Unit 6

Unit 7

Foreign exchange market

• The buying and selling of currency. 
• Any transactions that occurs in the balance of payments necessitates foreign exchange 
• The exchange is determined in the foreign currency market. 

Exchange rates are a function of the supple and demand for currency

• An increase in the supply of a currency will decrease the exchange rate of a currency. 
• A decrease in supply of a currency will increase the exchange rate of a currency 
• An increase in demand for a currency will increase the exchange rate of a currency 
• A decrease in demand for a currency will decrease the exchange rate of a currency. 

Appreciation and depreciation

• appreciation of a currency occurs when the exchange rate that currency increases. ⬆️
• Depreciation of a currency occurs when the exchange rate of that currency decreases. ⬇️

Exchange rate determinants

• Consumer tastes. 
• Relative income. 
• Relative price level. 
• Speculation. 

Exports and imports

• The exchange rate is a determinants of both exports and imports 
• Appreciation of the dollar causes Americans goods to be relatively more expensive and foreign goods to be relatively cheaper thus reducing exports and increasing 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 rate
Based on the supply and demand of that currency vs other currencies. It's very sensitive to business cycles and it provided options for investment.

Fixed rate
It's based on a countries willingness to distribute currency and control its amount


ABSOLUTE ADVANTAGE

individual - Exists when a person can produce more of a certain good/services than someone else in the same amount of time( or can produce q 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

Output
Miles per gallon
Apple per tree
Television produced per hour

Input
Hours to do a job
Number of acres to feed a horse
Number of gallons of paint to paint a house

Specialization and trade

• gains from trade are based on comparative advantage not absolute advantage  

Balance of payment. 
Measure of money inflows and outflows between the United States and the rest of the world (ROW)
Inflows - credit 
Outflows- debit 
The balance of payments is divided into 3 accounts. 

• current Accounts 
• capital / financial account 
• Official reserves Account 

Current account 

• exports of goods/services - import of goods/ services   
• Exports create a credit to the balance of payment. 
• Import create a debit 

Capital / financial account 

• The balance of capital ownership 
• Includes the purpose of both real and financial assets
• Direct investment in the United States is a credit. To the capital account. 

Ex- the Toyota factory in San Antonio

• direct investment by US firms/individuals in a foreign country are debuts to the capital account 

Ex- The Intel Factory in San Jose, Costa Rica. 

• purchase of foreign financial assets represents a debit to the capital account. 

Ex - Women Buffet buys stocks in petro china. 

• purchase of domestic financial assets by foreigners represents a credit to the capital account. 

Ex - The United Arab Emirates sovereign wealth fund purchases a large stake in the NASDAQ. 

Relationship between current and capital account

• The current account and the capital account should zero each other out. 
• That is if the current account has a negative balance (deficit), then the capital account should then have a positive balance ( Surplus). 

Official reserves 

• The foreign currency holdings of the United States federal reserve system. 
• When there is a balance of payments surplus the fed accumulated foreign currency and debits the balance of payments. 
• When there is a balance of payment deficit the fed depletes its respected of foreign currency and credits the balance of payments 
• The official reserves zero out the balance of payments. 

Active v. Passive Official reserves 

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

Unit 5

Unit 5

Unit 5
Short run aggregate supply 
-  In macroeconomics this is the period in which wages and other input prices remain fixed as price level increases or decreases. 

Long Run aggregate supply 
- Period of time in which wages have become fully responsive to chafes in price level. 

Effect 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 short run and long run AS curves. 

-  The long AS curve is represented with s vertical line @ full employment 

      Demand pull Inflation. 
Demand pull - prices increase based on increase in aggregate demand 

In the short run, demand pull will drive up prices, and increase production 

In the long run, increases in aggregate demand will eventually return to previous levels. 

Cost push inflation and extended model 

Cost push arises from factors that will increase per unit cost such as increase in the price of a key resource. 

Short run shifts left. What Is important is that 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.  
- Action such as spending by the Govt could begin an inflationary spiral 
- No action however could lead to recession by keeping production and employment levels declining. 


Because the long run Philips curve existed at a natural Rae of unemployment(Un) structural changes in the economy that affect Un will  also cause the LRPC to shift

Inflation - general rise in the price level 
Deflation - general decline in price level 

Disinflation - decrease in inflation or in the rate of inflation over time 

Regannomics 
Changes As And not Ad. It determines the level of inflation, unemployment rate and economic growth. 

Supply side economist support polices that promote GDP growth by arguing that high marginal tax rate along with the current system of transfer payment such as unemployment compensation and welfare programs provide disincentive to work, save, innovate and undertake entrepreneur. 

Lower Marginal Tax rate induce more work causing AS to increase. They also make leisure more expensive and work more attractive 

Incentives to save and invest 
1. High marginal tax rates- reduce the reward for saving and investment 
2. Consumption might increase but investment depends upon savings 
3. Lower marginal tax rate encourage saving and investments. 

Laffet Curve 
There is a theoretical relationship between tax rates and governments revenue as tax rates increase from 0 government revenues increase from 0 to some maximum level and then decline 

First criticism 
Research suggest that the impact of tax on incentives to work save and invest are small. 

Second criticism 
Tax cuts also increase demand which can fuel inflation and demand may exceed supply 

Where the economy is actually located in the curve is difficult to determine