Econ 102 2nd midterm to final

an economy that does not interact with other economies in the world

an economy that interacts freely with other economies around the world

goods and services that are produced domestically and sold abroad

goods and services that are produced abroad and sold domestically

the value of a nation's exports minus the value of its imports

an excess of exports over imports

an excess of imports over exports

a situation in which exports equal imports

the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners

Net exports (NX)

the rate at which a person can trade the currency of one country for the currency of another

an increase in the value of a currency as measured by the amount of foreign currency it can buy

a decrease in the value of a currency as measured by the amount of foreign currency it can buy

the rate at which a person can trade the goods and services of one country for the goods and services of another

Real x-rate= (nominal x-rate X domestic price)/foreign price

Purchasing Power Parity: a theory of exchange rates whereby a unit of any given currency should be able to buy the same quantity of goods in all countries

Law of One Price: a good must sell for the same price in all locations

an economy that trades goods and services with other economies and, by itself, has a negligible effect on world prices and interest rates

full access to world financial markets

a theory of interest rate determination whereby the real interest rate on comparable financial assets should be the same in all economies with full access to world financial markets

a period of falling incomes and raising unemployment

a severe recession

a curve that shows the quantity of goods and services that households, firms, and the gov't want to buy at each price level

a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level

• changes in consumption
• changes in investment
• changes in gov't purchases
• changes in net exports

• changes in labour
• changes in capital
• changes in natural resources
• changes in technological knowledge

a lower price level raises the real value of household's money holdings, a higher real wealth stimulates consumer spending

• As price level goes down, interest rate goes up, which increases investment spending
• most important of the 3 reasons the aggregate-demand curve slopes downward

lower price lvel reduces the real exchange rate, this depreciation makes Canadian-produced goods and services cheaper relative to foreign-produced goods and services, therefore Canadian net exports rise

Keynes's theory that the interest rate adjusts to bring money supply and money demand into balance

the one interest rate at which the quantity of money demanded exactly balances the quantity of money supplied

a policy by which the value of the exchange rate is allowed to vary without interference by the central bank

the additional shifts in aggregate demand that result when expansionary fiscal policy increase outcome and thereby increase consumer spending

Marginal propensity consume: the fraction of extra income that a household consumes rather than saves

the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces the investment spending

the offset in aggregate demand that results when expansionary fiscal policy in a small open economy with a flexible exchange rate raises the real exchange rate and thereby reduces net exports

changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession, without policer makers having to take any deliberate action

a curve that shows the short-run tradeoff b/w inflation and unemployment

the claim that unemployment eventually returns to its normal, or natural rate, regardless of the rate of inflation

an event that directly alters firms' costs and prices, shifting the aggregate-supply curve and thus the Phillips curve

the number of percentage points of one's year's output lost in the process of reducing inflation by one percentage point

the number of percentage points the unemployment rate increases when GDP falls by one percentage point

the theory according to which people ultimately use all the information they have, including information about gov't policies, when focusing or forecasting the future.