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