The Balance of Payments II: Output, Exchange Rates, and Macroeconomic Policies in the Short Run

Vocabulary flashcards from International Economics Lecture Notes Chapter 7 Part 2.

IS Curve

Combinations of output Y and the interest rate i for which the goods and forex markets are in equilibrium.

LM Curve

An economic model showing the relationship between interest rates, output, and the money market.

General Equilibrium

Equilibrium in all markets, including goods, money, and forex markets.

Uncovered Interest Parity (UIP)

The condition where domestic and foreign returns are equal, considering expected exchange rate changes.

Trade Balance Effect

The effect of lower interest rates causing a nominal depreciation, stimulating external demand.

Stabilization Policy

Policy actions aimed at maintaining the economy at or near its full employment level of output.

Inside Lag

The lag between an economic shock and the implementation of policy actions.

Outside Lag

The lag between policy actions and their effects on the economy.

Liquidity Trap

A situation where expansionary monetary policy is ineffective because interest rates are already near zero.

Crowding Out

When an increase in government spending is offset by a decline in private spending.

Monetary Policy

Using changes in the money supply to influence economic activity.

Fiscal Policy

Using government spending and taxes to influence economic activity.

Monetary Expansion

A monetary policy that increases the money supply.

Fixed Exchange Rate

When a country maintains a fixed value for its currency in terms of another currency or a basket of currencies.

Floating Exchange Rate

When a country allows the exchange rate to be determined by the market forces.

Trilemma

A situation where it is impossible for a country to have fixed exchange rate, free capital mobility and monetary policy autonomy simultaneously.

Austerity

A situation where a country reacts to adverse demand shocks with large government spending cuts.

Exchange Rate

The value of one currency expressed in terms of another currency.

Money Market Equilibrium

The condition where the demand for real money balances equals the real money supply.

LM Curve

Shows the combinations of interest rate and output that are consistent with money market equilibrium.