Shalom's AP Econ Blog

Foreign Exchange: the buying and selling of currency Appreciation: we have a strong dollar the dollar buys more of another currency and results in less expensive imports and more expensive exports always leads to a trade deficit and imports will increase because they are cheaper  Depreciation: we have a weak dollar the dollar buys less of another currency and results in more expensive imports and less expensive exports always leads to a trade surplus and cheap exports 

Balance of Payment: Measure of money inflows and outflows between the US and the rest of the world Inflows are known as credits Outflows are known as debits The balance of payments is divided into three accounts: Current Account Capital/Financial Account Official Reserves Current Account: Balance of Trade or Net Exports: Exports - Imports; Exports are credit/assets. Imports are debits/liabilities.  Net Foreign Income or Net Investment: Income earned by US owned foreign assets; Income paid to foreign held US assets Net Transfers or Foreign Aid: Humanitarian efforts; a foreigner in the US sends money that they gross here to their home country Capital/Financial Account:  The balance of capital ownership It includes the purchases of both real and financial assets Direct investment in the US is a credit to the capital account Ex: the Toyota factory in San Antonio Direct investment by US firms/individuals in a foreign country are debits to the capi...

Balance of Trade: Goods Exports + Goods Imports Balance on Goods and Services:  (Goods Exports + Service Exports) - (Goods Imports + Service Imports) Capital Account:  Foreign Purchase of Assets + US Purchases of Assets

Disinflation: A reduction in the inflation rate from year to year; this can be seen in the LRPC. It also occurs when the aggregate demand falls (year to year) Deflation: A general decline in the price level Hyperinflation: Where an economy experiences an unusually high inflation rate Reaganomics (supply side economics): The trickle down effect-reducing taxes Stagflation: High inflation and high unemployment Supply Side Economics: Changes in AD and NOT AD in determining the level of inflation, unemployment rates, and economic growth These economists argue that lower tax rates provide positive work incentives and thus shift the aggregate supply curve right Support programs and policies that promote GDP growth by arguing that high marginal tax rates, along with the current system of transfer payments (unemployment compensation, welfare programs, etc), provide disincentives to work, invest, and to undertake entrepreneurial ventures Laffer Curve: Depicts a theoretical r...

Balance Sheet: summarizes the financial position of the bank at a certain time Assets = Liabilities How do banks create money? Banks create money by lending out deposits Fractional Reserve Banking System: the bank holds a fraction of the total money supply in reserves as currency                       Where do the loans come from? Loans come from people who make deposits.          Money Market: the market where the fed and the users of money interact thus determining the nominal interest rate. Money demand comes from households, firms, the government, and foreign sector.  Money supply is determined only by the federal reserve because the fed has a monopoly over the supply of money, and for this reason the MS curve is vertical  MS is also vertical because it is independent of the interest rate  OMO: the Fed can buy or sell bonds to the bank or the pu...

Fiscal Policy: changes in the expenditures or tax revenues of the federal government. Two Tools of Fiscal Policy Taxes - government can either increase or decrease Spending - government can increase or decrease If the government increases taxes, they must decrease spending. If the government increases spending, they must decrease taxes.  Fiscal policy is enacted to promote our national economic goals: full employment, price stability, economic growth Deficits, Surpluses, and Debt Balanced budget: revenues = expenditures Budget deficit: revenues < expenditures Budget surplus: revenues > expenditures Government debt: sum of all deficits - sum of all surpluses  Government must borrow money when it runs into a budget deficit  Individuals Corporations Financial institutions Foreign entities or foreign governments Two Options for Fiscal Policy Discretionary Fiscal Policy Expansionary Fiscal Policy - think deficit ...