(4/1)

	Price Level	Wage Level	Employment Level	Implications
Keynesian or Horizontal	Fixed	Fixed	Flexible	Output depends on changes in employment.
Intermediate	Flexible	Fixed	Flexible	Output depends upon changes in price level & employment.
Classical or vertical	Flexible	Fixed	Fixed	Output depends on changes in price level.

Long run AS

·         Time long enough for wages to adjust to the price level.

·         Flexible Wage and Price level.

·         Both offset eachother.

Demand-pull Inflation

Cost-push Inflation

4/1/15

Absolute Advantage v. Comparative Advantage

•Absolute Advantage

-Individual: exists when a person can produce more of a certain good/service than someone else in the same amount of time.
-National: exists when a country can produce more of a good/service than another country can in the same time period.

•Comparative Advantage

-Individual/National: Exists when an individual or nation can produce a good/service at a lower opportunity cost than can another individual or nation.
•Absolute Advantage
   -Faster, more, more efficient
•Comparative Advantage
    -lower opportunity cost

Foreign Exchange Market

Foreign exchange market (3/15)

•The buying and selling of currency. 

•the exchange rate is determined in the foreign currency markets. 

•it is the price of a currency. 

Tips

•always change the demand line on one currency graph, The S line on the other currency's graph

•move the lines of the two currency graphs in the same direction (right or left) and you will have the correct answer

•if D on one graph increases, S on the other will also increase 

•if D moves to the left, S will move to the left on the other graph. 

Changes in exchange rates 

•exchange rates are a function of the supply and demand for currency. 

-an unease in the supply of a currency will make it cheaper to buy one unit of that currency. 

-a decrease in supply of a currency will make it more expensive to buy one unit of that currency. 

•an increase in demand for a currency will make it more expensive to buy unit of that currency 

•a decrease in demand for a currency will make it cheaper to buy one unit of that currency 

Appreciation 

•it occurs when the exchange rate of hat currency increases 

Exchange rate determinants 

•consumer tastes 

•relative income 

-imports tend to be normal goods 

•relative price level 

•speculation 

Depreciation 

•occurs when the exchange rate of that currency decreases. 

Official Reserves

Official reserves (3/13)

•the foreign currency holdings of the U.S. 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 depletes its reserves of foreign currency and credits the balance of payments. 

•the official reserves zero out the balance of payments. 

•Active official reserves Vs. Passive 

- the U.S. is passive in its use of official reserves. It does not seek to manipulate the dollar exchange rate. 

- the people's republic of china is active in its use of official reserves. It actively buys and sells dollars in order to maintain a steady exchange with U.S.