Unit 7

Foreign exchange (FOREX) 

• the buying and selling of currency 
• Any transaction that occurs in the balance of payments necessitates foreign exchange 
• The exchange rate (e) is determined in the foreign currency markets - [ex. the current exchange rate is approximately 8 yuan to 1 dollar] 

Changes is exchange rates 

• exchange rates (e) are a function of the supply and demand for currency 

• an increase in the supply of 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 of that currency increases (e⬆️) 
• Depreciation of a currency occurs when the exchange rate of that currency decreases (e⬇️) 

Exchange rate determinants 

1. Consumer tastes 
2. Relative income 
3. Relative price level 
4. Speculation 

Exports and imports 

• the exchange rate is a determinant of both exports and imports 
• Appreciation of the dollar causes American goods to be relatively more expensive and foreign goods to be relatively cheaper this 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 

Balance of Trade

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:  When a country can produce more of a good/service than the another country can in the same time period.

Comparative Advantage

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

 Input:(TVs produced per hour,  Miles per gallon)
Output:(# of hrs. to do jobs,  # of acres to feed horses)

Specialization and Trade

              Gains from trade are based on comparative advantage, not absolute advantage. (countries should trade if they have a lower opportunity cost)

Balance of Payments

:Measure of money inflows and outflows between the U.S. and the rest of the world. 

Inflow = credits

Outflow = debits

Balance of payment divided:

1. Current Account

2. Capital/Financial Account

3. Official Reserves Account

Current Account: 

• Balance of Trade of Net Exports

             - Exports = credit to balance

              -Imports = debit to balance

• Net Foreign Income
• Net Transfers (tend to be unilateral)

               -Foreign Aid = debit to current account

Capital/Financial Account:

• Balance of capital ownership
• Includes the purchase of both real and financial assets 
• Direct investments in the US is a credit to the capital account
• Direct investment 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.

               

         *Current Account and Capital account should zero each other out.*

Official Reserves 

The foreign currency holdings of the US Federal Reserve System

Balance of payments surplus = Fed accumulates foreign currency

BOP payments = Fed depletes its reserves of foreign currency 

*Official Reserves zero out BOP*

Active vs. Passive Official Reserves

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

Monetary Policy Notes

Fiscal Vs. Monetary Policy

Click For Video
https://www.khanacademy.org/economics-finance-domain/macroeconomics/aggregate-supply-demand-topic/monetary-fiscal-policy/v/monetary-and-fiscal-policy

The FED control money supply, issue paper currency, set reserve requirements and hold reserves of banks,lend money to banks & charge them interests,acts as personal bank for government, supervises member banks

The FED requires banks to always have some money readily available to meet consumers' demand for cash
- The amount set by the FED is required reserve ratio
- The RR is the % of demand deposits (checking account balances) that must not be loaned out
- typical RR = 10%

Reserve Requirement
- Required Reserve Ratio is % of demand deposits (must not be loaned out

FEDS Functions
1. Control money supply
2. Issue currency
3. Set reserve requirements and hold reserves of banks
4. Lend money to banks and charge them interest check clearing service for banks
5. Acts as personal bank for government
6. Supervises member banks

1. Reserve requirement
If there’s a recession we should decrease reserve ratio
- Banks hold less money and have more excess reserves
- Banks create more money by loaning excess
- Money supply increases, interest rates fall, AD goes up
If there’s inflation increase RR
- Banks hold more money and have less ER
- Banks create less money
- Money supply decreases, interest rates up, AD down


2. Discount Rate
a. The interest rate that the Fed charges commercial banks
To increase the MS, the Fed should decrease the Discount rate.
To decrease the MS, the Fed should increase the Discount rate.


3. Open Market Operations
a. The Fed buys/sells government bonds (securities)
b. This is the most important and widely used monetary policy
To increase the MS, the Fed should buy government securities
To decrease the MS, the Fed should sell government securities

Economic Video

http://www.youtube.com/watch?v=Rt9TmKHVHzk
click on link

Unit 3 blog

Feb-18-16

Aggregate supply 

-level of real GDP (GDPr) that firms will produce at each price level (PL)

Long run 

-period of time where input prices are completely flexible and adjust to changes in price level

-in the long run the level of real GDP supplied is independent of the price level. 

Short run 

-period of time where input prices are sticky and do not adjust to changes in the price level 

-in the short run, the level of real GDP supplied is directly related to the price level 

-long run agregate supply or LSAS marks the level of full employment in the economy (analogous to PPC)

-because input prices are completely flexible in the long run changes in price level do not change firms real profits and therefore do not change firms level of output this means that the LRAS. 

-An increase in SRAS is shift to right 

- decrease is shift to left

- per-unit production cost= total input cost/ total output

-determinants of SRAS 

1. Input prices

-domestic resource prices

 -wages(75%)

 -cost of capital 

 -raw material (commodity)

-foreign resource prices

-market power

-increase in resource prices=SRAS shift to left

-Decrease in resource prices=SRAS shift to right 

2. Productivity = total output/ total inputs 

- more productive you are=lower production cost= shift to right of SRAS

-lower productivity=higher unit production cost=SRAS to left

3. Legal-institutional 

Legal-Institutional Environment 

-taxes and subsidies 

 -taxes ($ of gov) on buissness increase per unit production cost=SRAS TO LEFT

-Subsidies ($from gov.) to buissness reduce per unit production cost= SRAS to right

-Government Regulation 

 -government regulation creates a cost of compliance=SRAS TO LEFT

 -Deregulation reduces compliance cost=SRAS to right

Nominal wages- amount of money received by a worker per unit of time 

-real wages- amounts of goods and services a worker can purchase with their nominal wage. 

-sticky wages-nominal wage level that is set according to an initial price level and it does not vary due to labor contracts or other restrictions 

what is an Investment 

- money spent on fine things such as:

- New plants(factories)

- Capital equipment (machinery)

- Technology (hardware and software)

- New homes

- Inventories (goods sold by producers)

Expected rates of return

-how does business make investment decisions?

- cost/benefit analysis 

-how does business determine the benefits?

- expected rate of return 

-how does business count the cost?

- interest cost

-how does business determine the amount of investment they undertake

- compare expected rate of return to interest cost

- If expected return is greater than interest cost then invest

- If expected return is less than interest cost then do not invest 

Real vs Nominal rate

-what's the difference?

- nominal is the observable rate of interest. Real subtract out inflation (pi%) and is only known ex post facto. 

How do you compute the real interest rate (r%)

- r%=i%-pi%

What then, determines the cost of an investment decision

- the real interest rate (r%)

-what is the shape of the investment demand curve?

- downward sloping 

-why

- when interest rates are high fewer investments are profitable; when interest rates are low, more investment are profitable. 

Shifts investment demand m(ID)

-cost of production 

- lower cost shift ID to right 

- Higher cost shift ID to left

-business taxes 

- lower business taxes shift ID to right

- Higher business taxes shift ID to left 

-  

Disposable income (DI)

-income after taxes or net income

2 choices with disposable income,households can either 

-consume(spend)

-save(not spend money)

Consumption 

-household spending 

-the ability to consume is constrained by

- the amount of disposable income 

- The propensity to save 

Do households consume if DI=0?

-autonomous consumption 

-dissaving 

Saving

-households don't spend 

-the ability to save is constrained b

- amount of disposable income

- The propensity to consume 

-do households save if DI=0?

- no

Apc =average propensity to consume

Aps-average propensity to save

-apc +aps =1

-1-apc=aps

-1-aps=apc

-apc>1 =dissaving

Mpc=marginal propensity to consume 

-mpc=change in consumption/change in disposable income

Mps=marginal propensity to save

-mps=change in savings/Change in disposable income

-mpc+mps=1

-mpc=1-mps

-mps=1-mpc

People either spend or save with their income. 

-spending multiplier effect 

- an initial change in spending (C, Ig, G, Xn) causes a larger change in aggregate spending or demand

- Multiplier=change in AD/change in spending 

- Multiplier=1/1-mpc or 1/mps

- Multipliers are positive when there is an increase in spending and negative when there is a decrease 

Tax multiplier 

-when gov. Taxes the multiplier works in reverse because money is leaving the circular flow

- tax multiplier =-mpc/1-mpc or -mpc/mps

- Negatives!!

- If there is a tax cut then the multiplier is positive because there is now more money in the circular flow.

 Feb.29.16

-Fiscal policy 

- changes in the expenditures or tax revenues of the federal government 

-2 tools of fiscal policy 

- taxes- government can increase or decrease taxes 

- Spending-government can increase or decrease taxes

Deficits, surplus, and debt

-balanced budget is  revenues=expenditures

-budget deficit is revenues<expenditures 

-budget surplus is revenues>expenditures

Government debt is sum of all deficit- 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 two options 

-discretionary fiscal policy(action)

- Expansionary fiscal policy- think deficit 

- Contractionary fiscal policy- think surplus 

-Non-discretionary fiscal policy (no action)

-discretionary 

- increasing or decreasing government spending and or taxes in order to return the economy to full employment. Discretionary policy involves policy makers doing fiscal policy in response to an economic problem 

-Automatic 

- unemployment compensation and marginal tax rate are examples of automatic policies that help mitigate the effects of recession and inflation. Automatic fiscal policy takes place without policy makers having to respond to current economic problems. 

Expansionary fiscal policy 

- combat recession 

- Increase gov. Spending

- Decrease taxes

Contactionary fiscal policy

- combat inflation 

- Decrease government spending

- Increase taxes 

Automatic or built in stabilizers 

-anything that increase the governments budget deficit during a recession and increases its budget surplus during inflation without requiring explicit action by policy makers 

-progressive tax system

- average tax rate rises with GDP

-proportional tax rate

- average tax rate remains constant as GDP changes

-regressive tax system

- average tax rate falls with GDP. 

Jan. 27.2016

Gross domestic product (GDP)- market value of all final goods and services produced within a nation in a given year

-what's not included in GDP

1. Intermediate goods-something that need further processing 

2. Used or second hand goods- already been accounted for 

3. Purely financial transactions-stocks and bonds 

4. Illegal activities( drugs)

5. Unreported business activity-tips 

6. Non-market activities- volunteering, babysitting 

7. Transfer payments- scholarships, welfare payments, social security. 

Jan.28,2016

Included in GDP

1. C-personal consumption expenditure 65% of American economy based on this

2. Ig-gross private domestic investment, factory equipment maintenance, nee factory equipment, construction of housing, unsold inventory or product built in a year 17%

3. G- government spending 20%

4. Xn-net exports (exports-imports) -2%

GNP-gross national product, total value of all final goods and services by citizens of that country on its land or foreign land. 

1-29-16

2 ways of calculating GDP

1. Expenditure Approach- add up all of spending on final goods and services produced in a given year. GDP=C+Ig+G+Xn. (Export-import)

2. Income approach- adds up all income that results from selling all final goods and services produced in a given year. W+R+I+P+statistical adjustments(indirect buissness taxes, depreciation, net foreign factor payment)

1. Compensation of employees-wages and salaries, pensions, insurance, health and welfare 

2. Rents- income received by property owners

3. Interest-money paid by private businesses to the suppliers of loans

4. Corporate profits- income of the corporation stock holders, dividends, and corporate income taxes

5. Proprietor income- income that comes from enterpenuers and partners in a business 

Feb 2,2016

-Nominal interest rates-percentage increase in money the borrower must pay the lender for a loan. Not adjusted for inflation. 

*unanticipated inflation

-real interest rate- percentage increase in purchasing power the borrower must pay the lender for a loan. Adjusted for inflation. (Nominal interest rate-inflation=real interest rate.)

*Anticipated inflation- fisher effect 

Nominal interest rate=expected interest rate+inflation premium. 

Hurt by inflation

1. Savers

2. Lenders/ creditors

3. People who are on a fixed income (elderly, welfare)

Helped by inflation 

1. Debtors 

Cost of living adjustments(cola)

- automatic wage increase when inflation occurs (New York and California)

Feb. 4 2016

- Unemployment- failure to use available resources. Particularly labor to produce desired goods and services 

- Labor force=employed and unemployed 

-above 16 years old

-able and willing to work 

-Not labor force

1. military

2. Students

3. Retired

4. Disabled

5. Homemakers

6. Mental institution 

7. Jail

8. Those who are not looking for a job. 

Unemployment rate-4 to 5% ideal rate of unemployment=full employment or natural rate of unemployment(NRU)

- how to calculate unemployment rate=# of unemployed/(# of employed+# of unemployed) x 100

4 types of unemployment- 

- Frictional- those who are searching for a job. Temporarily unemployed. In between jobs. Transferable skills. College or high school graduates. Laid off. Leave job looking for better job. 

- Structural unemployment- changes in structure of labor force. That makes some skills obsolete. These workers do not have transferable skills. Workers have to learn new skills. 

- Seasonal unemployment- due to the time of year and nature of the job.

-school bus drivers

-life guards

-Santa clause impersonators 

-construction workers

- cyclical-economic downturns such as a recession. As demand from goods and services falls and demand for labor falls and workers are laid off

-Walmart

-Macy's 

- frictional +structural employment=NRU

- Full employment= no cyclical employment. 

February 5th 2016

- GDP gap- amount by which actual GDP falls short of potential GDP

- Okun's law- for every 1 percent in which the actual unemployment rate exceeds the NRU a GDP of about 2 percent occurs. Ex: in 2012 the unemployment rate for Mexico was 7.4% the NRU for Mexico is 6%. 

-7.4-6=1.4x2=2.8. Actual unemployment rate-NRU

- rule of 70- used to determine how many years it takes for a value to double. Given a particular annual growth rate. 

-ex: if you put 20k in the bank and it earns a yearly interest of 7 percent how many years will it take for your income to double? Answer= 10. 70/7= how many years it takes to double. 

70/annual interest rate. 

https://www.youtube.com/watch?v=3x_GFkfp2kA <-------open video for more information

AP Economics Notes

Ap Economics

1-6-16

Factors of production-resources required to produce goods and services. 

-physical capital-tools, machines, fActories, robots etc

-human capital-knowledge, skill, ability and talents gained through education and work experience 

-tradeoffs-alternatives that we give up when we choose one course of action over the other. 

-Opportunity cost-next best alternative 

-production possibility graphs-alternative ways to use and economy's resources. (Ppg,ppf,ppc)

4 assumption of ppg 

1.two goods

2. Fixed resources (land,labor,capital,enterpenuership)

3.fixed technology 

4.full employment of resources 

Efficiency-using resources in such a way as to maximize production of goods and services 

Allocative Efficiency-products being produced are those most required by society 

Productive efficiency-products are being produced in the least costly way. Any point on ppc 

Underutilization-using fewer resources than an economy is capable of using

3 types of movement that occur within the ppc 

1.inside the curve, resources are unemployed or underemployed no productive efficiency 

2.along the ppc, move form B to C or C to B

3.shifts of the ppc,can shift out or in 

https://www.youtube.com/watch?v=g9aDizJpd_s <------------open video for more information

Jan.7-2016

What causes ppc to shift

1.technological changes 

2.economic growth 

3.change in resources 

4.change in labor force

5.natural disasters/war/famine

6.education/training(human capital)

Jan.21 

1.Peak-highest point of GDP. Greatest spending and lowest unemployment in this phase inflation becomes a problem.  

2.Expansion/ recovery stage- real GDP is increasing due to increase in spending and decrease in unemployment 

3. Contraction/Recession-real GDP declines for 6 months due to reduction in spending and increase in unemployment

4.Trough-lowest point of real GDP least amount of spending and highest unemployment.