Econ Chapter 9 An Introduction to Basic Macroeconomic Markets

What diagram is used to visualize the macro economy?

The Circular Flow Diagram

What are the four key markets that make up the macro economy?

1) Goods and services market, 2) Resource market, 3) Loanable funds market, 4) Foreign exchange market

What does the goods and services market encompass?

The flow of all final-user goods and services that count towards GDP.

How does money flow in the goods and services market?

Money flows from households to businesses as payments for goods and services.

What resources are included in the resource market?

Land, labor, capital, and entrepreneurship.

How does money flow in the resource market?

Money flows from businesses to households as wages and income payments.

What is the loanable funds market?

It coordinates the borrowing and lending decisions of business firms and households.

What role do banks play in the loanable funds market?

Banks connect households that save money with businesses that need loans.

What determines the amount of loanable funds available?

The interest rate.

How does a high interest rate affect saving and borrowing?

It creates a higher incentive to save money and increases the supply of funds for banks.

How does a low interest rate affect saving and borrowing?

It creates a higher incentive to borrow money and increases the demand for loans.

What is the real interest rate?

The interest rate adjusted for expected inflation, indicating the real cost to the borrower.

What is the nominal interest rate?

The interest rate that may overstate the real cost of borrowing during inflationary periods.

How does inflation affect savers in the loanable funds market?

Savers may lose value in their money, leading them to supply fewer funds.

How does inflation affect borrowers in the loanable funds market?

Borrowers may demand more money in anticipation of rising prices.

What is the foreign exchange market?

The market where different countries' currencies are bought and sold.

What is an exchange rate?

The price of one unit of foreign currency in terms of the domestic currency.

How is the exchange rate represented for $1 USD?

$1 USD = €0.91 Euro, meaning $1 can buy €0.91.

What is the relationship between nominal interest rate, real interest rate, and inflation rate?

Nominal interest rate - Real interest rate = Inflation rate.

How does the foreign exchange market facilitate trade?

It allows countries to import goods and services by exchanging their domestic currency for foreign currency.

What is currency appreciation?

An increase in the value of a currency relative to foreign currencies, increasing its purchasing power over foreign goods.

What happens to the purchasing power of a currency during appreciation?

It increases, allowing consumers to buy more goods and services from foreign countries.

What is currency depreciation?

A reduction in the value of a currency relative to foreign currencies, decreasing its purchasing power over foreign goods.

What happens to the purchasing power of a currency during depreciation?

It decreases, meaning consumers can purchase fewer goods and services from foreign countries.

What are capital outflows?

Purchases of real and financial assets from foreigners, which includes buying foreign currency.

How are capital outflows related to imports?

Capital outflows occur when domestic currency is exchanged for foreign currency to buy foreign goods and services.

What are capital inflows?

Sales of real and financial assets to foreigners, which includes selling foreign currency.

How are capital inflows related to exports?

Capital inflows occur when domestic currency is received in exchange for selling goods and services to foreign countries.

What does the equation Net Exports = Net Capital Outflows represent?

It shows the relationship between foreign currency exchange and trade, indicating how exports and imports affect capital flows.

What is a trade deficit?

A situation where a country's imports of goods and services exceed its exports, resulting in negative net exports.

What does a trade deficit imply about capital flows?

It implies that capital inflows are greater than capital outflows, as the country receives more of its currency from foreign sales.

What is a trade surplus?

A situation where a country's exports of goods and services exceed its imports, resulting in positive net exports.

What does a trade surplus imply about capital flows?

It implies that capital outflows are greater than capital inflows, as the country sells more of its currency to foreign buyers.

How does the circular flow diagram visualize the macro economy?

It shows the interactions between households, businesses, government, and foreign markets in the economy.

What role does the government play in the macro economy?

The government interacts with the economy through public goods, income transfers, and taxation.

What is the goods and services market?

A market where goods and services are bought and sold, involving transactions between consumers and businesses.

What is the resource market?

A market where resources, including labor and capital, are bought and sold.

What is the significance of the foreign exchange market for international trade?

It is essential for enabling imports and exports by allowing currency exchange necessary for transactions.

How does appreciation affect the exchange rate between the US Dollar and Korean Won?

If the dollar appreciates, it buys more Won, increasing purchasing power for US consumers in Korea.

How does depreciation affect the exchange rate between the US Dollar and Euro?

If the dollar depreciates, it buys fewer Euros, decreasing purchasing power for US consumers in Europe.

What is the relationship between net exports and GDP?

Net exports are a component of GDP, affecting the overall economic output based on trade balance.