ECON 103 Final Baer UIUC Study online at quizlet com jaylt 1 2 3 4 5 6 7 8 9 10 11 12 13 arguments for tariffs protect high paid jobs from cheap foreign labor employment defense infant industry can stop the vicious cycle at the investment stage Causes of Inflation MV PQ Inflationary gap government budget deficit financed by central bank downward stickiness of prices phillips curve service sector inflation inertial inflation IMF created after WW2 works to foster global monetary cooperation secure financial stability facilitate international trade promote high employment and sustainable economic growth and reduce poverty around the world Import Substitution Industrialization ISI solution to declining terms of trade developing countries need to develop their own industries Income Effect MPM related to DEMAND MPM change in imports over the change in income inertial inflation a situation where all prices in an economy are continuously adjusted with relation to a price index by force of contracts Institutional Arrangements to Promote Freer Trade Smoot Hewley Tariff 1930 dramatically increased the tariff passed on imported food Reciprocal Trade Act of 1935 transfered tariff making power from Congress to Executive GATT general agreement on Tariffs and Trade Internal equilibrium full employment with price stability 20 Laffer Curve reduce taxes and gov revenues will increase adapted by supply siders 21 Liquidity Extent to which an asset can easily be exchanged for money Distinguishes money from other asset forms marginal productivity the extra output an extra worker contributes to the total output Marginal Productivity MPL the change in income over the change in of laborers 24 Monetary Policy process by which the monetary authority of a country controls the supply of money often targeting a rate of interest for the purpose of promoting economic growth and stability 25 Money Measure of value store value and medium of exchange Must be durable divisible homogeneous and stable 26 MPM marginal propensity to import 27 MV PQ which is the nominal GDP or non inflation adjusted GDP 14 15 Comparative Advantage when one country has a lower opportunity cost to produce a good David Ricardo Big thing was the corn laws Established the idea of comparative and absolute advantages through trade specializtion a country can improve their well being and increase production possibility curves Declining Terms of Trade Pexports Pimports declining means 1 Deficit Country money supply declines prices decline exports rise and imports decrease Dilemmas of ISI increased dependence on multinationals new dependence on external business cycle resistance of industrialized countries to buy their goods Disguised unemployment when too many people work in one industry and the marginal productivity of labor is zero or negative external equilibrium balance of payments equilibrium fiscal policy the use of government revenue collection taxation and expenditure spending to influence the economy General characteristics of developing countries low per capita lower life expectancy population explosions until recently very high rural population precarious infrastructure human underdevelopment low capacity of private sector to save vicious cycle of poverty Gold Standard sacrifices internal equilibrium for external equilibrium 16 17 18 19 22 23 28 29 30 31 32 33 34 35 36 37 38 39 40 41 non tariff barriers to trade quotas customs bureaucracy government procurement marketing barriers labeling requirements health restrictions pegged exchange rate pin economy to that of another to increase stability Phillips Curve inverse relationship between unemployment and inflation 44 Potential Money Multiplier m 1 legal reserve LRR m ID increase in the money supply 45 Price Effect related to SUPPLY Problems associated with ISI decreases then rises again b c one country does not have all the means to make products ie limited means regional concentration of economic activity Have to borrow money from IMF which causes debt Rapid urbanization results in slums Production Possibility Curves relate one country s production items Raul Prebish ECLA declining terms of trade results in the developing countries remaining in poverty Monopolies and unions prevent the price of technology from coming down Food prices stay relatively the same b c they have elasticity 1 Supply side economics Arguments too much regulation stiffles growth taxes too high destimulations work effort savings and investments presence of gov wastes and resources crowding out too much welfare reduces incentives to work Supply Side Policies reduce taxes deregulation decrease in social expenditures and increase in defense expenditures Surplus Country gold flows in money supply increases inflation exports decline and imports increase lower interest rate causes boom causing imports to grow Tariff types protective and revenue Trade Deficit Example M X have an outflow of gold Causes money to decrease and price to decrease When the price decreases exports increase This causes the deficit to decrease and the trade bablance to increase Trade Deficit Moneys affect on interest When money decreases the interest rate increases which causes the investment rate to decrease This causes income to decrease imports to decrease and the trade balance to increase 42 43 46 47 48 Trade off of phillips curve emphasises the possibility that an economy can be in equilibrium with unemployment Unconditional Most Favored Nation Principle All members bargain for tariffs on trade all tariffs agreed upon are transferred to all other countries Velocity ther average of times per year each dollar is used to transact an exchange Velocity of Money Quantity Theory of Money How does money supply affect prices Theory that money supply has a direct proportional relationship with the price level Vicious cycle of poverty low per capita low savings low investment low productivity low per capita World Bank international financial institution that provides loans to developing countries for capital programs goal is to end poverty World Trade Organization WTO global international organization dealing with the rules of trade between nations