Unit 9 econ review

Economic Concepts

  • Trade-off between Inflation and Unemployment

    • In the short run, there is a clear inverse relationship between inflation and unemployment.
    • Low Inflation, High Unemployment:
      • When inflation rates are low, it often correlates with higher unemployment rates.
    • High Inflation, Low Unemployment:
      • Conversely, as inflation rates increase, unemployment tends to decrease.
    • This relationship illustrates the trade-off between the two economic indicators.

  • Long-term Relationship

    • In the long run, inflation and unemployment are not linked.
    • Regardless of inflation levels, the output and unemployment rates stabilize.
    • For instance, during an election, politicians may attempt to stimulate the economy to lower unemployment by expanding economic output.
    • However, this can lead to higher inflation without affecting either output or unemployment in the long run.
      • Example: If output were to expand beyond full employment, one can expect no change in output or unemployment levels, although inflation would increase.

  • Production and Trade

    • Understanding production efficiency through trade scenarios.
    • Example: Comparing Trades
      • With trade:
      • For every apple produced, a person can get half a banana.
      • Without trade:
      • For every apple produced, that person would have to give up one banana, which is less advantageous.
      • Hence, trade can lead to better outcomes depending on production capabilities.

Financial Accounts

  • Capital Account
    • The capital account records transactions regarding financial investments.
    • A credit occurs when foreigners invest in US financial or economic investments—this is considered an inflow to the capital account.
    • Conversely, if the US invests abroad, it functions as an import to the capital and is recorded as a negative.
  • Balance of Payments
    • The current account plus the capital account must total zero.
    • If one account shows a positive balance, the other must reflect a negative balance to maintain the equilibrium.

Market Dynamics

  • Supply and Demand Graph
    • Market graphs typically illustrate standard supply and demand dynamics, yet may have unique representations.
    • Exchange Rates
    • The graph provides insights on currency valuation; specifically, it conveys how many euros can be obtained per dollar.
      • Appreciating Dollar:
      • As the graph moves upward on the y-axis, an appreciation of the dollar occurs, indicating more euros can be acquired for each dollar spent.