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The traditional monetary rule is the idea that:

the annual rate of increase in the money supply should be equal to the potential annual growth rate of real GDP

A trade deficit occurs for a nation when it:

imports more than it exports.

Nontariff barriers are

licensing requirements, unreasonable quality standards, and the like designed to impede imports

Short Run

Input prices inflexible, upward sloping aggregate supply

Long Run

input prices fully flexible, vertical aggregate supply

Phillips Curve

a curve showing the short-run relationship between the unemployment rate and the inflation rate

Supply-side

the theory that investment incentives such as lowered federal spending and tax cuts will stimulate economic growth and increased employment.

The Laffer Curve

Shows the relationship between the tax rates and tax revenue collected by governments; as tax rates increase from low levels, tax revenue would increase; if taxes rise too high people stop working; lack of work leads to a lack in income and therefore, a fall in tax revenue

Inflation

a general and progressive increase in prices

Real Interest Rates

Interest rates adjusted for the effect of inflation, calculated as the nominal rate less the rate of inflation.

mainstream view

instability in the economy arises from price stickiness, changes in investment, and unexpected shocks to aggregate demand or aggregate supply, view monetary policy as a stabilizing factor, prices and wages inflexible in short run

sticky prices

Prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded.

supply shock

An unexpected event that causes the short-run aggregate supply curve to shift

demand shock

any event the causes the AD curve to shift

investment spending

spending on productive physical capital, such as machinery and construction of buildings, and on changes to inventories

monetarist view

criticize discretionary policy making- oppose discretionary fiscal policy

discretionary fiscal policy

the deliberate manipulation of government purchases, taxation, and transfer payments to promote macroeconomic goals, such as full employment, price stability, and economic growth

equation of exchange

MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of output of goods and services produced in an economy.

real-business-cycle view

business fluctuations result from significant changes in technology and resource availability-affects long run growth trend of AS

coordination failures

occur when people fail to reach a mutually beneficial equilibrium bc they lack a way to coordinate their actions, fourth view of macroeconomic instability - bad equilibrium = coordination failure

expectations

if producers think the price of their product will go up, they may withhold some of their supply

rational expectations theory

A branch of New Classical theory which holds that firms and individuals have rational expectations about the economy and government policies and thus may pursue their own interests in such a way as to render those policies ineffective.

monetarists

Economists who believe that (1) monetary instability is the major cause of fluctuations in real GDP and (2) rapid growth of the money supply is the major cause of inflation.

speed of adjustment

Amount of time that it takes prices to fully adjust so that all markets are in equilibrium and output equals potential output.

efficiency wage theory

an explanation for unemployment that says employees who are paid above the market wage rate have incentive to be more productive, giving employers an incentive to pay them above market wage

monetary rule

belief that the Fed should not change monetary policy; it should be set low enough to encourage business, but high enough to discourage inflation

inflation targeting

conducting monetary policy so as to commit the central bank to achieving a publicly announced level of inflation

balanced budget

a budget in which revenues are equal to spending

discretionary monetary policy

the use of changes in the interest rate or the money supply to stabilize the economy

World Trade

Exchange of goods and services across international boundaries

trade deficit

When a country imports more than it exports

transportation technology

The physical ways humans move materials, goods and people

specialization

Workers concentrate on producing those goods and services for which they have a competitive advantage.

absolute advantage

exists when a country can produce a good or service at a lower cost than other countries

Comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

exchange rates

the rate of exchange of one nation's currency for another nation's currency

Foreign Exchange Market

market for converting the currency of one country into that of another country

currency appreciation

with respect to the dollar, a decrease in the number of dollars neeed to purdchase 1 unit of foreign exchange in a flexible rate system

trade barriers

taxes, quotas, and other restrictions on goods entering or leaving a country

export subsidies

Government payments to domestic producers to enable them to reduce the price of a good or service to foreign buyers

trade wars

Countries impose tariffs or other restrictions on good from another nation to eliminate a trade deficit.

GATT

General Agreement on Tariffs and Trade; international trade organization that encourages free trade by lowering tariffs and other trade restrictions

WTO

The World Trade Organization - an international body that enforces agreements that reduce barriers to international trade; successor to the GATT

EU

an international organization of European countries formed after World War II to reduce trade barriers and increase cooperation among its members

NAFTA

North American Free Trade Agreement; allows open trade with US, Mexico, and Canada

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