Unit 2- Supply, Demand, LFM, MM, FOREX, BOP

If the Federal Reserve purchases treasury bills from a commercial bank, what happens to bank reserves and the money supply?

They both increase

Crowding Out refers to the decrease in

Private investment due to increased borrowing by the government

A budget surplus exists when the government does what?

Collects more tax revenue than it spends in one year

RIR

NIR - Inflation

NIR

RIR + Inflation

RIR Decrease

Investment Spending & Growth Increase

Demand-Pull Inflation

Increase in demand does not equal the ability to increase production, so prices increase

Discount Rate

The interest rate that banks pay the Federal Reserve for loans

The equilibrium interest rate on a LFM graph is

Determined by the supply and demand of money

Determinants of Demand

Taste, Income, Market Size, Expectations of Future Price Availability or Income, and Related Good Price Changes.

Determinants of Supply

Number of Sellers, Technology, Output Alternatives (price or profit changes), Cost of resources/production (inputs-land,labor,capital used in production), Expectations of Future Prices, Subsides Taxes and Government Policies

Law of Demand

There is an inverse relationship between quantity demanded of a good or service and the price of that good or service

Income Effect

At lower prices, current buyers are richer and will buy more

Substitution Effect

Buyers of higher priced subsitues will buy the lower priced substitutes

Diminishing Marginal Utility

Buyers will buy more only when the price is lowered b/c they don’t get the same dollar value from the last purchase as they do from the first.

Non-price factor

Shift curve

Price factor

Shift along curve

Normal Goods

good in which we buy more of when we get more income

Inferior Goods

Good that we buy less of when we get more income

Law of Supply

theres is a postive, direct, relationship between the price of a good or service and the quantity supplied in the market.

Supply

quanitities of G/S that producers are willing to make

Quantity Supplied

amount of goof supplied at a price

Subsidies

free money from the government; “opposite” of a tax; govt pays sellers to produce goods

Regulation

behave just like a tax because businesses costs rise

Causes of Shortages

QD > QS

Causes of Surpluses

QD < QS

Price Controls

government intervention in free markets (ineffective or non binding prices have no effect on the market

Price Ceiling

Market Max

Price Floor

Market Min

Trade deficit

refers to current account; more payments OUT than IN.

Account surplus

more payments IN than OUT.

Appreciated Currency

Exports Decrease, Imports Increase

Decpreciated Currency

Exports Increase, Imports Decrease

Causes for currency appreciation/depreciation

Growth, Real Interest Rate, Lower Inflation, Trade, Stability

Floating Exchange Rate

value of currency is allowed to fluctuate subject to Laws of Supply & Demand