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70 Cards in this Set
- Front
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If price level is high
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the quantity of money demanded increases
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If price level is low
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the quantity of money demanded decreases
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quantity theory of money
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determines the price level and the growth rate in the quantity of money available determines the inflation rate
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Nominal Varialbes
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variables measured in monetary units (dollar values)
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Real varialbes
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variables measured in physical units
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theoretical separation of nominal and real variables
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classical dichtomoy
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rate at which money changes hand
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velocity of money
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the revenue the government raises by creating money
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inflation tax
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an increase in the rate of money growth raises the raite of inflation but changes in money supply do not affect real variables
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monetary neutrality
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When the Fed increases the rate of money growth, the long-run result is..
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both a higher inflation rate and a higher nominal interest rate
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one-for-one adjustment of the nominal interest rate to the inflation raet
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fisher effect. Does not hold true in the short run because inflation may be unanticipated
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Inflation discourages saving because of capital gains:
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the profits made by selling an asset for more than its purchase price
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Trade surplus
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an excess of exports over imports
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trade deficit
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an excess of imports over exports
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factors that influence a country, exports, imports, and net exports
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-tastes of consumers for domestic and foreign goods
-prices of goods at home and abroad -exchange rates at whcih people can use domestic currency to buy foreign currencies -incomes of consumers at home and abroad -cost of transporting goods from country to country -government policies toward internation trade |
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Net capital outflow
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purchase of foreign assets by domestic resiendents minuts the purchase of domestic assest by foreigners
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rate at whcih a person can trade the currency of one country for the currency of another
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nominal exchange rate
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appreciation
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increase in the value of a currency as measured by the amount of foreign currency it can buy
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depreciation
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a decrease in the value of currency as measured by the amount of foreign currency it can buy
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Depreciation in the U.S real exchange rate means
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us goods are cheaper relative to foreign goods
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appreciation in the U.S real exchange rate means
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that U.S goods are more expensive compraed to foreign goods
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a theory of exchange rates whereby a unit of any given currency should be able to buy the same quantity of goods in all countries
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purchasing power parity
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Key facts about (short run) economic fluctuations
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-Economic fluctuations are irregular and unpredictable
-as output falls, unemployment rises |
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model of aggregate demand and aggregate supply
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model that most economists use to explain short-run fluctiations in economic activity around its long-run trend
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Why the aggregate demand curve slopes downward
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-the wealth effect
-the interest rate effect -the exchange rate effect |
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The wealth effect
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a lower price level increases wealth, which stimulates spending on consumption
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The interest rate effect
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a lower price level reduces the interst rate, which stimulates spending on investment
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The exchange rate effect
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a lower price level causes the real exchange rate to depreciate, which stimulates spending on net exports (Exports>Imports)
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When the price level rises...
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decreased wealth depressed consumer spending, higher interest rates depress investment spending, and a currency appreciation depress net exports
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Shifts arising from changes in government purchases:
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-an increase in government purcahses of goods and services shifts the aggreate demand to the right
-a decrease in government purchases on goods and services shift the aggregate-demand curve to the left |
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an event that rises the spending on net exports at a given price level...
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-shifts the aggregate-demand curve to the right
Ex: a boom overseas, speculation that causes exchange-rate depreciation |
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an event that reduces spending on net exports at a given price level
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shifts the aggregate demand curve to the left
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natural rate of output
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the production of goods and services that an economy achieves in the long run when unemployment is at its normal rate
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Why the long-run curve might shift
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-Shifts arising from changes in labor
-Shifts arising from changes in capital -Shifts arising from change sin natural resources -Shifts arising from changes in technological knowledge |
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Why the aggregate supply curve ships upward in the short run
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-Sticky-wage theory
-sticky-price theory -misperceptoins theory |
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Stick wage theory
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an unexpectedly low price level raises the real wages, whcih causes firms to hire fewer works and produce a smaller quantity of goods and service
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Stick-price theory
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unexpectedly low price level leaves some firmst with higher-than-desired prices, which depresses their sales and leads them to cut back production
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The misperceptoins theory
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an unexpectedly low price level leads some supplier to think their relative prices have fallen, which induses a fall in production
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Stagflation
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when the economy is experiencing both stagnation (falling output) and inflation (rising prices)
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Wage-price spiral
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phenomenon of higher prices leading to higher wages, in turn leading to even higher prices
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If policy makers do not get involved...
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the aggregate demand curve will remain constant and the economy willl have to regulate itself bakc to norm
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if policy makers do influence aggregate demand
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they increase money supply or increase government spending, this moves the demand curve to the right to prevent the shift in aggregate supply curve from affecting output
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The msot important reason for the downward slope of the aggregate-demand curve is the
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interest-rate effect
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Theory of liquidity preference
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Keyne's theory that the interest rate adjusts to bring money supply and money demand into balance
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When the fed buys government bonds....
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they add to the money supply
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when the fed sells government bond
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bank reserves and the mone supply falls
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Fed can change the supply by decreasing the...
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discount rate: the interest rate at which bands can borrow reserves from the FED
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What determines the quantity of money demanded
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the interest rate
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When the fed increases money supply..
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it lowers the interest rate and incrases the aggregate-demand curve to the right
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When the fed decreases money suplly
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money supply curve shifts to the left, increasing the interest rate and reducing the quantity of goods and services demanded, shifting the aggregate-demand curve to the left
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Federal Funds rate
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intrerst rate the banks charge one another for short-term loans
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FOMC
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federal open market comittee
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If the fed wants the aggregated demand to increases....they can either
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increase the money supply or lower the interest rate
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if the fed wants the aggregate demand to decrease they can either...
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decrease money supply or raise the interest rate
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Fiscal policy
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the setting of the level of government sepdning and taxation by government policymakers
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multiplier effect
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the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending
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Marginal propensity to consume (MPC)
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the fractoin of extra income that a household consumes rather than saves
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Crowding-out effect
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offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending
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Change in aggregate demand
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-the government-use fiscal policy
-the fed- use monetary policy |
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Automatic stabilizer
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changes in fiscal policy that stimualte aggregate demand when the economy goes into a recession without policy-makers having to take any deliberate action
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Phillips curve
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curve that shows the short-run trade-off between inflation and unemployment
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the vertical long-run Phillips curve illustrats the conclusion that...
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unemployment does not depend on money growth and inflation in the long run
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Natural ratment e of unemployment
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unemployment rate toward which the economy gravitates in the long run
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Expected inflation
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meausures how much people expect the overall price level to change and determines the poisiton of the short-run aggregate-supply curve
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Natural-rate hypothesis
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claim that unemployment eventually returns to its natural rate, regardless of the rate of inflaiton
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Supply shock
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event that directly alters firms' costs and prices, shifting the economy aggregate-supply curve and thus the Phillips curve
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Disinflation
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a reduciton in the rate of inflation
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Deflation
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reduction in the price level
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Sacrifice ratio
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number of percentage points of annual output lost in the porcess of reducing inflation by 1 percentage point
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Rational expectations
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theory that people optimally use all the information they have, including information about government policiies, when forecasting the future
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