Macro Unit 4/5

Classical Economist believe…

…when the economy is not at long run equilibrium, it has the ability to fix itself because of the belief that resource prices and wages are flexible.

Recession (Problems)

Lots of Unemployment, workers eventually accept lower wages→good for businesses; Wages down, resource prices down, AS up (right) →all lead back to LR equilibrium

Inflation (Problems)

Lots of high Inflation, workers demand and receive higher wages→bad for businesses; wages up, resource prices up, AS down (left)→all leads back to LR equilibrium

Keynesian Economist

Believe in taking action (Fiscal Policy) ex; changing spending, change AD, Wages are Sticky

Monetarist

Believe in getting the money supply correct, ex if you want to grow economy by 3%, grow money supply by 3%

Monetary Equation of Exchange

MP=PQ (M-money supply, V-velocity of money, P-price level/inflation, Q-output/RGDP)

P x Q =

= Nominal GDP

Change the price level =

= change the money supply

In the short run, V and Q…

…Do NOT change

In the long run, changing money supply ___ change output

_ DOES NOT _

Rational Expectations

People anticipate gov policies →gov manipulation (policies will fail) in order to get the money supply correct (tax on tips, cash)

Supply Side

Encourage Investment, which will will increase LRAS(shift AD right) →good for everyone!

Supply Side: HOW

Investment Tax Credits (Tax breaks if you own business) and Low Marginal Tax Rates (business owners keep profits to reinvest in business)

Philips Curve

illustrates the potential inverse relationship between inflation and unemployment, suggesting that lower unemployment might lead to higher inflation, and vice versa, in the short run

SRPC (short run philips curve)

Tradeoff between unemployment and inflation; when AD shifts→move alongSRPC (opposite direction)

LRPC (long run philips curve)

Vertical curve at natural rate of unemployment, in LR → NO TRADEOFFs

Inflation Expectations..

Are the same as Actual inflation at LR equilibrium

Expectations in a Recession..

..People expect prices to go down, workers accept lower wages, AS up/right, businesses are happy bc of lower resource prices→GDP down and Unempl. Up. The philips curve shifts to the left

Expectations in Inflation..

.. People expect higher prices, workers demand higher wages, AS down/left, Employees not happy bc higher resource price. Philips curve to the right

FOREX (Foreign Exchange Market)

Market where people go to buy and sell currencies

Determinants of FOREX

Taste, Income (Nat/GDP), Interest Rates, Inflation, Speculation

If USD$ depreciates..

..Exports increase (cheaper to buy US products) and Imports decrease (foreign products seem expensive) → TRADE SURPLUS

If USD$ appreciates..

..Exports decrease (more expensive to buy US products) and Imports increase (seems cheaper to buy US products) → TRADE DEFICIT

Balance of Payments

Sum of all transactions between Americans and All residents of other nations (credit and debit)

Credit

Money coming IN (exports)

Debit

Money going OUT (imports)

Current Account

Goods and Services, Interest & Dividends (net investment income) and Contributions/gifts (net transfers)

Balance on Goods=

=Trade

If Current Accounts (added up) are Positive..

..there is a trade surplus

If Current Accounts (added up) are negative..

..there is a trade deficit

Financial Account

Stocks, Bonds, Real Estate and Companies

Current Account and Financial Accounts are..

..Inversely Related

Official Reserves

usde if accounts do not offset—foreign assets held by a country's central bank that can be used to settle international debts, influence the value of its currency, and ensure financial stability (gold etc)

Pros of Free Trade

variety of products, consume beyond PPC, more money/more customers, efficient bc of specializations, more output

Pworld < Pdomestic=

=Import

Pworld < Pp =

= Protectionism of US industries

Protectionsim

Protecting US industries through tariffs and quotas

Tariff

tax on imports

Quotas

Limit on Imports