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
Nontariff barriers are
licensing requirements, unreasonable quality standards, and the like designed to impede imports
a curve showing the short-run relationship between the unemployment rate and the inflation rate
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
Real Interest Rates
Interest rates adjusted for the effect of inflation, calculated as the nominal rate less the rate of inflation.
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
Prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded.
spending on productive physical capital, such as machinery and construction of buildings, and on changes to inventories
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.
business fluctuations result from significant changes in technology and resource availability-affects long run growth trend of AS
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
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.
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
belief that the Fed should not change monetary policy; it should be set low enough to encourage business, but high enough to discourage inflation
conducting monetary policy so as to commit the central bank to achieving a publicly announced level of inflation
discretionary monetary policy
the use of changes in the interest rate or the money supply to stabilize the economy
Workers concentrate on producing those goods and services for which they have a competitive advantage.
exists when a country can produce a good or service at a lower cost than other countries
the ability to produce a good at a lower opportunity cost than another producer
Foreign Exchange Market
market for converting the currency of one country into that of another country
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
Government payments to domestic producers to enable them to reduce the price of a good or service to foreign buyers
Countries impose tariffs or other restrictions on good from another nation to eliminate a trade deficit.
General Agreement on Tariffs and Trade; international trade organization that encourages free trade by lowering tariffs and other trade restrictions
The World Trade Organization - an international body that enforces agreements that reduce barriers to international trade; successor to the GATT
an international organization of European countries formed after World War II to reduce trade barriers and increase cooperation among its members