-
NIA for National Savings
Y C G = National Savings
-
Relationship between National Savings and budget deficits
Increase in G means a decrease in National Savings
-
Where does the government get resources for spending?
Taxes, selling assets, borrowing
-
Two tools the government can use to get out of recessions?
Increased spending, decreased taxes
-
What is the interest rate impact of the Fed tightening the money supply?
Short-term interest rates will increase. Long term, prices fall.
-
Tightening the money supply should have what impact on inflation?
Lower inflation
-
How to get out of hyperinflation?
Reduce spending, peg the currency, currency board
-
Whats the cost of holding money?
Nominal interest
-
What is the impact on the CA of an increase in the budget deficit?
The CA will fall.
-
-
Quantity Theory Equation:
Change in Money Supply + Change in Velocity = Change in Price Level + Change in Output
-
T/F: There would be no inflation if money grew at the rate of growth of the economy
F: it depends on V. If V is constant then there is no inflation.
-
In a fixed exchange system, what must happen if theres an excess supply of FX?
CB must clear the market, increasing the supply of domestic currency, lowering interest.
-
If there is unexpected inflation the bondholders (gain/lose)
Lose. Their future payments will be worth less.
-
Causes of FX Crisis in fixed regimes?
Loss of confidence, decreased demand for domestic goods/services, CA deficit
-
Causes of low national savings in US over last 15 years?
High G, Low T, low interest, increasing asset prices = higher portfolio value (perceived savings)
-
Two ways to describe GDP:
Total income of everyone in the economy. Total expenditure on the economys output.
-
-
What parts of the NIA are impacted by fiscal policy?
G and T
-
Multipler Equation:
Change in G x Multipler = Change in Y
-
Why is the multipler hard to estimate?
Rational Expectations, Crowding Out, Offsetting Monetary Polciy
-
How do rational expectations impact estimations of the multipler?
Budget deficit eventually has to be offset by taxes, so save for future taxes
-
What is crowding out?
Deficit spending increases interest rates, undercutting private I and C
-
-
What does the FA measure?
Cross-border trade in claims to capital
-
What happens to the CA if I is NOT financed domestically?
CA will fall because CA will decrease as I rises
-
What happens to the CA if I is financed domestically?
S and I increase in tandem, leaving CA unchanged.
-
Types of currency (most liquid first):
C, M1, M2, M3, L
-
Monetary Policy:
Changes in money supply or interest by the CB
-
Problems with computing CPI:
Substitution, List Prices, Quality Change, New Goods
-
Seigniorage:
Government purchases made by printing money
-
Quantity Theory: If change in M > change in Y, what happens to P
Increase in P aka INFLATION
-
Fisher Equation
Nominal Interest = Real Interest + Expected Inflation
-
How to prevent seigniorage:
Currency board, currency peg, create institutions to promote good monetary policy
-
Tools of Monetary Policy:
Discount Rate, Reserve Requirements, Open Market Operations
-
Discount Rate:
Rate at which the Fed lends to banks
-
Federal Funds Rate:
Market rate at which banks lend to one another overnight to meet reserve requirements.
-
Quantitative Easing:
Purchasing non-traditional assets on the secondary market to get bad debt off private balance sheets
-
In Open Market Ops, how does the Fed pays for the bonds it buys?
It credits the sellers account with the Fed.
-
Why dont prices adjust faster?
Menu costs, impact on business relationships, contract restrictions o
-
Philips Curve:
In the short run, a reduction in the money supply leads to unemployment.
-
Why the Gold Standard is bad:
No discretionary monetary policy, supply changes when gold is found, possible better uses for gold
-
Why do countries peg exchange rates?
Signal of stability, encourages trade, restricts CBs power, gives government credibility
-
How does a peg rely on reserves?
The amount of money in circulation is a fixed proportion of the amount in reserves in the CB
-
In which FX system is hyperinflation impossible?
Pegged
-
Disadvantages of pegging?
No monetary policy, direct impact of foreign events, large reserves to stop speculation, FX crisis
-
Does restricting capital flows work as monetary policy in with a pegged FX?
NO! If gov tires to slow inflation by requiring bond purchase, locals look elsewhere, increasing inflation
-
How to stop FX Crisis:
Borrow more FX, raise interest rates, freeze assets/capital flows, devalue and abandon the peg
-
What is the impact of abandoning the peg?
The currency devalues, making FX too costly for locals, ending the FX crisis
-
Interest Rate Parity Theory: Currency with lower interest rates will ___ in value.
Appreciate
-
Carry Trade:
Borrowing in a currency with a low interest rate to invest in a currency with high interest. Risky.
-
PPP Theory: Currency in the country with ___ inflation with appreciate.
Lower
-
When does PPP Theory work well?
Countries with high inflation rates, large differences in inflation rates, over the long-term
-
When does PPP Theory not work well?
Moderate differences in inflation, it takes into account local costs (which vary)
-
Real Exchange Rate:
Nominal exchange rate adjusted for relative prices at home and abroad
-
When is real exchange rate useful?
Determining expat salary, identifying undervaluation, where to travel
-
Fundamental Equilibrium Theory:
Currency in countries w/ unsustainable CA deficits will depreciate
-
Currencies of countries with CA Deficits > GDP Growth tend to ___
Depreciate
-
Random Walk:
Best over short and medium term. Can be beaten over long-term and with very high inflation.
-
According to the Random Walk, whats the best indicator of tomorrows FX rate?
Todays rate.
-
How do you get out of a liquidity trap?
Create an expectation of inflation
-
What creates money supply changes in systems of pegged FX?
Imbalances in the BOP accounts.
-
What three sources make output rise over time?
Increase in labor, increase in capital, increase in efficiency.
-
Nominal GPD will increase whenever Real GDP increases, except when
Prices fall
-
Why is deflation bad?
Inputs may cost more than final goods, debt burdens increase, unemployment rises
-
What are the three prices of money?
Price relative to time, price relative to foreign currency, price relative to goods and services
|
|
