April 1, 2015
Short-run Aggregated Supply (SRAS
Time is too short for wages to adjust to the price level.
Workers may not be aware of changes in their real wages due
to inflation and has adjusted their labor supply decisions and wage demands accordingly.
Long-run AS
·
Flexible wage in price level
·
Offset each other.
·
The possible production graph curve the shift
the
·
Time long enough for wages to adjust to the
price level. (Growth in format, technological change)
Demand-Pull Inflation (Demand changes not AS)
Cost-Push Inflation “prices go up production goes up.”
(Never use AD) unless I change the supply.
Recession: AD decreases because we’re not using fiscal or
monetary policy, (AD) no one will spend, pressure in production PL no one will
buy.
Economic Growth:
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|
Price Level
|
Wage level
|
Employment Level
|
Implications
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1. Horizontal/Keynesian
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Fixed
|
Fixed
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Flexible
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Output depends upon changes in
employment.
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2.
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Flexible
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Fixed
|
Flexible
|
Output depends upon changes in price level and employment
|
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3
|
Flexible
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Fixed
|
Fixed
|
Output depends upon changes in price level.
|
4/6/15
Ø
The Long-Run Phillips Curve (LRPC)
·
Because the Long-Run Phillips curve exists at
the natural rate of unemployment (Un), structural changes in the economy that
affect Uvn will also cause the LRPC to shift
·
Increases in Un will shift LRPC ->
·
Decreases in Un will shift LRPC <-
Ø
Stagflation
·
Is when inflation and unemployment increases occurring
at the same time
o
During baby boomer
o
Womans movement
o
Civil Rights movement
o
Vietnam War Ends
o
All embargo 1973-1979
Ø
Disinflation
·
It is reduction in the inflation rate year to
year this occurs when aggregate demand decreases
Ø
Deflation
·
General drop in the price level
April 9, 2015
The Balance of Payments
Measure of money inflows and outflows between the US and the
Rest of the World (ROW)
o
Inflows are CREDIT
o
Out flows are DEBITS
The Balance of Payments is divided into 3 accounts
Current Account
Capital/Financial Account
Official Reserves Account
Double Entry Bookkeeping
Every transaction in the balance of payments is recorded
twice in accordance with standar accounting practice.
Credited must be debited
-Ex. US manufacturer, John Deere, exports $50 million worth
of farm equipment to Ireland.
~
A credit of $50 million to the current account
(-$50 million worth of farm equipment or physical assets)
~
A debit of 50 million to the capital/financial
account
(+$50 million worth of Euros or financial assets)
Balance must=0
Current Accounts
~
Balance of Trade or Net Exports
o
Exports of Goods/Services – Import of Goods/
Services
o
Exports create a credit to the balance of
payments
o
Imports create a debit to the balance of
payments
Net Foreign Income
~
Income earned by U.S. owned foreign assets –
Income paid to foreign held U.S. assets
o
Ex. Interest payments on U.S. owned Brazilian
bonds – Interest payments on German owned U.S. Treasury bonds.
Net Transfers (tend to be unilateral (one sided))
~
Foreign aid -> a debit to the current account
o
Ex. Mexican migrant workers send money to family
in Mexico.
Capital/Financial Account
~
The balance of capital ownership
~
Includes the purchase of both real and financial
assets
~
Direct investment in the United States Is a
credit to the capital account
o
Ex. The Toyota Factory in San Antonio
~
Direct Investment by U.S. firms/individuals in a
foreign country are debits to the capital account
o
Ex. The Intel Factory in San Jose. Costo Rico.
~
Purchase of foreign financial assets represents
a debit to the capital account
o
Ex. Warren Buffet buys stock in Petrochina
~
Purchase of domestic financial assets by
foreigners represents a credit to the capital account
o
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).
Ø
Official Reserves
~
The foreign currency 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
4/13/15
Ø
Active v. Passive Official Reserves
·
The US is passive in its use of official
reserves. Because our exchange does not change. It does not seek to manipulate
the dollar exchange rate.
·
The People’s Republic of China is active in its
use of official reserves. It actively buys sells dollars in order maintain a
steady exchange rate with the US.
4/14/15
Ø
Goods and services exports - goods and serves
imports
·
You can have a trade deficit or trade surplus
·
If you have a trade deficit imports are greater
than imports
·
If you have a trade surplus Exports greater than
imports
Ø
7Informal way to balance of trade
·
Goods exports + Goods imports
·
Balance on goods and services
·
Goods imports + Service Imports
Current account
Balance on trade + Net Investment + Net transfers
Capital account
Foreign purchases of US assets + US purchases of assets
abroad
Official reserve
Current account balance + Capital account balance
