Macroeconomics Final Exam

Flashcards for Macroeconomics Final Exam Review

Microeconomics

Studies individual behavior (households, firms)

Macroeconomics

Studies the economy as a whole

Sticky Prices

Prices that do not adjust quickly, causing imbalances like unemployment

Circular Flow of Income Model

Shows how money moves between households, firms, and government, demonstrating economic interdependence

Role of Households in Circular Flow

Provide labor and spend income on goods and services

Firm interaction with Households

Hire labor from households and sell goods/services to them

GDP

The total value of goods/services produced in a country

GDP vs. GNP (GNI)

GDP measures domestic production; GNP measures income earned by nationals at home and abroad

Value Added

Output minus input costs; it prevents double counting in GDP

Business Cycle

A cycle of economic ups and downs: expansion, peak, contraction, trough

Recession vs. Depression

Recession = 2 quarters of decline; depression = deeper, longer recession

Tools of Fiscal Policy

Spending and taxation: expansionary (stimulate) or contractionary (slow down)

When to use Expansionary Fiscal Policy

During downturns to boost demand and reduce unemployment

Purpose of Contractionary Fiscal Policy

To slow inflation during overheating (raise taxes, cut spending)

Monetary Policy

Controlled by the central bank to manage inflation and growth

Expansionary vs. Contractionary Monetary Policy

Expansionary = lower rates to boost demand; contractionary = raise rates to reduce inflation

Influence of Great Depression on Macroeconomic Theory

Showed markets don't self-correct; led to Keynesian economics

Key Principles of Keynesian Economics

Governments should manage demand using spending/taxes to stabilize output and employment

Collapse of Bretton Woods System

Costs of war, deficits, and inflation ended fixed dollar-gold link; led to floating rates

Embedded Liberalism

Government intervention at home + free trade abroad

Washington Consensus

A 1990s reform agenda promoting liberalization, deregulation, and privatization

Banking Crisis vs. Currency Crisis

Banking = insolvency/liquidity issues; currency = inability to defend exchange rate

Twin Crises

A banking and currency crisis together; more severe and contagious

Role of IMF during Financial Crises

Provides emergency loans and policy advice during financial crises

Systemic Risk

When one institution's failure threatens the whole system

Basel Accords

International banking standards to improve capital adequacy and reduce risk

Impossible Trinity

A country can't have all three: stable exchange rate, free capital movement, and monetary independence

Capital Controls

To control exchange rate, prevent outflows, and stabilize economy

Role of G20 in Global Economic Governance

A forum for coordinating macroeconomic policy among top economies

Soft Law vs. Hard Law in Financial Regulation

Soft law = non-binding norms; regulatory arbitrage = exploiting weaker regulations

European Monetary Union (EMU)

Includes the euro but also policy coordination and criteria compliance

Foreign Direct Investment (FDI) vs. Portfolio Investment

Implies lasting interest and control; portfolio = passive investment (stocks/bonds)

Role of Multinational Corporations (MNCs) in Global Trade

They control global supply chains, influence trade/investment flows, and transfer tech

Global Value Chain (GVC)

The full network of cross-border production processes for a good/service

WTO and Main Agreements

WTO manages global trade rules; TRIPS = IP rights, TRIMS = investment, GATS = services

Capital Controls Implementation

To manage volatility, prevent capital flight, and protect monetary policy

Systemic Risk in Financial Systems

Risk that failure in one part of the system destabilizes the whole economy

Contagion in a Financial Crisis

When financial problems spread across countries due to interdependence

Moral Hazard and 'Too Big To Fail'

Entities take risks assuming bailouts; TBTF means they must be saved

Stress Tests

Simulations testing how banks cope with economic shocks

Basel Accords

Basel I-III set global rules on bank capital, risk management, and liquidity

Maastricht Criteria for Joining Eurozone

Inflation <1.5% of average, deficit <3% of GDP, debt <60%, stable rates/currency

EMU vs. Euro

Euro = currency; EMU = broader policy, rules, and integration structure

Optimal Currency Area (OCA)

An area where a shared currency is optimal due to mobility, integration, and symmetry

Structural Flaws of Eurozone

No fiscal union, lack of transfer mechanisms, one-size policy, and ECB rigidity

Causes of 2008 Financial Crisis

Subprime mortgages, securitization, deregulation, global imbalances, poor oversight

Managed Float Exchange Rate Regime

Currency value floats but central banks intervene to stabilize

Pegged vs. Floating Exchange Rate

Pegged = fixed to another currency; floating = determined by market

Plaza Accord

1985 G-5 deal to devalue the USD to fix trade imbalances

Impossible Trinity (Trilemma)

Pick 2: stable rates, free capital, or policy independence - can't have all 3

Fiat Currencies

Not backed by gold; value depends on trust and legal enforcement

Macroeconomic Diplomacy

The negotiation and coordination of cross-border economic policies

Importance of Global Policy Coordination

Because economies are interconnected; uncoordinated actions can cause crises

Role of Financial Stability Board (FSB)

Coordinates global financial regulations; monitors systemic risk

Reforms Proposed to Improve IMF Governance

More voice for emerging markets, merit-based leadership, better quota rules

Criticisms of IMF Conditionality

Conditionality can harm growth, impose austerity, and lack democratic legitimacy

Washington Consensus

Set of liberal reforms (privatization, austerity, free trade) used by IMF/WB

Soft Law and Regulatory Arbitrage

Soft law = voluntary norms; regulatory arbitrage = exploiting weak jurisdictions

Significance of European Stability Mechanism (ESM)

Provides financial aid to euro states in crisis (permanent mechanism)

Illiquidity vs. Insolvency

Illiquidity = can't pay now; insolvency = can't pay at all

Institutions, Culture and Economic Development

Culture and institutions shape how economies develop and adapt