Thursday, May 12, 2016

Unit 7 Notes - May 9th, 2016

Absolute Advantage

Individual: exists when a person can produce more of a certain good/service than someone else in the same amount of time (or can produce a good using the least amount of resources).
National: exists when a country can produce more of a good/service than another country can in the same time period.

Comparative Advantage

A person or a nation has a comparative advantage in the production of a product when it can produce the product at a lower domestic opportunity cost than can a trading partner.

Specialization and Trade


Gains from trade are based on comparative advantage, not absolute. 

Unit 7 Notes - May 3rd, 2016

Foreign Exchange (FOREX)

·         The buying and selling of currency.
·         Any transaction that occurs in the Balance of Payments necessitates foreign exchange.
·         Exchange rate is determined in the foreign currency markets.

Changes in Exchange Rates

·         Exchange rates are a function of the supply and demand for currency.
o   An increase in the supply of a currency will decrease the exchange rate of a currency.
o   A decrease in the supply of a currency will increase the exchange rate of a currency.
o   An increase in demand for a currency will increase the exchange rate of a currency.
o   A decrease in demand for a currency will decrease the exchange rate of a currency.

Appreciation & Depreciation

Appreciation: of a currency occurs when the exchange rate of that currency increases.
Depreciation: of a currency occurs when the exchange rate of that currency decreases.

Exchange Rate Determinants

·         Consumer’s Taste
·         Relative Income
·         Relative Price Level
·         Speculation

Exports and Imports

·         The exchange rate is a determinant of both imports and exports.
·         Appreciation of the dollar causes American goods to be relatively more expensive and foreign goods to be relatively cheaper thus reducing exports and increasing exports and reducing imports.
·         Depreciation of the dollar causes American goods to be relatively cheaper and foreign goods to be relatively more expensive thus increasing exports and reducing imports.

Floating/Flexible Rates

Based upon supply and demand of that currency versus other currencies. Very sensitive to the business cycle and it provides options for investments.

Fixed Rates


Based upon a countries willingness to distribute currency and to control the amounts. 

Unit 7 Notes - April 27th, 2016

The Balance of Payments: The measure of money inflows and outflows between the United States and the rest of the world.
·         Inflows are referred to as CREDITS
·         Outflows are referred to as DEBITS
·         Balance of Payments is divided into 3 accounts:
o   Current Account
o   Capital/Financial Account
o   Official Reserves Account
·         Whatever is purchased/sold appears twice on the Balance of Payments.

Current Account

·         Balance of Trade or Net Exports
o   Exports of goods/services – Imports of goods/services
o   Exports create a credit to the balance of payments.
o   Imports create a deficit to the balance of payments.
·         Net Foreign Income
o   Income earned by US owned foreign assets – Income paid to foreign held US assets
·         Net Transfers (tend to be unilateral)
o   Foreign aid = a debit to the current account.

Capital/Financial Account

·         Balance of capital ownership.
·         Includes the purchase of both real and financial assets.
·         Direct investments in the United States is a credit to the capital account.
·         Direct investments by US firms/individuals in a foreign country are debits to the capital account.
·         Purchase of foreign financial assets represents a debit to the capital account
·         Purchase of domestic financial assets by foreigners represents a credit to the capital account.

Relationship Between Current and Capital Account

·         Current Account and Capital Account should zero each other out.
·         That is… If the current account has a negative balance (deficit), the capital account should have a positive balance (surplus).

Official Reserves

·         The foreign country holdings of the US Federal Reserve System.
·         When there is a balance of payments surplus, the Fed accumulates foreign currency and debits the balance of payments.
·         When there is a balance of payments deficit, the Fed depletes its reserves of foreign currency and credits the balance of payments.
·         The official reserves zero out the balance of payments.

Active vs Passive Official Reserves

The US is passive in its use of official reserves. It does not seek to manipulate the dollar exchange rate.

Equations:

·         Balance of Trade = Goods Exports + Goods Imports
·         Balance on Goods & Services = (Goods Exports + Service Exports) + (Goods Imports + Service Imports)
·         Current Account = Balance on Goods & Services + Net Investments + Net Transfers

·         Capital Account = Foreign Purchases + Domestic Purchases

Unit 5 Notes - April 13th, 2016

Supply Side Economics (Reaganomics)

·         Shows changes in AS not AD which determines the level of inflation unemployment rates and economic growth.
·         Supply side economists support policies that promote GDP growth by arguing that high marginal tax rates along with the current system of transfer payments such as unemployment compensation or welfare programs provide disincentives to work, invest, innovate, and undertake entrepreneurial ventures.
·         Low marginal tax rates induce more work thus AS increases.
·         Lower marginal tax rates also make leisure more expensive and work more attractive.

Incentives to Save and Invest

·         High marginal tax rates reduce the rewards for savings and investment.
·         Consumption might increase, but investments depend upon savings.
·         Lower marginal tax rates encourage saving and investing.
Laffer Curve: A theoretical relationship between tax rates and government revenue. As tax rates increase from 0, tax revenues increase from 0 to some maximum level and then decline.

Criticisms of the Laffer Curve

·         Research suggests that the impact of the tax rates on incentives to work, save, and invest are small.
·         Tax cuts also increase demand which can fuel inflation and demand may exceed supply.

·         Where the economy is actually located on the curve is difficult to determine. 

Unit 5 Notes - April 8th, 2016

The Phillips Curve

The Long Run Phillips Curve is vertical at the natural rate of unemployment.

·         Because the LRPC exists at the natural rate of unemployment, structural changes in the economy that affect the natural rate of unemployment will also cause the LRPC to shift.
·         Increases in the natural rate of unemployment shift the LRPC right.
·         Decreases in the natural rate of unemployment shift the LRPC left.
·         There is no tradeoff between inflation and unemployment.
·         LRPC will shift if LRAS shifts.
·         The natural rate of unemployment = frictional + structural + seasonal unemployment [4%-5%]
·         The major LRPC assumption is that more worker benefits create higher natural rates and fewer worker benefits create lower natural rates.
Supply Shocks: A rapid and significant increase in resource costs which causes the SRAS to shift.

Misery Index: The combination of inflation and unemployment in any given year. A single digit index is good. 

Unit 5 Notes - April 7th, 2016

Extending the Analysis of Aggregate Supply

SRAS: In macroeconomics, this is the period in which wages (and other input prices) remain fixed as price level increases or decreases.
LRAS: The period of time in which wages have become fully responsive to changes In proce level.

Effects over Short-Run

·         In the short run, price level changes allow for companies to exceed normal outputs and hire more workers because profits are increasing while wages remain constant.
·         In the long run, wages will adjust to the price level and previous output levels will adjust accordingly.

Equilibrium in the Extended Model

·         The extended model means the inclusion of both the short run and long run AS curves.
·         The long run AS curve is represented with a vertical line at the full employment level of real GDP.

Demand Pull Inflation in the AS Model

·         Demand Pull prices increase based on increases in AD
·         In the short run, demand pull will drive up prices and increase production
·         In the long run, increases in AD will eventually return to previous price levels.

Cost Push and the Extended Model

·         Cost Push arises from factors that will increase per unit costs such as increases in the price of a key resource.
·         Short run shifts left. In this case, it is the cause of the price level increase, not the effect.

Dilemma for the Government

·         In an effort to fight cost push, the government can react in two different ways.
o   Actions such as spending by the government could be an inflationary spiral.
o   No action however could lead to a recession by keeping production and employment levels declining.

Tuesday, April 5, 2016

Unit 4 Notes - March 30th, 2016

Customers

·         When a customer deposits cash or withdraws cash from their demand deposits account, it has No Effect on the Money Supply. It only changes the Composition of Money, RR, and ER.
·         Single Bank: Loan money from Excess Reserves
·         Banking System: ER x Money Multiplier

FED


·         When the FED buys or sells bonds, ER is created.



 Money Market Graph



Unit 4 Notes - March 21st, 2016

Tools of Monetary Policy

Reserve Requirement

·         Reserve Requirement: Only a small % of your bank deposit is in the safe. The rest of your money has been loaned out. [Fractional Reserve Banking]
·         The FED sets the amount banks must hold.
·         Reserve Requirement is the % of deposits that banks must hold in reserve and NOT loan out.
·         When the FED increases Money Supply, it increases the amount of money held in bank deposits.
·         If there is a Recession, what should the FED do to the RR?
o   Decrease it
§  Banks hold less money and more ER
§  Banks create money by loaning
§  Money Supply increases, Interest Rates fall, AD increases
·         If there is Inflation, what should the FED do to the RR?
o   Increase it
§  Banks hold more money and less ER
§  Banks create less money
§  Money Supply decreases, Interest Rates go up, AD decreases

Discount Rate

·         Discount Rate: The interest rate that the FED charges commercial banks.
·         Example: If Banks of America need $10 million, they borrow it from the US Treasury but must pay it back with interest.
·         To Increase MS, FED should Decrease the Discount Rate (Easy Money Policy)
·         To Decrease MS, FED should Increase the Discount Rate (Tight Money Policy)

Open Market Operations

·         Open Market Operations: FED buys/sells government bonds [securities]
·         Most important and widely used Monetary Policy
·         To Increase MS, FED should Buy government securities.
·         To Decrease MS, FED should Sell government securities.

Monetary Policy
Expansionary
(Easy Money)
(Recession)
Contractionary
(Tight Money)
(Inflation)
OMO
Buy Bonds
Sell Bonds
Discount Rate
Decrease
Increase
RR
Decrease
Increase
Loans, AD, GDP, MS
Increase
Decrease
Interest Rate
Decrease
Increase

Federal Fund Rate: FDIC member banks loan each other overnight funds [from bank to bank].
Prime Rate: Interest Rate that banks give to their most credit worthy customers.