Key Concepts in Macroeconomics and Trade Policies

Prime mortgages

Loans made to borrowers with excellent credit and who, as a result, were charged low interest rates.

Phillips curve

A graphical representation showing the inverse relationship between inflation and unemployment.

Adjustable-rate mortgage

A financial instrument not backed by pooled mortgage debt.

2007-2009 recession triggers

An increase in demand following a rapid increase in the money supply did not trigger the recession.

Jobless recoveries explanation

U.S. productivity has been decreasing does not help explain jobless recoveries.

Inflation-wage tradeoff

The misery index is not used to describe the inflation-wage tradeoff.

Labor demand fall effects

When labor demand falls, unemployment rises and wages decline.

Expansionary monetary policy

To shift from point b to point a in the short run, policymakers implement expansionary monetary policy, thereby accepting inflation to increase employment.

Disinflation

Occurs when both inflation and unemployment decrease.

Expansionary policy effect on unemployment

If policymakers use expansionary policy to increase inflation, the unemployment rate will be lower.

Phillips curve shift

The Phillips curve would shift to the left if workers expect higher inflation.

Federal Reserve's money supply plan

If the Federal Reserve announces a plan to decrease the money supply next year, this would shift the Phillips curve to the left.

Supply-side policy effect

In the long run, a supply-side policy that boosts productivity will reduce inflation.

Natural rate of unemployment

If the Phillips curve PCa reflects a lower unemployment rate, the natural rate of unemployment could be 3%.

Real wages and inflation

If inflation is lower than expected, then real wages have risen and workers will demand decreases in their nominal wages.

Aggregate demand fall

Starting at point r, if aggregate demand falls, the economy moves in the short run to point s.

Adaptive expectations

Expectations formed without full use of public information are called adaptive expectations.

Rational expectations theory

According to rational expectations theory, if contractionary policy is unexpected, the economy will move from point c to point b before reaching d.

Absolute advantage

If Nicaragua produces fewer bananas than Costa Rica, then Costa Rica has an absolute advantage in banana production.

Opportunity cost in Kenya

Based on the table, the opportunity cost of one kilogram of cocoa in Kenya is 3 kilograms of coffee.

Autarky imports

In autarky, this country imports 0 surfboards, while with free trade it imports 60.

Canada's tulip export impact

If Canada increases exports of tulips, tulip producers in Canada will be better off and tulip consumers will be worse off.

Brazil's pricing if not dumping

If Brazil is not dumping, then Brazil is selling goods at or above domestic prices and costs.

Import scenario with excess demand

If the world price is $100 and domestic demand exceeds domestic supply by 60, this country would import 60 widgets.

Absolute advantage definition

A country lacks an absolute advantage in a good if it produces less using the same resources.

Germany's opportunity cost

Germany's opportunity cost of producing a gallon of milk is 2 loaves of bread.

U.S. comparative advantage

If the U.S. has a comparative advantage in watches, it should export watches and import corn.

U.S. flip-flop market price scenario

In the U.S. flip-flop market, if the world price is lower than domestic equilibrium, the price is $12 and results in imports.

Tariff definition

A tariff is not a tax on exports.

Tariff impact on consumer price

With a tariff, consumer price increases compared to free trade and the tariff equals $2.

Quota definition

A quota is a restriction on import quantities.

Trade balance with excess imports

If imports exceed exports, the trade balance is a deficit of $2,000.

Trade deficit definition

If imports exceed exports, the nation has a trade deficit.

Current account component

Profits made by a U.S. shoe company in Vietnam belongs in the current account, not financial.

Exchange rate definition

The term for the rate between two currencies is exchange rate.

Euro to dollar conversion

If 1 euro = $1.30, then $1 = 0.77 euro.

Real exchange rate equality

If price levels are equal, the real exchange rate equals the nominal exchange rate.

PPP exchange rate example

PPP implies that £50 in the UK = $75 in the US, so the exchange rate is £0.67 = $1.

Big Mac Index purpose

The Big Mac Index attempts to measure purchasing power parity.

Euro surplus impact

If there's a surplus of euros, the euro will depreciate.

Demand increase impact on dollar

When demand for U.S. goods increases, the U.S. dollar will appreciate; e0 → e1.

Dollar depreciation effect

If the dollar depreciates vs the euro, European goods become more expensive in the U.S.

Interest rate and currency relationship

A country that raises interest rates usually sees its currency appreciate.

Dollar appreciation against yen

When the dollar appreciates against the yen, U.S. exports fall; imports rise.

Real exchange rate calculation

Salmon at $4 in US, ¥1488 in Japan. With $1 = ¥124, real exchange rate is 0.33.

Investor demand with euro rise

If the euro is expected to rise 2%, investors will demand a 7% return in the U.S.

Fixed exchange rates and fiscal contraction

With fixed exchange rates, fiscal contraction results in capital outflow and reduced GDP.

Contractionary fiscal policy effect

Contractionary fiscal policy under fixed exchange rates leads to lower interest rates; capital outflow.

Fixed exchange rate definition

A government that sets exchange rates and adjusts policy to maintain them uses a fixed exchange rate.

Gold standard trade surplus effect

Under a gold standard, if a country has a trade surplus, gold flows in.