Economics Exam #2 Notes_2008

To sell more bonds government increases interest rate

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To sell more bonds, government increases interest rate r, r>r* A dom S FX , FA D FX e, appreciation Lecture 16, graph 3 Change in risk risk without change in i,r less investment because there is no increase in benefit from the increased risk A dom S FX , FA D FX , e, depreciation Graph 2 LAST CLASS ways to change r: Unexpected changes in p (inflation) Change in monetary policy with no change in inflationary expectations Changes real interest rate (MS up, i down; MS down, i up) MS increases, i decreases, inflation constant, so r decreases, so r<r*, back to top Balancing return (i) against risk More risk lowers expected real return (r), r<r* Less risk increases expected real return (r), r>r* Federal deficit/surplus Productivity Fed enacts contractionary monetary policy which is successful in lowering prices. p<p*, LOWER PRICES p i=r+ p
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Economics lecture #17 07:12 NOTES IN ECONOMICS LECTURE #16 AND Trade- goods and service flow No real trade until 14 th century Mercantilism Export more than imports Accumulate wealth (gold) Support military
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Economics Lecture #18 07:12 Trade- goods and service flow No real trade until 14 th century Mercantilism- export more than imports, accumulate wealth (gold), support strong army Problems: 1) Assumes trade is a zero sum game. 2) If it really worked this way it would siphon off all the wealth of the importing country, impoverishing it. This issue was the impetus to colonization. Absolute advantage- Each country produces for export that which it produces best (attempt at solving mercantilism’s problems) Problems: 1) Assumes each country produces a different thing the best. 2) Other country wants what you export Comparative advantage- Each country produces for export that which it produces at the lowest domestic opportunity cost (Ricardo) Absolute advantage- occurs when each country has an absolute advantage in ONE good Saudi Arabia Japan Oil 200 2 Stereos 1 50 Japan produces absolutely more stereos while Saudi Arabia produces absolutely more oil ( GRAPH ) Saudi Arabia Japan Oil = =.005 stereos = =25 stereos Stereos = =200 stereos = =.04 oil
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Economics Lecture #18 07:12 These are the autarkic (no trade) prices (domestic price) Exports increase because a country earns more on foreign market; import because a country can buy at cheaper than the domestic market Range of the terms of trade for oil: .005 stereos<1 oil<25 stereos Range of the terms of trade for stereos: .04 oil<1 stereo<200 oil World price: P Stereo =2 barrels, P oil = ½ stereo Quantifying the gains from trade: Saudi Arabia exports oil: = =100, SA gets 100x more on world market Japan exports stereos: = ,=50 Japan gets 50x more on world market Small countries gain more from trade than the larger country. Importance of being unimportant, because on the supply side of the market, they generate very small increases so there is a larger difference between the very large world price and their price, so they get more money for their goods, comparatively.
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