity cost of holding money d. the quantity of money

d. the quantity of money

Net Exports

exports - imports factors that determine NX: taste, price, exchange rates, incomes, transportation costs, trade policies when foreign Price increases, imports decrease and nx decreases when price increases, exports decrease, nx decreases

Stagflation

oil embargo -> SRAS -> Yn decreases, Price increases -> open market sales -> money supply decreases -> interest rate increases -> investment decreases -> AD decreases

National Savings

public savings + private savings

Open Market Purchases by the Fed

recession GDP decreases, price decreases Buy US bonds to bring equilibrium back to normal -> money supply increases, interest rate decreases, investment increases -> GDP increases -> AD increases

Money supply

vertical line due to it being controlled by the fed

Net Outflow of Capital

when NCO > 0 net purchases of capital overseas adds to the demand for domestically generated loanable funds