Ap macroeconomics Exam: Course Study Guide [ unit I ] What is economics?

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[Flow of Goods and Services]: CAUSE

r in county X
r in the U.S., relative to country X
capital inflow to country X OR
capital outflow from the U.S.

 demand for dollar denominated financial assets

 D_$

depreciation of the US$relative to the X$ from (e₁– e₂)

[Typical International Goods (Current Account) Question]:

[HINT] If forced to use S_$, it should respond to ΔrGDP. [TRUTH] Goods questions are S_$.

Appreciation of the $ relative to the  from e₁ –e₂	$ denominated goods become relatively more expensive » D_$ [truth » S_$] ( denominated goods become relatively less expensive)	 X  M
Depreciation of the $ relative to the  from e₁ –e₂	$ denominated goods become relatively less expensive » D_$ [truth » S_$] ( denominated goods become relatively more expensive)	 X  M
PL in U.S. ($)	$ denominated goods become relatively more expensive » D_$ [truth » S_$] ( denominated goods become relatively less expensive)	 X  M
PL in U.S. ($)	$ denominated goods become relatively less expensive » D_$ [truth » S_$] ( denominated goods become relatively more expensive)	 X  M

[Flow of Goods and Services]:

CAUSE	EXPLANATION	EFFECT
PL in the U.S – country you are looking at Appreciation of $ –  value of the currency you are looking at PL in  – the other country Depreciation of  –  value of the other country’s currency	PL: The increase in price level makes dollar denominated goods relatively more expensive. Appreciation here: The appreciated $ makes dollar denominated goods relatively more expensive. PL in other country: The decrease in price level makes  denominated goods relatively less expensive. Depreciation of : The depreciated  makes  denominated goods relatively less expensive.	Decrease in U.S. exports (X) Increase in U.S. imports (M)
PL in the U.S – country you are looking at Depreciation of $ – value of the currency you are looking at PL in  – the other country Appreciation of  – value of the other country’s currency.	PL: The decrease in price level makes dollar denominated goods relatively less expensive. Depreciation here: The depreciated $ makes dollar denominated goods relatively less expensive. PL in other country: The increase in price level makes  denominated goods relatively more expensive. Appreciation of : The appreciated  makes  denominated goods relatively more expensive.	Increase in U.S. exports (X) Decrease in U.S. imports (M)

A Look-Ahead to Other International Consequences:

[NOTICE] Your answer is different depending on whether it is a goods or financial assets question.

			PL	Goods/Current Account	Value of the $	r	Financial Assets/Capital Account	Value of the $
FISCAL POLICY	EXPANSIONARY	G		$ denominated goods become relatively more expensive  D_$ (truth  S_$)	Depreciation of the $ relative to the  from e₁ – e₂		 demand for $ denominated financial assets in order to yield a higher return  D_$	appreciation of the $ relative to the  from e₁ - e₂
		T_income		$ denominated goods become relatively more expensive  D_$ (truth  S_$)	Depreciation of the $ relative to the  from e₁ – e₂		 demand for $ denominated financial assets in order to yield a higher return  D_$	appreciation of the $ relative to the  from e₁ - e₂
		T_corporate		$ denominated goods become relatively more expensive  D_$ (truth  S_$)	Depreciation of the $ relative to the  from e₁ – e₂		 demand for $ denominated financial assets in order to yield a higher return  D_$	appreciation of the $ relative to the  from e₁ - e₂
	CONTRACTIONARY	G		$ denominated goods become relatively less expensive  D_$ (truth  S_$)	Appreciation of the $ relative to the  from e₁ – e₂		 demand for $ denominated financial assets in order to yield a higher return  D_$	depreciation of the $ relative to the  from e₁ - e₂
		T_income		$ denominated goods become relatively less expensive  D_$ (truth  S_$)	Appreciation of the $ relative to the  from e₁ – e₂		 demand for $ denominated financial assets in order to yield a higher return  D_$	depreciation of the $ relative to the  from e₁ - e₂
		T_corporate		$ denominated goods become relatively less expensive  D_$ (truth  S_$)	Appreciation of the $ relative to the  from e₁ – e₂		 demand for $ denominated financial assets in order to yield a higher return  D_$	depreciation of the $ relative to the  from e₁ - e₂
MONETARY POLICY	EXPANSIONARY	OMO buy		$ denominated goods become relatively more expensive  D_$ (truth  S_$)	Depreciation of the $ relative to the  from e₁ – e₂		 demand for $ denominated financial assets in order to yield a higher return  D_$	depreciation of the $ relative to the  from e₁ - e₂
		 discount rate		$ denominated goods become relatively more expensive  D_$ (truth  S_$)	Depreciation of the $ relative to the  from e₁ – e₂		 demand for $ denominated financial assets in order to yield a higher return  D_$	depreciation of the $ relative to the  from e₁ - e₂
		 reserve requirement		$ denominated goods become relatively more expensive  D_$ (truth  S_$)	Depreciation of the $ relative to the  from e₁ – e₂		 demand for $ denominated financial assets in order to yield a higher return  D_$	depreciation of the $ relative to the  from e₁ - e₂
	CONTRACTIONARY	OMO sale		$ denominated goods become relatively less expensive  D_$ (truth  S_$)	Appreciation of the $ relative to the  from e₁ – e₂		 demand for $ denominated financial assets in order to yield a higher return  D_$	appreciation of the $ relative to the  from e₁ - e₂
		 discount rate		$ denominated goods become relatively less expensive  D_$ (truth  S_$)	Appreciation of the $ relative to the  from e₁ – e₂		 demand for $ denominated financial assets in order to yield a higher return  D_$	appreciation of the $ relative to the  from e₁ - e₂
		 reserve requirement		$ denominated goods become relatively less expensive  D_$ (truth  S_$)	Appreciation of the $ relative to the  from e₁ – e₂		 demand for $ denominated financial assets in order to yield a higher return  D_$	appreciation of the $ relative to the  from e₁ - e₂

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