Unit 7

Purchasing Power Parity

When the currency rates are set by the International markets changes will be based on the actual purchasing power of the currency.

For example if the US dollar to the European Euro is a $1.5 to one than each one dollar and fifty cents will buy one euro.
However if an item in the US costs a dollar fifty then cost more or less than one euro the parody is lost. Markets will adjust quickly inflating rates or pressure fix rates.

Why do we exchange currneeycies?
1. Invest in other countries. Stocks and bonds.
2. Sell exports and buy imports.
3. Build factories or stores in other markets
4. Hold currencies in bank accounts for futures imports emports or business loans
5. Speculate on currency values
6. Control imbalances.

Unit 7

Foreign Exchange Market

- The foreign currency holdings of the United States Federal Reserve System
- When there is a balance of payments surplus the Fed accumulates foreign currency and debits the balance of payments
- when there is a balance of payments deficit the fed depleted it's reserves of foreign currency and credits the balance payments
- The official  Reserves zero out the balance of payments

Active v. Passive official reserves
- The United States is passive in its use of official Reserves. It's doesn't not seek it manipulate the dollar exchange rate
- The people's republic of China is active in it's use of official reserves. It's actively buys and sells dollars in order to maintain a steady exchange rate with the United States.

Unit 6

Official Reserves

- The foreign currency holdings of the United States Federal Reserve System
- When there is a balance of payments surplus the Fed accumulates foreign currency and debits the balance of payments
- when there is a balance of payments deficit the fed depleted it's reserves of foreign currency and credits the balance payments
- The official  Reserves zero out the balance of payments

Active v. Passive official reserves 

- The United States is passive in its use of official Reserves. It's doesn't not seek it manipulate the dollar exchange rate
- The people's republic of China is active in it's use of official reserves. It's actively buys and sells dollars in order to maintain a steady exchange rate with the United States.

Unit 6

Balance of Payments

Is a measure of money inflows and outflows between the United States and the rest of the world. (ROW)
- Inflows are referred to as CREDITS
- Outflows are referred to as DEBIT

The balance of Payments is divided into 3 accounts
- Current Account
- Capital/Finance
- Official reserves

Double Entry Bookkeeping
- Every transaction in the balance of Payments is recorded twice in accordance with standard accounting practice.
    Ex US manufacturer John exports $50 million worth of farm equipment to Ireland.
     - a credit of 50 million to the current account
    
Current Account
- Balance of trade or net exports
        Exports of goods and services - import of goods and services

        Exports create a credit to the balance of Payments

        Imports create a debit to the balance to the balance of Payments

Net Foreign Income
- Income earned by US owned assets - income paid to foreign held U.S. assets
Ex. Interest payments on US owned Brazilian bonds minus interest payments on German ownered US Treasury bonds

Net Transfers (tend to be one sided)
Ex. Mexican migrant workers workers send money to family in Mexico.

Capital/ Financial account
- the balance of capital ownership
- includes the purchase of both real and financial assets
- direct investment in the United States is a credit to the capital account

Direct investment by U.S. firms/individuals in a foreign country are debits to the capital account.
Ex. The intel factory

- Purchase of foreign financial aasets represents a debit to the capital account.
Ex. Warren buffet buys stocks in Petrochina.

- Purchase of domestic Fianacal assrts by foreigners represents a credit to the capital account.

Relationship between current and capital account.
- the current account and capital account should zero eachother out. 

Unit 5

Supply Side

Is the belief that the AS curve will determine levels of inflation unemployment and economic growth. To increase the economy the AS curve should shift to the right which will always benefit the company first.

Focus on marginal tax rates (which are the amount paid on the last dollar earned or on each additional dollar earned)
By reducing the marginal tax rate supply siders believe that you will encourage more people to work longer and forgo leisure time for entra income. Support that help GDP growth by arguing thay the high tax rate and current system of transfer payments provide disincentives to work, invest, innovat, and undertake entrepreneurial ventures.

Reagonnomics

-Lowered the margial tax rate to get the US out of a recession.

Lafer curve it is a trade-off between tax rates and government revenue. Used to support supply side argument.

3 criticisms of Lafer Curve

- Research suggests that the impact of tax rates on incentives to work, save and invest are small
- tax cuts increase demand which can fuel inflation and cause demand to exceed supply
- where the economy is actually located on the curve is difficult to determine 

Unit 5 Notes

Phillips Curve: 

Represents the relationship between unemployment and inflation. The trade of between inflation and unemployment only occurs in the short run.

Two points 

- Short run- inverse relationship between inflation and unemployment. When inflation increase unemployment goes down. Relevance to Okun's law. Since wages are sticky inflation changes move the points on the SRPC. If inflation persists and expected rate of inflation rise then the entire SRPC moves upwars causing inflation. If inflation expectation drop due to technology or economic growth then the SRPC will move downward.
AS shocks (rapid increase in resource cost) can cause higher rates of unemployment.

- Long run- occurs at the natural rate of unemployment. (4-5 percent) If the natural rate of unemployment the vertical line changes. Represented by vertical line. No trade off between unemployment and inflation in the long run. Meaning economy produces at full employment level. LRPC will only shift if the LRAS curve shifts.

Misery index is the combination of unemployment and inflation in any given year. Single digit memory is good. (4-5 percent)

Unit 4 Notes