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Transcript
FED buys bonds from the public Draw graph showing effect on interest rate. What happens to value of $ in foreign exchange market? i Sm1 Sm2 Money Market i1 i2 Dm Q1 Q2 Q Draw graph showing effect on the interest rate from increased saving in the U.S. What happens to nation’s capital stock? i Loanable Funds Market SLF1 SLF2 i1 i2 DLF Q1 Q2 Q Effect on P and GDP when $ depreciates P ASLR AS AD/AS P2 P1 AD2 AD1 Qf Q2 GDP FED sells bonds. Draw graph showing effect on interest rate. What happens to the value of the $ in the foreign exchange market? i Sm2 Sm1 Money Market i2 i1 Dm Q2 Q1 Q Government & FED do nothing in response to short-run recession ASLR P ASSR1 ASSR2 AD/AS P1 P2 AD Q1 Qf GDP Effect on interest rate when government runs a budget deficit Loanable Funds Market SLF i i2 i1 DLF2 DLF1 Q1 Q2 Q Value of U.S. $ and Japanese yen when U.S. interest rates increase. What happens to American imports and exports? Foreign Exchange Market P ($) SYen1 P (Yen) S$ SYen2 P2 P1 P1 D$2 P2 DYen Q1 Q2 Yen Q D$1 Q1 Q2 Dollars Q Effect on P, GDP when $ appreciates ASLR P AS AD/AS P1 P2 AD1 AD2 Q2 Qf GDP Effect on AD of FED’s bond sales during inflation P ASLR AS AD/AS P1 AD1 P2 AD2 Qf Q1 GDP Government and FED do nothing in response to short-run inflation ASSR2 P ASLR ASSR1 AD/AS P2 P1 AD Qf Q1 GDP Effect on AS and SRPC when price of oil increases dramatically P Inflation rate AS2 AS1 P2 P1 SRPC2 AD GDP2 GDP1 P goes up Unemployment rises GDP SRPC1 Unemployment rate Expansionary fiscal policy during a recession ASLR P AS AD/AS P2 P1 AD2 AD1 Q1 Qf GDP Effect on ASLR and LRPC when U.S. capital stock increases P Effect on AS ASLR1 ASLR2 Qf1 Qf2 Inflation GDP LRPC2 LRPC1 NRU2 NRU1 Unem The FED and Monetary policy • Always affects the money market • Money market has vertical supply curve • Increase in money supply lowers interest rates – increases investment and consumption and AD • Lower interest rates cause $ to depreciate – exports increase, imports decrease • Decrease in money supply has opposite effect Loanable funds market • S affected by savings; D affected by increased budget deficit (increasing G or decreasing taxes) • Upward sloping S curve • Increase in budget deficit raises interest rates (decreases I and C – crowding out) • Increase in savings lowers interest rates • Changes in income affect BOTH savings and consumption in the same direction Short run vs. long run • If unemployment rises in the short run, wages fall • Falling wages increases AS (shifts to right) • If unemployment falls in the short run, wages rise • Rising wages decreases AS (shifts to left) • Long run equilibrium is at the NRU Phillips Curves • Inflation on y axis; unemployment on x • Short run slopes downward • SRPC moves only when AS moves; if AD moves, there is movement along the SRPC • If AS shifts left, SRPC shifts right; if AS shifts right, SRPC shifts left • LRPC is vertical at the NRU • LRPC moves when NRU changes (when LRAS moves) • If LRAS shifts left, LRPC shifts right Capital Flows • Money coming into a country increases D for that currency and increases S of other currency • Increasing D for a currency causes it to appreciate; increasing S for a currency causes it to depreciate • Higher interest rates in a country increases D for its currency b/c it increases the D for that country’s financial assets • A higher P in a country decreases D for its currency b/c people will buy another country’s goods instead • Interest rates and value of $ move in same direction! socks 50 Comparative Advantage Finland 40 Swaziland 10 •Swaziland can produce 40 socks or 10 balloons using the same # of resources that Finland can use to produce 50 socks or 50 balloons 50 balloons • Which country has the absolute advantage in each product? • Which country has the comparative advantage in each product? • What are Finland’s opportunity costs for the 2 goods? Swaziland? • If 2 pairs of socks are traded for 1 balloon, how will each country benefit? Jet packsComparative Advantage •Djibouti can produce 50 jet 50 Djibouti 30 Botswana 10 packs or 10 time machines using the same # of resources that Botswana uses to produce 30 jet packs or 60 time machines 60 time machines • Which country has the absolute advantage in each product? • Which country has the comparative advantage in each product? • What are Djibouti’s opportunity costs for the 2 goods? Botswana’s? • If 4 jet packs are traded for 1 time machine, how will each country benefit? Money Creation • Deposits into banks are not new $. • Checkable deposits increase by the same amount that reserves increase • Loans determined by excess reserves • Required reserves = CHECKABLE DEPOSITS x required reserve ratio!!!!! • Increase in # of loans or deposits = 1st LOAN x monetary multiplier • When the FED buys bonds, that is NEW MONEY! Is included in any increase in the money supply! Graphs to know! • AD/AS, including LRAS – know how AS moves as the economy “approaches long run equilibrium” • Money market vs. loanable funds market • Phillips Curve • Foreign exchange market