It can spend more by borrowing from abroad or it can

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Unformatted text preview: ses menu costs since normal business practices like printing and distributing catalogues with fixed prices are impossible. It is hard to shop around for the best prices since relative prices do not reflect true scarcity. Tax systems are also distorted since the delay reduces real tax revenue. It is also highly inconvenient to have to carry so much money around. Hyperinflations are due to excessive growth in the supply of money. If a government finds that it cannot borrow money due to bad credit, it will turn the central bank to raise revenue, resulting in rapid money growth and Page 11 of 52 Jessica Gahtan Prof: Mokhles Hossain Macroeconomics ECON2000 Fall 2013 hyperinflation. After hyperinflation begins, the drop in real revenue from tax leads to a repeating cycle. Usually it ends when the government reduces spending and increases taxes. All variables measured in physical units, such as quantities or relative prices, are real variables. Nominal variables are expressed in terms of money. Economists call the theoretical separation of real and nominal variables the classical dichotomy. The classical dichotomy arises because in classical economic theory, changes in the money supply to not influence real variables. This irrelevance of money for real variables is called monetary neutrality. In the long- run, monetary neutrality is approximately correct. Chapter 5 The key macroeconomic difference between open and closed economies is that, in an open economy, a country’s spending in any given year need not equal its output of goods and services. It can spend more by borrowing from abroad, or it can spend less and lend the difference to foreigners. We can divide expenditure on an open economy’s output Y into four components: Cd, consumption of domestic goods and services Id, investment in domestic goods and services Gd, government purchases of domestic goods and services EX, exports of domestic goods and services. Y = Cd + Id + Gd + EX Total consumption = Cd + Cf, total investment = Id + If, total government purchases = Gd + Gf. Y = (C – Cf) + (I – If) + (G – Gf) + EX → Y = C + I + G + EX – (Cf + If + Gf) Y = C + I + G + EX – IM → Y = C + I + G + NX Net exports is exports minus imports. NX = Y – (C + I +...
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