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Milton Friedman ( most closely associated with)


Monetarists (believe that)

velocity is relatively stable

(according to) monetarists

Changes in the money supply are the primary cause of changes in the price level

the basic equation of monetarism


The Velocity of money (is the)

number of times per year the average dollar is spent on final goods and services

At the equilibrium level of GDP

MV= nominal GDP

The real Business cycle theory (holds that business fluntuations are caused by)

Significant changes in technology and resource availability

New Classical economists (believe)

left alone, the economy gravitates to its full employment level of output

Rational expectations theory ( is based on the assumption that)

Both product and research markets are very competitive

Rational expectations theory (assumes that)

People behave rationally and that all product and resource prices are flexible both upward and downward

Mainstream economists (question the new classical assumption that)

wages and prices are equally flexable up and down

If firms are paying efficiency wages

may be reluctant to cut wages when aggregate demand declines

Efficiency wage

an above market wage that minimizes a firms labor cost per unit of output

The traditional monetary rule

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

Traditional monetarty rule believers say that the supply of money should be

increased at a constant rate each year

Crowding out effect

deficit financing will increase the interest rate and reduce investment

According to monetarists an expansionary fiscal policy is a weak stabilization tool because

goverment borowing to finance a deficit will raise the interest rate and reduce private investment

Theory of Rational expectaions concludes that

by reacting in its self interest to the expected effects of stabalization policy, the public tends to negate the impact of those policies

Rational expectations economists

most likely to favor balanced federal budgets

Mainstream economists favor

the use of discretionary monetary and fiscal policy

US exports of goods and services are about

13 percent of US GDP

Countries engaged in international trade specialize in production based on

Comparative advantage

The terms of trade reflect

the ratio at which nations will exchange too goods

Comparative advantage , a good should be produced in thte nation where

its costs is least in terms of alternative goods that might otherwise be produced.

Primary gain from international trade-

more goods than would be attainable through domestic prodction alone


Imposed to raise revenues or to shield domestic producers from foreign competion

Revenue tariff

An excess tax on an imported good

Protective tariffs

taxes on forien good that help shield domestic producers of the good

Nontariff barrier example

box by box requirments for imported fruit

Volountary export restriction

canada aggreing to have limit of total lumber sent to US

Import quota

Limit of tons of sugar that can be imported each year

A protective tariff will

increase the price amd sales of domestic producers

for tariffs economists prefer

free trade to taridds and tariffs to import quoatas

tariff studies show

cost of trade barriers exceed their benefits, creating an efficiency loss for society

Infant industry argument

new domestic industries need support to establish themselves and survive

World Trade organization established to

resolve disputes arising under world trade rules

The euro zone

is the subset of EU that uses comon currency


North American Free trade agreement

foreign curreny inflow

foreign purchases of assets in the US

A nations official reserves

compensates for the surrent and capital and financial accounts

A nations capital and financial account-

includes both impayment and outpayments

US Dollar out flow

US purchases of assets abroad

There must always be a balance of a nations

total international payments

the managed float

the exchange rate currently used by the industrially advanced nations

under the managed floating system of exchange rates

Exhange rates are essential flexible, but goverments intervene to offset disorderly fluctutaions in rates

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