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Terms
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- Con of Free Trade for Working Peopl
- their profits and market shares would be reduced by lower prices for imported goods
- Import Substitution
- mexico
- What is the role of exchange rates in balancing trade?
- They balance the value of imports and exports through trade, taking into account conditions such as trade deficit
- Hamilton Neomercantilism
- infant industry, import substitution, export promotion-used by Hamilton to protect industries that are not up to world standards from bigger, older companies; disadvantage is becoming reliant on government
- Different Schools of Macroeconomics
- monetarists, keynesians, supply siders
- Supply Siders
- focus on investment and supply; nonacademic (Reagan); use tax cuts-reagan's worked because tax rate was at 70% and bush didn't because it was at 40% and was for wealthy who invest instead of spend, creating lag; Lag in incease in investment cycle because tax cuts start at bottom of business cycle; o Limit to tax cut effectiveness, cannot go to infinity so laffer curve is wrong; o Limit to tax cut effectiveness, cannot go to infinity so laffer curve is wrong
- To Control Inflation
- Supply Siders-expand supply of goods; Monetarists-control the money supply relative to the supply of goods; Keynesian-keep Y less than Yfe
- Semi-Fixed Exchange Rates
- easier to predict for business; devalued pesos when sold them for dollars; doesn't work (was case for EU before the Euro)
- Supply Siders-no policy
- Some supply-siders advocate that monetary policy should be based on a price rule. The aim of monetary policy should be to target a specific value of money irrespective of the quantity of money that must be created or withdrawn by the central bank to achieve this target. This contrasts with monetarism's focus on the quantity of money, and Keynesian theory's emphasis on real aggregate demand. The important difference is that to a monetarist the quantity of money, specifically represented by the money supply is the crucial determining variable for the relationship between the supply and demand for money, while to a Keynesian adequate demand to support the available money supply is important. Supply-side economists assert that the value of money is purely dictated by the supply and demand for money. In fiat money system the government has a legislated monopoly on the supply of base money. Hence it has complete control over the value of money. Any decline in the value of money (or appreciation) is hence viewed as the result of errant central bank policy.
- Hyperinflation
- Out of control, where prices increase reapidly as currency loses value (germany in 20s, mexico during 80s)
- Keynesians-control interest rates and accomodate fiscal policy
- adequate demand to support the available money supply is important
- Reserve Requirements
- Percentages of deposits that banks must hold in reserve
- Open Market Operations
- purchase or sale of government securities
- Monetarists
- Moneytary policy to control inflation (quanitity theory of money, believe in private sector); Expand money supply at constant rate equal to long term increase in goods and services; Gov't has limited role and economy to market control; Keynesian ineffective because: G up through T up reduces multiplier, G up trhgouh selling bonds crowds out private I and reduces multiplier, and G up increasing money supply causes inflation
- Keynesians with Buchanan Criticism
- IS-LM model, focus on i and I, control inflation by Y< YFE, fiscal/monetary policy to be coordinated, manipulate demand through fiscal policy to maintain YFE; Buchanan said politicians self-interest is get re-elected without surplus (social choice theory); focus on consumption and demand
- Freely Floating Exchange Rates
- Supply and demand, or the market controls exchange rates with no government interference
- Stagflation
- period of inflation combined with stagnation, usually recession (when Nixon imposed wage and price controls to try to control rising inflation, but it failed causing a recession)
- Cost-Push Inflation
- When you have a commodity and someone gets a cartel and it permeates throughout the economy (OPEC tripled oil prices)
- The Discount Window
- Reserve Banks act as safety valve relieving market pressure by lending funds to banks
- Exchange Rates
- freely floating (market), semi-fixed, fixed
- Trade Balance Components
- goods and services, Capital flows, Payments from previous investments abroad
- Moneyarists-Control Money Supply Relative to Supply of Goods
- Since the work of Monetarists is mainly limited to their view of inflation, their policy recommendations are pretty much on inflation only as well. They tend to believe that if you control inflation as the main priority, then this will create stability and the economy will be able to grow at its optimum rate. The key policy is therefore control of the money supply to control inflation. The government should certainly not intervene to try to reduce unemployment as the economy will automatically tend to the natural rate of unemployment. The only way to change the natural rate is through the use of supply-side policies.
- Relation between k and K
- k>K; k: no monetary equation and doesn't show crowding out; K: IS-LM
- Trade Concepts
- Absolute and Relative/Comparative Advantage
- Types of Inflation
- cost-push, demand-pull, hyperinflation, stagflation
- Why is media discussion of trade misleading?
- they only report goods and services, and not capital flow (what people investing in U.S. and Americans abroad)
- Fed Policy
- maximum employment, stable prices, moderate interest rates, promotion of sustainable economic growth
- Keynesians-Keep Y less than Yfe
- Since the work of Monetarists is mainly limited to their view of inflation, their policy recommendations are pretty much on inflation only as well. They tend to believe that if you control inflation as the main priority, then this will create stability and the economy will be able to grow at its optimum rate. The key policy is therefore control of the money supply to control inflation. The government should certainly not intervene to try to reduce unemployment as the economy will automatically tend to the natural rate of unemployment. The only way to change the natural rate is through the use of supply-side policies.; typically emphasize the role of aggregate demand in the economy rather than the money supply in determining inflation. That is, for Keynesians the money supply is only one determinant of aggregate demand.; A fundamental concept in Keynesian analysis is the relationship between inflation and unemployment, called the Phillips curve. This model suggests that there is a trade-off between price stability and employment. Therefore, some level of inflation could be considered desirable in order to minimize unemployment. The Philips curve model described the U.S. experience well in the 1960s but failed to describe the combination of rising inflation and economic stagnation (sometimes referred to as stagflation) experienced in the 1970s.
- Use Monetary Policy to:
- Keynesians-control interest rates and accomodate fiscal policy; Monetarists-control the supply of money; Supply Siders-no policy
- Quantity Theory of Money
- inflation source comes from growth rate of money supply-predicts during hyper inflation and useless with small change in money supply
- Up the Food Chain
- Fundamental concept of international competition wher you move up in an industry you were once weaker in (textiles, japan in 60s and 80s, south korea, china-electronics, brazil-airplanes and agriculture, mexico-autos)
- Supply Siders-Control Inflation
- Under supply-side theory, the rate of inflation should be based on the substitutions that individuals make in the market place, and should take into account the improved quality of goods.
- Fed Instruments
- open market operations, discount window, reserve requirements-additional margin requirements and foreign exchange operations
- How Bernanke Dealt With Bear Stearns?
- Fed engineered a takeover in a fire sale. Fear of collapse of investment banks; bernanke picked up $30 billion in BSC debt
- What has Bernanke has he made available to investment banks?
- -Pros: allows investment banks to be bailed out if theyre in trouble so they don't collapse like during the great depression since thy don't have insurance -Cons: they may take more risks now that they know the Fed will bail them out; energy was at over $100 a barrel so have potential for 70s inflation; fed is printing money, so its expanding the money supply=inflation; Democratys saying Bernanke bailed out provide investors and govt isn't doing much for poorer people losing their houses cuz they cant pay mortgages
- Export Promotion
- east asian countries do this by limiting imports of an industry until that industry is up to world standards to be able to export-very successful (GM outta Japan to help Toyota)
- Demand-Pull Inflation
- When government tries to expand at full employment (Johnson had it in 60s when went to Vietnam, Bush didn't because of dot com bust; labor cost goes up, so output price increases)
- Monetarists-control the supply of money
- it argues that excessive expansion of the money supply is inherently inflationary, and that monetary authorities should focus solely on maintaining price stability. Friedman argued that the demand for money depended predictably on several major economic variables. Thus, were the money supply expanded, people would not simply wish to hold the extra money in idle money balances; i.e., if they were in equilibrium before the increase, they were already holding money balances to suit their requirements, and thus after the increase they would have money balances surplus to their requirements. These excess money balances would therefore be spent and hence aggregate demand would rise. Similarly, if the money supply were reduced people would want to replenish their holdings of money by reducing their spending. Thus Friedman challenged the Keynesian assertion that "money does not matter"; he argued that the supply of money does affect the amount of spending in an economy. Thus the word 'monetarist' was coined. Federal Reserve chief Paul Volcker who made inflation fighting his primary objective, and restricted the money supply to tame inflation in the economy. The result was the most severe recession of the post-war period, but also the creation of the desired price stability.