Balance of Payments: Measure of Money inflows and outflows between US and rest if world; inflows referred as “credits” and outflows referred as “debits” Balance of Payment divided into 3 accounts: Current Account: Balance of Trade aka Net Exports, Net Foreign Income aka Net Investment: income earned by US owned by foreign assets, Net Transfers: foreign aid Capital/Financial Account: Includes purchase above real and financial access (ex: direct investment- in US, debit is credit to capital account; brand factory in area); direct investment by US firms/individuals in a foreign country are debits to capital account; purchase of foreign financial asset reps a debit to capital account (ex: rich buys stock in petral China); purchase of domestic product reps purchase of credit in financial account (ex: Venezuela buys steak from Venezuela); current and capital account should zero each other out; Real asset: real estate, G & Financial asset: stocks or bonds Official R...
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Disinflation: Reduction in the inflation rate from year to year which can be seen in the long run Phillips Curve; also occurs when AD declines Deflation: general decline in price level Hyperinflation: when an economy experiences an unusual high rate of inflation Supply Side Economics: Changes in AS not AD determines level of inflation, unemployment rates, economic growth; supporters believe it's best to lower taxes and decrease regulation; Reaganomics; lower tax rates provide positive work incentives and thus shift AS curve to right Reaganomics: poor gets money last Laffer Curve: depicts theoretical relationship between tax rates and government revenue; as tax rates increase from zero, tax revenues increase from zero to some maximum level and then decline; 3 criticisms: empirical evidence suggest that the impact of tax rates on incentives to work, save, and invest are small. Tax cuts also increase AD which can fill inflation; where economy is actually located on ...
Money Creation Process: (assume 10% required reserves) $1000 cash deposited in checking account => no immediate change in MS => Assets // reserves $1000 $1000 FED purchase of bonds from public (deposited into checking account) => immediate increase in MS of $1000 => Liabilities // demand deposits $1000 RR = $100 (.10 x 1000 deposit) Single Bank: of Money in single bank can create (loan out) = ER Actual Reserves-Required Reserves=Excess Reserves; $1000-$100=$900 in ER Banking System: create money by multiple of initial ER; monetary multitude=1/RR=1/.1=10 System New Money=deposit multiplier x initial excess reserves; 10 x $900 = $9000 Total change in MS as result of deposit; initial deposit of right now + Banking system = total change; $1000+$900=> $10000
Uses of Money: Medium of Exchange Unit of Account Store of Value Types of Money: Commodity money Representative money (IOU’s) Fiat money ($ bc govt says so) Characteristics of Money: Durability Portability Divisibility Uniformity Scarcity Acceptability Money Supply: M1 Money) cash, coins, currency, traveler’s checks, demand or checkable deposits (largest component) M2 Money) M1 Money + savings accounts M3 Money) M2 Money + money market accounts + CDs Liquidity: easy to convert to cash Balance Sheet: summarizes finance decision of a bank at a certain time Liabilities = Assets Liabilities (owe): RR and ER; Assets (own): DD; net worth or owner’s equity Required Reserve + Excess Reserve = Demand Deposit RR: Bank holds a fraction of deposit back as reserve in bank ER: Held by a bank or financial institution in excess of what is required ...
MPC & MPS: Marginal propensity to consume: delta C / delta DI ; % of every extra dollar earned that is spent Marginal propensity to save: delta S / delta DI ; % of every extra dollar earned that is saved MPC+MPS=1 1-MPC=MPS 1-MPS=MPC Spending Multiplier Effect: initial change spending (C,Ig,G,Xn) causes larger change in aggregate spending or AD Formula: Multiplier = change in ad / change in spending Happens because expenditures and income flow continuously which sets off a spending increase in economy Formula: Multiplier = 1 / 1-MPC or 1 / MPS Multipliers are positive when there's increase in spending and negative when there's decrease Tax Multiplier: when government taxes, multiplier works reverse bc money leaves circular flow Formula: Tax Multiplier = -MPC / 1-MPC or -MPC / MPS if tax cut, multiplier is positive bc more money in circular flow *MPS, MPC, Multipliers: Fiscal Policy: changes in expenditures or tax revenues of federal gov...
Investment: money spent or expenditures on new plants (factories), capital equipment (machinery), technology (hardware and software), new homes, inventories (goods sold by producers) Expected Rate of Return: -How does business make investment? Cost / benefit analysis -How does business determine benefits? Expected rate of return -How does business count the cost? Interest costs -How does business determine amount of investment they undertake? Compare expected rate of return to interest cost (return > interest cost : invest // return < interest cost: don't invest) -What determines cost of investment decision? Real Interest Rate (r%) Investment Demand Curve (ID) - What is the shape of investment demand curve? Downward sloping -Why? When interest rates are high, fewer investments are profitable; when low, more investments are profitable. Conversely, there are few investments that yield high rates of return, and many that yield low rates of return D...
Aggregate Supply: Level of real GDP (GDPr) that firms will produce at each price level (PL) Long Run: period of time where input prices are completely flexible and adjust to changes in price level ; level of real GDP supplied is independent of price level Short Run: period of time where input prices are sticky and do not adjust to changes in the price level ; level of real GDP supplied is directly related to price level Long Run Aggregate Supply (LRAS): marks the level of full employment in economy (analogous to PPC) Short Run Aggregate Supply (SRAS): input prices are sticky in the short run, SRAS is upwards sloping. Changes in SRAS: increase is shift to the right & decrease is shift to the left ; key to understanding is per unit cost of production ; formula: per unit production cost = total input cost / total output Determinants of SRAS (all of following affect until production cost): input prices: domestic resource prices (wages <75% of a...
Aggregate Demand curve: -AD is demanded by consumers, businesses, government, and foreign countries -Changes in price level move along curve not shifts on curve Aggregate Demand (AD): Shows amount of real GDP that private, public, and foreign sector collectively desire to purchase at each possible price level ; The relationship between the price level and the level of real GDP is inverse 3 Reasons Why AD is downward sloping: Wealth Effect: higher prices reduce purchasing power of $, decreases quantity of expenditures, lower price levels increase purchasing power and increase expenditures ; ex: price level goes up, gdp demand goes down Interest-Rate Effect: as price level increase, lenders need to charge higher interest rates to get REAL return on their loans, higher interest rates discourage consumer spending and business investment ; ex: increase in price leads to increase in interest rate from 5% to 25%. Less likely to take out loans to improve business Foreign T...