ECON 12:5

ECON 12:5 - variables-the money supply cannot effect the...

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Be ready to draw the three graphs Trade policy With quota, Imports go DOWN, NX goes UP Goods look more expensive to foreigners, i.e. currency goes UP - exports go DOWN - NCO unchanged - NX unchanged Quota does not always have a certain effect - Saves jobs in the auto industry, but destroys jobs in the US export industries If NCO increases in mexico, the bank in mexico will try to prevent you from closing your bank account, will raise the interest rate - the value of the Mexican peso will fall - They will just want to buy assets in the US Raise in the interest rate will raise NCO Business fluctuations - Aggregate price and aggregate level of production fluctuate a lot - Business cycle theory – percentage change of GDP from year to year measured with the price deflator Aggregate demand and Short Run aggregate supply - over the long run, there is not an influence form the nominal variables to the real
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Unformatted text preview: variables-the money supply cannot effect the real variables-Equilibrium output is the real GDP-If there is a change in the GDP deflator, that means there was a change in every product on average Y = C + I + G + NX where g is fixed Wealth effect Suppose P rises-the dollars people hold buy fewer goods and services o Real wealth is lower o People feel poorer Consumption falls Therefore, Real GDP goes DOWN Interest rate effect-Buying goods and services requires more dollars o To get these dollars, people sell bonds or other assets Decreasing savings-spiking the interest rate-decreasing investment-Real GDP falls Exchange rate effect-Increase in prices-Increase the real interest rate o NCO decreases (this is the line that is vertical)-Real exchange rate goes up (this is NX on the same graph as the vertical NCO)...
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This note was uploaded on 01/14/2012 for the course ECON 002 taught by Professor Eudey during the Fall '08 term at UPenn.

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ECON 12:5 - variables-the money supply cannot effect the...

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