final eco of money banking ( 1 )

AD curve

shows the relationship between inflation , total output

why is the AD curve downward sloping ?

when inflation increases - the central bank raises , the real interest rate , higher interest rates , reduce investment spending , net exports also decreases , aggregate demand falls , output decreases

What shifts the AD curve ?

AD shift right : Government spending ( G tăng ) , taxes decrease ( T giảm ) , expansionary monetary policy
AD shift left : G giảm , T tăng , contractionary monetary policy

Long - run aggregate supply ( LRAS ) :

shows the economy’s potential output

Long- run aggregate supply shift right when

capital increases , labor supply increases , technology improves , natural unemployment decreases

Three factors shift short- run aggregate supply ( SRAS )

expected inflation , output gap , inflation ( supply ) shocks

Self-correcting mechanism :

Regardless of where output is initially , it returns eventually to the natural rate
Slow : wages are inflexible , particularly downward , need for active government policy
Rapid : wages and prices are flexible , less need for government intervention

3 important conclussions :

there is no long- run trade off between unemployment , inflation

there is a short - run trade off between unemployment , inflation

there is 2 types of Phillip curves , long run , short run

Aggregate demand and supply analysis yields the following conclusions :

The economy has a self - correcting mechanism that reuturns it to potential output and the natural rate of unemployment overtime
A shift in the aggregate demand curve affects output only in the short run and has no effect in the long run
A temporary supply shock affects output and inflation only in the short run and has no effect in the long run

Three important conclusions

there is no long-run trade off between unemployment , inflation
there is a short- run trade off between unemployment , inflation
there are two types of Phillip curves , long run and short run

Okun’s Law :

decribe the negative relationship between the unemployment gap and the output gap

Policy makers can respond to this shock in two possible ways :

no policy response , policy stabilizes inflation in the short run , policy stabilizes economic activity in the short run

Efficient market prescription for the investor :

outperform the market , hot tip , new and unexpected , buy and hold strategy

Foreign exchange market :

appreciate : a currency rises in value relative to another currency
depreciation : a currency falls in value relative to another currency

Theory of purchasing power parity ( PPP ) :

all goods are identical in both countries
trade barriers and transportation costs are low
many goods and services are not traded across borders - PPP holds better in the long run

Domestic interest rate ( i D ) :

demand for USD shifts right , dollar appreciates

Foreign US interest rate ( i F ) :

demand shifts left , dollar depreciates

Expected future exchange rate ( E t+1 ) :

demand shifts right , dollar appreciates today

Changes in Interest Rates :

real interest rates , appreciates
expected inflation , depreciates

Changes in Money ( USD ) supply :

appreciate