Chapter 7
increase in rGDP per capita over a given period of time
What are economic fluctuations
Also called business cycles -- short run changers in the growth of GDP.
The Fed
Why do we trade?
to increase efficiency in production through gains
Flexible Exchange Rate
the government does not intervene in FOREX
growth rate formula
growth= Yt+1-Yt/yt
Recession?
A period of negative economic growth
Who conducts Fiscal Policy
The government
What is absolute advantage
if a producer can produce more in a given amount of time compared to other producers.
Fixed exchange rate?
The government fixed a value and intervenes to maintain the value
What is exponential growth
compounding growth Xt=X0(1+g)t
Expansion?
Period of positive economic growth
What is Expansionary Monetary Policy
Fed lowers short term interest rate
-Consumption rises. -Labor Demand moves up
What is comparative advantage
producing a good if the producer had a lower opportunity cost compared to that of other producers.
Managed Exchanged rate
A system between flexible and fixed exchange rates
What is Rule of 70
if something grows exponentially, (70/growth rate)= double starting number
What does Co-Movement imply?
Implies each market is interrelated
When is contractionary Policy enacted
Winners in Trade?
Consumers and producers exporting to foreign countries
What is the foreign exchange market
a global financial market in which currencies are traded and nominal exchange rates are determined
What is Catch-Up growth
poorer countries might grow faster than rich ones, using the rich's technology
Co-Movement
many aggregate macro variables grow or contract together during economic booms and busts.
Government spending and Taxation
Losers in Trade?
Producers competing with foreign exporting firms
what affects quantity transacted and exchange rate
Malthus's theory about income levels
should not rise above subsistence level--thats why we have little growth.
Reasons for economic fluctuations
- Real Business Cycle Theory
- Keynesian Theory
- Financial and Monetary Theories
What does Contractionary fiscal policy look like?
cutting government spending and increasing taxes.
Example of restrictions on trade
Tariffs, taxes, politics, etc.
What is capital outflow?
Capital (k) or money leaving a country.
e.g. buying foreign bonds
Changes around 1800
Industrial Revolution
Demographic change
Real Business Cycle?
Changes in technology, resources-- supply side changes.
Why would expansionary fiscal policy take place
the price of one country's currency in units of another country's currency, interpreted as the price of a dollar abroad.
Malthusian trap
Keynesian Theory
Changes in Aggregate Demand affecting (C) and (I).
Automatic Stabilizer vs Discretionary Policy
Automatic stabilizer automatically adjust to smooth out economic fluctuations. While Discretionary are deliberately enacted in response to Econ fluctuations.
Nominal Exchange Rate formula
e =units of foreign currency / US dollar
When the real exchange rate is high what happens to exports and imports in the US?
More imports (US dollar will buy more foreign goods). Foreigns will export more to US.