Nawal's AP Macroeconomics Blog

Foreign exchange market: the buying and selling of currency Appreciation : the value of the currency is strong. The Dollar buys more of another currency, which results in less expensive imports and more expensive exports  Imports increase because they are cheaper Creates a trade deficit Depreciation : a weak dollar. The dollar buys less of another currency, which results in more expensive imports and less expensive exports.  Cheap exports

Balance of payments: a measure of money inflows and money outflows between the US and the rest of the world. Inflows are referred to as credits Outflows referred to as debits The balance of payment is divided into 3 accounts:  Current account:  Balance of trade or net exports: Exports is a credit or an asset, while import is a debit or a liability  Net foreign income or net investment: Income earned by US owned foreign assets, also incompasses income payed to foregin held US assets  Net transfers: Foreign aid. Tend to be unilateral. EX: US giving money to another country in a time of disaster.  Capital/ Financial:  Balance of capital ownership. Includes the purchase of both real (real estate) and financial assets (stocks and bonds).  Direct investment in the US is a credit to the capital account. Ex; Toyota factory in San Antonio.  Direct investments by US firms/ individuals in a foreign country are debits the capital account. Ex: ...

Phillips curve Represents the relationship between unemployment and inflation There is a trade-off between inflation and unemployment in the short term In the short run, inflation increases as the economy expands During a recession, unemployment increases because the economy slows down Long Run Phillips Curve (LRPC) Occurs at the natural rate of unemployment Represented by a vertical line There is no trade-off between unemployment and inflation in the long run The economy produces at full employment output level LRPC will only shift if LRAS shifts Shifts of the Phillips Curve if AD changes, we will move points on the SRPC if SRAS changes, we will move the SRPC Disinflation A reduction in the rate from year to year, which can be seen in the long-run Phillip curve This also occurs when aggregate demand declines Deflation A general decline in the price level Hyperinflation When an economy experiences a high and unusual rate of inflation, which can decrease...

Uses of money Medium of Exchange (barter/trade) Unit of Account (economic value/money’s worth) Store of Value (what is the money’s value over time/where is it?) Types of money Commodity Money (gold/silver: a product) Representative Money (IOU) Fiat Money (Government money) Characteristics of money Durability Portability Divisability Uniformity Scarctiy Acceptability Money Supply Determined by Fed because of monopoly over money supply (vertical curve) Also vertical because it is independent of the interest rate M1 Cash, coins, currency, traveler's checks, and demand or checkable deposits(largest component) 75% of transactions in the economy M2 M1 + Savings Account M3 M2 + Money Market Account + CD's (Certificate of Deposit) Liquidity Easy to convert to cash M2 & M3 (M1, major component, not included) Balance sheet: T account, t-chart. Summarizes the financial position of a bank, at a certain time. Asset(own)-...

Fiscal Policy Changes in the expenditures or tax revenue of the federal government  2 tools of fiscal policy Taxes- government can increase or decrease taxes Spending- government can increase or decrease spending Fiscal policy is enacted to promote or nations economic goals: full employment, price stability, economic growth.  Deficits, Surpluses, and debt Balanced budget Revenues= expenditures Budget deficit Revenues<expenditures Budget surplus Revenues>expenditures Government debt Sum of all deficits-sum of all surpluses Government must borrow money when it runs a budget deficit. Government borrows from Individuals  Corporations Financial institutions  Foreign entities or foreign governments  Fiscal Policy 2 Options Discretionary Fiscal Policy(action) Expansionary fiscal policy-think deficit Contractionary fiscal policy-think surplus Non-discretionary fiscal policy(no action) Discretionary v. Automatic Fiscal P...

The spending multiplier effect An initial change in spending (C,Ig, G, Xn) causes a larger change in aggregate spending, or Aggregate demand (AD). Multiplier=Change in AD/Change in spending  Multiplier= change in AD/ change in C, Ig, G, OR Xn Why does it happen? Expenditures and income flow continuously which sets off on spending increases in the economy. Calculating the spending multiplier: The spending multiplier can be calculated from the MPC or the MPS. Multiplier = 1/1-mpc or 1/MPS Multipliers are positive when there is an increase in spending and negative where there is a decrease.  Calculating the tax multiplier: When the government taxes, the multiplier works in reverse Why? Because now money is leaving the circular flow Tax multiplier (note its negative) -MPC/1-MPC or -MPC/MPS If there is a tax cut then the multiplier is + because there is now more money in the circular flow.