Unit VII: Foreign Markets/ Advantages:

Foreign Exchange: The buying and selling of currency. The exchange rate (e) is determined in the foreign currency markets. Simply put the exchange rate is the price of a currency. 

Four tips: *Always change the D line on ones currency graph, the S line on the other currency's graph. *Move the two lines of both graphs in the same direction and you will have the correct answer. *If D on one graph increases, S on the other will also increase.*If D moves to the left, S will move to the left on the other graph. 
Changes in Exchange Rate: Exchange rates (e) are a function of the supply and demand for currency. An increase in the supply of a currency will make it cheaper to buy one unit of that currency. A decrease in supply of a currency will make it more expensive to buy one unit of that currency. An increase in the demand for a currency will make it more expensive to buy one unit of that currency. A decrease in demand for a currency will make it cheaper to buy one unit of that currency. 

Appreciation: appreciation of that currency occurs when the exchange rate of that currency increases. (E increases) the dollar is stronger 
Depreciation: occurs when the exchange rate of that currency decreases (e decreases) the dollar is weaker. 
Exchange rate determinants: Consumer Tastes: the increase in the supply of dollars leads to the depreciation of the dollar. Relative Incomes: imports tend to be normal goods. This increases he demand for the dollar, causing the dollar to appreciate and the currency to depreciate. Relative Price LevelSpeculation 

Purchasing power policy: When the currency rates are set by international markets changes will be based on the actual purchasing power of the currency. 
If the U.S. Dollar to European euro rage is 1.5 to 1 , then each 1.5 will buy one euro, however if an item in the U.S. Cost 1.50 and then cost more or less than one euro, the parody is lost. Markets will adjust quickly in floating rates or pressure for change will occur in fixed rates. 

Why do we exchange currencies
1. to invest in other countries stocks & bonds
2. To sell exports buy imports
3. To build factories or stores in other markets
4. To hold currencies in bank accounts for future exports imports or business loans
5. To speculate on currency values
6. Control excessive imbalances 

Absolute Advantage
-Individual: exists when a person can produce more of a certain good/service than someone else in the same amount of time.
-National: exists when a country can produce more of a good/service than another country can in the same time period.
Comparative Advantage
-Individual/National: exists when an individual or a nation can produce a good/service at a lower opportunity cost than can another individual or nation can.
Input Problems:
-the country or individual that uses the least amount of resources land or time has the absolute advantage.
Output Problems:
-the country or individual that can produce the most has, the country or individual that has lowest opportunity cost has comparative advantage for that product.
AA:
-faster, more efficient
CP:
-lower opportunity cost

Unit VII: BOP

Unit VII: AP Macroeconomics: The Balance Of Payments: 

Balance of Payments: measure of money inflows (credits) and outflows (debits) between the U.S. And the rest of the world. 

Balance of Accounts is divided into 3 parts: 

1. Current Account

-balance of trade + our net invest + our net transfers 

-every transaction in the balance of payments is recorded twice in accordance with standard accounting practice.

- what goes out should come back equal to zero

2. Capital/Financial Account

-the balance of capital ownership

-includes purchase of both real and financial assets

-direct investment in the united states 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 the foreigners represents a credit to the capital account

Relationship between current and capital 

account:

-they should zero each other out

-if current account is negative then capital account should have a positive balance

- foreign purchases of US assets + US purchases of assets abroad

3. Official Reserves Account  

-foreign currency holdings of the united states federal reserve system

-when there is a balance of payments surplus the fed accumulates foreign currency and debits the balance or payments

-when there is a balance of payments deficit the fed depletes its reserves of foreign currency and credits the balance payments

-official reserves zero out the balance of payments

current account + capital account

Double Entry Book Keeping: 

Every transaction in the balance of payments is recorded twice in accordance with stranded accounting practice.

Theoretically, The balance payment should always equal zero. 

Balance of trade:

-exports - imports = balance of trade

Balance of trade:

-goods and services exports - goods and services imports

-trade deficit or trade surplus

-imports > exports =deficit

-exports < imports =surplus

-goods exports + goods imports

Net foreign income:

-income earned by US owned foreign assets - income paid to foreign held US assets

Net Transfers:

Ex: people work here and send money to their country

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.

-the people's republic of china is active in its use of official reserves. It actively buys and sells dollars in order to maintain a steady exchange rate with the united states

Goods and Services:

-goods imports + service imports

Unit VI: Economic Growth

Unit VI: Economic Growth & Productivity:

Economic Growth Defined:

·         Sustained increase in Real GDP over time.

·         Sustained increase in Real GDP per Capita over time.

·         Growth leads to greater prosperity for society.

·         Lessens the burden of scarcity.

·         Increases the general level of well-being.

Conditions of Economic Growth:

• Rule of Law
• Sound Legal and Economic Institutions
• Economic Freedom
• Respect for Private Property
• Political & Economic Stability
• Low Inflationary Expectations
• Willingness to sacrifice current consumption in order to grow
• Saving
• Trade

Human Capital:

·         People are a country’s most important resource. Therefore human capital must be developed.

·         Education

·         Economic Freedom

·         The right to acquire private property

·         Incentives

·         Clean Water

·         Stable Food Supply

·         Access to technology

Unit V: Phillips Curve

Unit V: Phillips Curve: Represents the relationship between unemployment and inflation 


Long Run Phillips curve: Occurs at the natural rate of unemployment. (4-5%) represented by a vertical line 
No trade off between unemployment and inflation in the long run - the economy produces at the full employment level. Will only shift if the LRAS curve shifts 
The major LRPC assumption is that more worker benefits create higher natural rate and fewer worker benefits create lower natural rates. 

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 (un). 
Supply side economics: it is the belief That the as curve will determine levels of inflation, unemployment, and economic growth. 
To increase the economy you would shift the as curve to the right. 
Supply side economists focus on the marginal tax rate-(Amount paid on the last dollar earned or on each additional dollar earned)
Beliefs: Lower taxes are an incentive for a business to invest in the economy and that lower taxes are an incentive for workers to work hard thereby becoming more productive. Lower taxes are incentives for people to increase savings and therefore create lower interest rates which causes an increase in business investment. 
They support policies that promote GDP growth by arguing that high marginal tax rates along with the current system of transfer payments such as unemployment compensation or welfare programs provide disincentives to work invest innovate and undertake entrepanuer ventures 
Known as Reaganomics. 

Ladder curve : a Tradeoffs between tax rates and government revenue. Used to support the supply side argument. As tax rates increase from zero tax revenues increase from zero to some number and then decline. 

Three criticisms of the ladder curve: 
1. Research suggests that the impact of tax rates on incentives to work save and invest are small. 
2. Tax Cuts also increase demand which can fuel inflation thus creating a situation where demand exceeds supply. 
3. Where the economy is actually located on the curve is difficult to determine. 








Short Run Phillips Curve: there is a trade off between inflation and unemployment. SRPC has relevance to Okun's law. Since wages are sticky, inflation changes move the points on the SRPC. If inflation persists and the expected rate of inflation rises, then the entire SRPC moves upward which causes a situation called stagflation. If inflation expectations drop due to new technology or economic growth then SRPC moves downward. 

Aggregate Supply Shock: causes both the rate of inflation and the rate of unemployment to increase. It is a rapid and significantly increase in resource cost. 



The misery Index: is a combination of inflation and unemployment in a any given year, single digit misery is good. 

Unit IV: Monetary policy Video

Unit IV: Loanable Funds Market

Unit IV: Loanable Funds Market: 

The market where savers and borrowers exchange funds(Qlf) at the real rate of interest (r%) 

The demand for loanable funds or borrowing comes from households, firms, government and the foreign sector. The demand for loanable funds is in fact the supply of bonds. 

The supply of loanable funds, or savings comes from households,firms, government, and the foreign sector. 

Changes in the Demand for Loanable Funds: 

Remember that demand for loanable funds=borrowing(supplying bonds)

More borrowing=more demand for loanable funds. (Increase,right)

Less borrowing=less demand for loanable funds (decrease,left)

Changes in the Supply Fr Loanable Funds: 

Remember that supply of loanable funds = saving(demand for bonds) 

More savings= more supply of loanable funds (right) 

Less savings=less supply of loanable funds (left) 

Final Thoughts on Loanable Funds: when government does fiscal policy , it will affect the loanable funds market. 

Unit IV:

The money market demand for Money has an inverse relationship between nominal interest rates and the quantity of money demanded.  

Discount rate: Interest rate that the fed charges commercial banks for borrowing money. 

Reserve Requirement: Fraction of money that the bank must keep to reserve. 

Federal fund rate: interest rate that commercial banks charge one another for an overnight loan. 

Prime Rate: interest rate that banks charge their most credit worthy customers

Unit IV:

Unit IV: chapter 13: 

Money Market: Any assets that can be used for any goods 

Three uses of Money is a medium of exchange. 

Determining value

Unit of account (comparing costs) 

Store of value 

Three types of money

Commodity money- has value in itself (salt olive oil and gold) 

Representative money-represents something of value(IOU) 

Fiat money-it is money because the government says so. (Paper currency, coins) 

Six Characteristics of Money 

Durability

Portability 

Divisibility

Uniformity

Limited supply

Acceptability 

Money Supply made up of m1 (liquid assets - easy to convert to cash- cash currency check able or demand deposits) and m2 money (M1 money + Savings Account , money markets accounts) 

Financial Institutions -to save (1. Savings account 2. checking account 3. Money markets account 4. Certificate of Deposit(CD), loan(1.credit cards 2. mortgages), store money 

Interest:

Principle: amount of money borrowed 

Interest- price paid for the use of borrowed money 

1.simple interest - paid on the principal I=PRT/ 100 

p=I x 100 / RT

R=I x 100/ PT 

T=I x100/ 

2. compound interest paid on the principle plus accumulated interest 

Commercial banks 

Savings and Loan Institutions 

Mutual Savings Bank

Credit Union

Finance Companies

Investments: redirecting resources that we would consume now for future purposes. 

Financial Assets: claims in property and income of the borrower

Financial Intermediaries: Institution that channels funds from savers to borrowers

Purposes:

 1. Share risk - through diversification, Spreading investments 

2. Providing information

3. Liquidity - returns

Bonds are loans or RIU that represent death that the government or a corporation must repay to an investor. Bonds are literally low risk investments 

Three Components: 

Coupon Rate:  interest rate that a bond issuer will pay to a bond holder 

Maturity: time at which payment to a bond holder is due. 

Par Value: amount that an investor pays to purchase a bond and that will be repaid to an investor at maturity. 

Functions of the FED: 

It issues paper currency 

Sets reserve requirements and holds reserve of banks

It lends money to banks and charges them interest. 

They are a check clearing service for banks 

It acts as personal banks for the government

Supervises member banks

Controls the money supply in the economy. 

The Three Types of multiple deposit expansion question: 

Type 1: calculate the initial change in excess reserves aka the amount a single bank can loan from the initial deposit. 

Type 2: calculate the change in loans in the banking system. 

Type 3: calculate the change in the Money supply, sometimes type 2 and 3 will have the same result (ie no federal involvement)

Creating a bank: transaction #4: depositing reserves in a Federal Reserve Bank 

- Required reserves

- Reserve Ratio 

Reserve Ratio: commercial banks required reserves / commercial banks checkable-deposit liabilities 

Reserve Requirements: 

Excess reserves : actual reserves - required reserves 

Required Reserves: checkable deposits x reserve ratio 

 

 

AP Macroeconomics Unit 4 Monetary Policy Videos

AP Macroeconomics Unit 4 - Part 1 Summary: In this video she covers basic concepts. She begins talking about the types of money, which are commodity, representative and fiat. She mentions the functions of money, medium of exchange, store value and unit of account. She finishes by talking about how price gives a way of determining quality.

AP Macroeconomics Unit 4 - Part 4 Summary: In this video she talks about the Fed’s tools of money policy. She compares expansionary and contractionary policies. Expansionary is easy money whereas contractionary is tight money. Expansionary decreases required reserves and discount rate, and buys bonds increasing money supply. Contractionary increases required reserves and discount rate.

AP Macroeconomics Unit 4 - Part 8 Summary: In this video she talks about how money is created. She says banks make money buy creating loans. Loans are determined by required reserves and excess reserves available. Once you have loan amount you multiply it by the money multiplier and that is how much money is created.

AP Macroeconomics Unit 4: Part 3: Summary: This particular video's main concept was about how to graph money market graphs and how the slopes relate to the law of demand. The video also demonstrates that when the price is high, the demand decreases which makes it slope downward. We learn that the supply of money is graphed vertically because it is not tied into the interest rate. If we have an incentive for more money, there will be an increase in demand, therefore a shift to the right. Overall, you are shifting the supply of money and the demand of money to the right or to the left.

AP Economics Unit 4: Part 7: Summary: This video is about Loanable funds graphs. The main idea is to tie loanable funds with the money market and demonstrate the results in AD/AS. The demand of loanable funds is downward slope because when the interest rate is lower people demand for more money. When the demand is sloping upward the demand for money decreases and people are stable. For the final result, you have to make sure to show the increase or decrease in interest rate causes the same change in your second graph.

AP Economics: Unit 4: Part 9: Summary: This video explained one of the things you have to know for succeeding in the creation of these graphs and the fundamental concepts of economics. You have to be able to show a connection between the graphs, money market, loanable funds, AD/AS and how it effects the economy as a whole. This is the whole purpose of macroeconomics. Remember! To keep your lines straight when demonstrating the graphs side by side and that your increases and decreases are shifting to the right or to the left. You need to be able to relate all three graphs accurately with one another.

Unit III

Interest Rates & Investment 

Investment: money spent or expenditures on 

- new plants(factories) 

- capital equipment (machinery)

- technology (hardware and software)

- new homes

- inventories (sold by producers)

Expected Rates of return: 

•How does businesses make investment decisions?  

Cost/ benefit analysis 

•How does business determine the benefits? 

Expected rate of return 

•How does business count the cost? 

Interest costs 

•How does business determine the amount of investment they undertake? 

Compare expected rate of return to interest cost 

• if expected return > interest cost, then invest

• if expected return < interest, then do not invest 

Real vs Nominal 

Nominal is the observable rate of interest. Real subtracts out inflation and is only know. Ex post facto. 

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

r%=i%-£%

R=real interest rate 

I= nominal interest rate 

£=inflation 

What then determines the cost of an investment decision?

The real interest rate (r%)

Investment Demand Curve:(ID): What is the shape of the investment demand curve? 

Downward sloping

- because when the interest rates are high fewer investments are profitable when interest rates are low, more investments are profitable. 

Shifts in Investment Demands (ID): cost of production: lower costs shift ID to the right 

Higher costs shift ID to the left 

Business Taxes: lower business taxes shifts ID to the right 

Higher business taxes shifts ID to the left 

Technological Change: 

New technology shifts ID to the right 

Lack of technological change shifts ID to the left 

Stick of capital: 

If an economy is low on capital then ID shifts to the right

If an economy has much capital then ID shifts to the left

Expectations: 

Positive expectations, ID shifts to the right

Negative expectations, ID shifts to the left 

Long run AS is a vertical line at an out put level, that represents the quantity of goods and services a nation can produce over a sustain period using all of its productive resources as efficiently as possible with all of the current technology available to it. 

Is stable at full employment 

LRAS curve represents a point on an economy's production possibilities curve. 

LRAS is synonymous got pf to shift outward 

Does not change as the price level changes 

Consumption: household spending, the ability to consume is constrained by - the amount of disposable income and the propensity to save. 

Do households consume if DI=0? 

-Autonomous consumption 

-Dissaving

APC=C/DI=% DI that is spent. Saving: household NOT spending 

The ability to save is constrained by- the amount of disposable income and the propensity to consume. Do households save if DI=0? No 

APS=S/DI=%DI that is not spent. 

Disposable Income: Income after taxes orbit Income 

DI= Gross Income-Taxes 

With disposable income, households can either: 

- Consume (spend money on goods and services)  

- Save (not spend money on goods and services) 

 

APC and APS

APC+APS=1

1-APC=APS

1-APS=APC

APC > Dissaving

-APS Dissaving 

MPC and MPS:

MPC: marginal Propensity to consume: change in c/ change in DI

% of every extra dollar earned that is spent 

Marginal Propensity to Save: change in s/ change in DI

% of every extra dollar earned that is saved 

MPC+MPS=1 

1-MPC=MPS

1-MPS=MPC 

The Spending Multiplier Effect: an initial change in spending (C,Xn,Ig,G) causes a larger change in aggregate spending or aggregate demand 

Multiplier= change in AD/ change in spending 

Why did this happen? Expenditures and income flow continuously which sets off a spending increase in the economy. 

Calculations the spending Multiplier: the spending multiplier can be calculated from the MPC or the MPS. Multiplier= 1/1-MPC or 1/MPS 

Multipliers are + when there is an increase in spending and - when there is a decrease. 

Calculating the Tax Multiplier: when he government taxes, the multiplier works in reverse. Why? Because now money is leaving the circular flow. Tax Multiplier (note: it's negative) = -MPC/1-MPC OR -MPC/MPS 

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

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 spending. 

Deficits, Surpluses, and Debt; 

Balanced budget: revenues = expenditures 

Budget Deficit: revenues < expenditures 

Budget Surplus: revenues > expenditures 

Government Debt: Sum of all deficits 

Government must borrow money when it runs a budget deficit.

Government borrows from individuals, corporations, financial institutions, foreign entitlement of foreign government. 

Fiscal Policy: discretionary Fiscal Policy:(action): Expansionary fiscal policy-think deficit 

Contractionary fiscal policy- think surplus 

Non-Discretionary Fiscal policy: no action. 

Discretionary v. Automatic Fiscal Policies: 

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 rates 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. 

Contractionary vs. Expansionary Fiscal policy:

Contractionary fiscal policy: policy designed to decrease aggregate demand. - strategy for controlling inflation. Inflation is contested with Contractionary policy. Decrease government spending. 

Expansionary Fiscal Policy: policy designed to increase aggregate demand. Strategy for increasing GDP, combatting a recession and reducing unemployment. 

Recession is countered with Expansionary policy. increase government spending. Decrease taxes. 

Automatic or Built in Stabilizers: anything that increases the governments budget deficit during a recession and increases its budget surplus during inflation without requiring explicit action by policy makers.  

Transfer Payments: welfare checks, food stamps, unemployment checks, corporate dividends, social security, veterans benefits. 

Progressive Tax System: average tax rate(tax revenue/GDP) rises with GDP. 

Proportional Tax System; average tax rate remains constant as GDP changes.

Regressive Tax System: average tax rate falls with GDP