Unit 5

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:                                                                                                                                            

	Price Level	Wage level	Employment Level	Implications
1. Horizontal/Keynesian	Fixed	Fixed	Flexible	Output depends upon changes in employment.
2.	Flexible	Fixed	Flexible	Output depends upon changes in price level and employment
3	Flexible	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