M2

  • Interest Rate

    • Definition: The interest rate is the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets.

    • World Interest Rate vs. Domestic Interest Rate:

      • Not always the same.

      • The world interest rate refers to the overall rate in the international financial market, while the domestic interest rate is specific to a country's economy.

  • Financial Markets

    • Domestic Financial Market:

      • Refers to markets within a country's economy.

    • World Financial Market:

      • Refers to international markets that include various countries and currencies.

    • Determination of Interest Rates:

      • The world interest rate is primarily determined by global market forces.

  • Graphs

    • Two key graphs to draw:

      1. Demand and Supply for Loanable Funds:

        • X-axis: Quantity of Loanable Funds.

        • Y-axis: Interest Rate.

      2. Net Exports & Capital Outflow:

        • Analysis of how trade surplus impacts capital flow.

  • Nominal vs. Real Exchange Rates

    • Nominal Exchange Rate: Current exchange rate of currency without adjustment for inflation.

    • Real Exchange Rate: Takes into account the relative price levels of two countries, affecting the exchange of goods.

  • Trade Surplus

    • When a country exports more than it imports.

    • Indicates net capital outflow.

    • A trade surplus identifies a country as a net lender.

  • Small Open Economy vs. Large Open Economy

    • Small Open Economy: Cannot influence world interest rates, operates as a price taker.

    • Large Open Economy: Can influence world interest rates due to its size and economic power.

  • Effects of Tariffs

    • Impact on Net Exports:

      • An increase in import tariffs can decrease imports, thus shifting net exports positively.

    • S-I Curve:

      • Stays the same with respect to tariffs but impacts net exports.

  • Net Capital Outflow (NCO)

    • NCO is affected by domestic investment; if investment decreases, NCO will increase as capital flows outwards in search of better returns.

  • Unemployment Types

    • Cyclical Unemployment: Related to the economic cycle, affected by downturns.

    • Structural Unemployment: Results from changes in the economy that create a mismatch between skills and job requirements.

  • Natural Rate of Unemployment

    • Refers to the level of unemployment that exists when the economy is at full employment.

    • Factors that can elevate the natural rate include skills mismatch, technology displacements, and demographic changes.

  • Solow Growth Model

    • Characteristics of Capital Per Worker: In steady-state, capital per worker does not change (growth rate is zero).

    • Equation: The output per worker (y) can be calculated as total output (Y) divided by total labor (L).

  • Romer Model

    • Focuses on the role of technology and innovation in economic growth. Key arguments from economists Johnson and Robinson relate to institutional and geographical factors influencing economic performance.

  • Exam Preparation

    • Emphasize understanding definitions and the graphs: demand/supply for loanable funds, net exports curves, and factors influencing exchange rates.

    • Review types of unemployment and their impact on the economy.