Unit 5 - 6.1: Fiscal/Monetary Issues and International Trade

crowding out, velocity of money, phillips curve, current and financial account quiz

crowding out

when the government pursues expansionary policy which leads to an increase in the government deficit, causing the gov to issue bonds and borrow, raising the interest rate

velocity of money

the number of times in a year that an “average” dollar gets spent on goods and services

M * V = P * Y

formula for velocity of money

M = Money supply / V = Velocity of money / P = aggregate price level / Y = RGDP

what does each letter stand for in the velocity of money formula? ( letter = _____ / letter = ____ / letter = _____ / etc. )

quantity theory of money

a percent increase or decrease in the MS will lead to the same change in the price level

demand

the business cycle is ______ driven

inverse 

inflation rate and unemployment rate have a ________ relationship

movement along

shifts in AD will cause ________ _________ the (short run) phillips curve

movement up

a positive demand shock will cause _____ ______ along the Phillips curve

movement down

a negative demand shock will cause _____ ______ along the Phillips curve

shift left

a positive supply shock will cause SRPC to ______ ______

shift right

a negative supply shock will cause SRPC to ______ ______

expected inflation

what households expect inflation to be and they use this info to negotiate nominal wages

recent experiences

people base their expectations of inflation on _____ ________

shift right

if expected inflation increases, SRPC will ______ _______

shift left

if expected inflation decreases , SRPC will ______ _______

the same amount, real wage

If inflation increases, people will demand that their nominal wages increase by ____ _____ ______ or else their _____ _____ will decrease

long run phillips curve

graph that shows the relationship between unemployment and inflation after expectations of inflation have had time to adjust to experience (contracts are renegotiated)

natural rate of unemployment

any time the _____ ____ ___ __________ changes the LRPC will shift

NRU

the level of unemployment where LRPC intersects with the x-axis (use abbreviation)

nairu

the level of inflation that is associated with the natural rate of unemployment and unemployment rate at which inflation does not change over time (use lowercase abbreviation)

nonaccelerating inflation rate of unemployment

what does NAIRU stand for

NAIRU

the inflation rate where SRPC and LRPC meet (use caps abbreviation)

decreasing, growth

LRPC shifting left means that the NRU is _______ meaning there is a economic ______

increasing, contraction

LRPC shifting right means that the NRU is _______ meaning there is a economic _______

balance of payment accounts

a summary of a country’s transactions with other countries

current account

the balance of payments on goods and services plus net international transfer payments and factor incomes

credit

money coming into the country (payments from foreigners)

debit

money going into a foreign country (payment to foreigners)

international transfers, remittances

______ _______ is sending or receiving money to/from someone in another country, which is also known as ______

credits, debits

exports are _____ for this account and imports are _______

factor income

payments for the use of factors of production owned by other countries

interest paid on loans/bonds from overseas, profits earned by companies operating overseas, payments to foreign countries

3 parts of factor income

financial account

the difference between the sales of financial assets to foreigners and the purchases of financial assets from foreigners during a given period

stocks, bonds, loans

financial assets include _____, _____, and _______

factor income

interest earned on loans and bonds doesn’t go into the financial account, but into ______ ______ in the current account

official asset sales and purchases

purchases of assets by a government of central bank

private asset sales and purchases

purchases made by households

zero

the difference of the financial account and current account must always equal _______

surplus

if there is a deficit in the current account, there must be a _______ in the financial account

deficit

if there is a surplus in the current account, there must be a _______ in the financial account