macro econ

describle solow model

explains long term economic growth using capital, tech, labor, human capital, net exports

buisness cycle

reoccuring pattern of expansion/recessions/recoveries over time

Aggregate Demand (AD)

all demands of goods/services in an economy

Short Run Aggregate Supply

amount of total output firms are willing to produce in the short run at different price levels

Positive Demand Shock

Unexpected event that increases Demand

Negative Demand Shock

Unexpected event that decreases Demand

Fiscal Policy

government spending and taxation to influence the economy

Expansionary Fiscal Policy

government increases spending and cuts taxes in order to boost AD (ex:Infrastructure Spending when unemployment is high)

Contractionary Fiscal Policy

government decreases spending and raises taxes in order to reduce inflation (ex: The government increases income tax rates so people buy less and save more)

Multipliers

an initial change in spending in order to create a large change in GDP

automatic stabilizers

government programs that automatically reduce economic fluctuations without new legislation (ex: unemployment benefits)

monetary policy

actions done by central banks to influence interest rates/money supply/economic activity

Expansionary Monetary Policy

central banks lower interest rates (ex: during a recession)

Contractionary Monetary Policy

Central banks raise interest rates (when inflation is too high)

zero lower bound (ZLB)

where a central bank's policy interest rate is at or very close to 0%, making it difficult to stimulate the economy by cutting rates further.

open economy

an economy that trades goods and services/financial assets with other countries

net capital outflow (NCO)

Foreign purchases of domestic assets minus Domestic Purchases of foreign assets = NCO

real exchange rate (RER)

relative price of domestic goods compared to price of foreign goods

capital flows

Capital flows occur when investors move money into or out of a country to buy financial assets, businesses, property, or government bonds.

capital inflow

Money enters a country. (ex: Foreign investors buy Czech government bonds, The koruna appreciates)

capital outflow

Money leaves a country (ex: Czech firms build factories abroad, so The koruna depreciates)

policy channels

the mechanisms thru which monetary/fiscal policy effects spending, output, and inflation

fix trade off

provides stability but limits independence (ex: Must often follow the monetary policy of the country whose currency it is pegged to)

float trade off

more flexibility but exchange rates are more volatile (ex: Foreign demand for exports falls. Currency depreciates automatically)

policy trilemma

it is impossible for a country to have a fixed exchange rate, free capital flows, and independent monetary policy all at the same time

steady state

point in solow model where investment = depreciation and capital per worker remains constant (sY=δK)

fisher equation

shows that real interest rate = nominal interest rate — expected infaltion

crowding out

when government borrowing actually raises interest rates and reduces private investment (ex: If the state borrows a lot for public projects, banks have less cheap credit available for businesses → firms invest less)

quantitative easing (QE)

a central bank policy (monetary policy) of purchasing assets to lower long term interest rates when short term rates are near zero (ex: central bank prints money → buys bonds → pushes interest rates down → encourages spending and investment)

liquidity trap

when very low interest rates fail to stimulate spending and investment sufficiently enough

stagflation

a combination of high inflation and low economic growth, usually caused by supply shocks (ex: Oil became much more expensive → everything to produce goods became costlier → firms raised prices (inflation) and reduced output/jobs (unemployment) )

recessionary gap

the amount by which actual output falls short of potential output

inflationary gap

amount by which actual output exceeds potential output

Purchasing Power Parity (PPP)

If a basket of goods costs the same in two countries after converting currencies, then their currencies are in “parity.”

conditional convergence solow model

Poor countries do not automatically catch up to rich countries. They only converge if they share similar “steady-state” conditions

Ricardian equivalence

government borrowing does not affect overall demand in the economy, because people anticipate future taxes

twin deficits problem

If the government is borrowing and spending a lot, part of that extra spending “leaks out” to foreign goods

(1.A government budget deficit (government spends more than it collects in taxes

2.A current account deficit (the country imports more than it exports)

The wealth (real balance) effect

When the price level falls, the real value of money increases:

• Households feel “wealthier”

• They spend more on goods and services

• So aggregate demand increases

Interest rate effect

• Lower price level → people need less money for transactions

• Interest rates fall

• Borrowing and investment increase

• → AD rises

Exchange rate effect

• Lower price level → domestic goods become cheaper relative to foreign goods

• Currency may depreciate

• Exports rise, imports fall

• → AD rises

AD-AS model

s a macroeconomic framework used to explain output (real GDP) and the price level in an economy, and how they change in the short run and long run.

trade surplus

when a country’s exports are greater than its imports over a given period

fiscal multiplier

measures how much national income (GDP) changes in response to a change in government spending or taxation. (ex: change in GDP / change in fiscal policy (G or taxes)