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THE BIGGEST QUESTIONS 1. What causes business cycles and unemployment and what can/should we do about each? 2. What causes inflation in the short-run? in the long-run? what should we do about each? 3. What policies would you recommend to stimulate long-run economic growth? 4. What roles do money and the financial system play in the macroeconomy? 5. How do international trade and international finance impact the macroeconomy? INTERNATIONAL MACRO 1. FREE TRADE IS POTENTIALLY BENEFICIAL TO ALL TRADING PARTNERS, ALTHOUGH NOT NECESSARILY EQUALLY SO o This is due to comparative advantage -- when countries specialize in whatever production they have a relative advantage in (lowest opportunity cost ) o Also, trade leads to increased competition and transmission of ideas and technology o Thus barriers to trade are ‘bad’ o Quota’s, tariffs, restrictions on dumping all reduce gains from trade. Attempts to ‘save jobs’ are very expensive per job and inefficient : However, trying to assist those who lose jobs with retraining, tax breaks etc may be morally and politically ‘good’ 2. IMPACT OF OPEN ECONOMY ON MACROECONOMIC ISSUES o X increases aggregate D, M reduces it (D=C+I+G+X-M) : determinants of X - $, foreign income - note using $ to mean dollar exchange rate with other currencies : determinants of M - $, domestic income o X-M will be called current account balance later (roughly) 3. DETERMINANTS OF EXCHANGE RATES IN THE SHORT RUN – FLEXIBLE OR FLOATING RATES o Exchange rate is determined by the S&D for currency derived from S&D for Goods and Services (and real and financial assets which we will ignore for a moment) o Look at $ market (against the yen say) – exchange rate is # of yen per dolla – Yen/$ : $ is denominator in $ market If Japanese wish to buy more American goods or services, then : Demand for dollars increase from D1 to D2 since Japanese ultimately pay for American goods and services with $ : $ appreciates (floats up) to intersection of S1 and D2 – 1$=more yen
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: Any increase in demand for a countries goods or services – X will cause currency to appreciate (and vice versa)
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