final m

Exports

goods and services produced domestically and sold abroad 

Net exports (or trade balance)

value of country exports - country imports 

Trade surplus

exports > imports, the country sells more goods and services abroad than it buys from other countries, net exports positive 

Net Capital outflow

purchase of foreign assets by domestic residents - purchase of domestic assets by foreigners

US residents buying these foreign assets increase

US net capital outflow 

Negative NCO

domestic residents buying fewer foreign assets than foreigners buying domestic assets, capital is flowing out of the country. Net capital outflow is negative, country experiencing capital inflow 

• More money coming into country from foreigners buying domestic assets

Net capital outflow (NCO) =

net exports (NX)

real interest rate formula

nominal interest rate - inflation
used to compute expected real rates and missing inflation values

supply side economics

emphasizes that low marginal tax rates increase incentives to work, save, and invest

automatic stabilizers

elements built into economy that automatically adjust (w/o new legislation)

• examples: unemployment benefits increasing during recessions

• income tax, unemployment insurance, and welfare

During a recession, as incomes fall, individuals automatically pay lower tax rates or move into lower tax brackets, reducing their tax burden.

budget surplus

gov collects more in taxes than it spends

during economic expansions

budgets naturally move toward surpluses due to automatic stabilizers

laffer curve

relationship between tax rates and tax revenues

•  after some point there is no more benefit 

• high taxes can disincentivize work and reduce revenue

0 to 1 horizontal axis

type of taxation that represents the largest and second largest component of the federal budget revenue

individual income tax (1)
payroll, funding SS and Medicare

List the different types of taxation systems

Progressive Tax: rich families -> larger tax 

Regressive Tax: poor and middle income to pay a larger share compared to higher income earners
Proportional Tax: same amount paid no matter your income level 

budget debt

The total amount of money the government owes to creditors, including the public and foreign governments.

federal budget categories

Mandatory : Social Security and medicare (LARGEST)

Discretionary: defense spending, congress needs to pass these acts 

Net interest: debt payments

Discretionary

defense spending, congress needs to pass these acts 

stabilizations are intended to

move economy closer to potential output, full employment

3 different timelines of fiscal policies

Recognition Lag → Decision Lag → Implementation Lag

Real Interest rate

corrects the nominal interest rate for the effect of inflation to tell you how fast the purchasing power of your savings account will rise over time. Used to compute expected real rates and missing inflation values
nominal interest rate - inflation rate

Inside lag

delay in deciding and implementing a policy

outside lag

delay before policy effects are felt

Crowding Out

Increased government borrowing to fund spending can raise interest rates, which reduces private sector borrowing, investment, and consumption.

all fiscal policies are

influenced by multiplier effect

business tax cuts increase

investment spending

tools of fiscal policy

government spending
taxation

expansionary fiscal policy

used during recessions
increases AD and real gdp
implemented through
increasing gov spending
decreasing taxes

contractionary fiscal policy

used during inflation or overheated economies
decreases aggregate demand
implemented through
decreasing government spending
decreasing taxes

saving in a closed economy

National saving = GDP - Consumption - Gov spending
Y - C - G
S=I

open economy

Y-C-G-NX
S=I+NCO

if interest rate is too high

supply is greater than demand, interest rate falls

if government makes interest income tax-free

supply of loanable funds increase (shifts right)
interest rate falls

specific/unsystematic/inherent risk

unique for each company, organization or sector. It is reduced through diversification

current account

goods and services
international income flows
foreign aid