classical model of the price level
Simplified model in which the real quantity of money, M/P is always at its long-run equilibrium level
inflation tax
the reduction in the value of the money held by the public caused by inflation
Short-run Phillips curve
negative short-run relationship between the unemployment rate and the inflation rate
nonaccelerating inflation rate of unemployment or NAIRU
Unemployment rate at which inflation does not change over time
disinflation
Process of bringing down inflation that has become embedded in expectations
Zero bound
nominal interest rates cannot go below zero
liquidity trap
Situation in which conventional monetary policy to fight a slump-cutting interest rates can't be used because nominal interest rates are up against the zero bound
macroeconomic policy
activism the use of monetary and fiscal policy to smooth out business cycle
Monetarism
GDP would grow steadily if money supply grows steadily
discretionary monetary policy
changes in the interest rate or the money supply by the central bank in order to stabilize the economy
monetary policy rule
a formula that determines its actions and left it relatively little discretion
Velocity of money
the ratio of nominal GDP to the money supply
Natural rate hypothesis
inflation is eventually embedded into expectations, to avoid accelerating inflation over time, the unemployment rate must be high enough that the actual inflation rate equals the expected rate of inflation
a political business cycle
unnecessary instability in the economy caused by the use of macroeconomic policy to serve political ends
new classical macroeconomics
the classical view that shifts in the aggregate demand curve affect only the aggregate price level, not aggregate output
Rational expectations
a theory originally introduced John Muth in 1961, is the view that individuals and firms make decisions optimally, using all available information
Real business cycle theory
claims that fluctuations in the rate of growth of total factor productivity cause the business cycle
Balance of payment accounts
summary of the country's transaction with other countries
balance of payments on current account or current account
Transactions that don't create liabilities. the balance of payments on goods and services plus net international transfer payments and factor income
the balance of payments on goods and services
the difference between the value of exports and the value of imports during a given period
Merchandise trade balance or trade balance
the difference between a country's exports and imports of goods alone- not including services
balance of payments on financial account or financial account
Transactions that involve the sale or purchases of assets, and therefore do create future liabilities
foreign exchange market
International transaction then require a market in which currencies can be exchanged for each other
appreciates
When currency becomes more valuable in terms of other currencies
depreciates
When currency becomes less valuable in terms of other currencies
Equilibrium exchange rate
exchange rate at which the quantity of U.S. dollar demanded in the foreign exchange market is equal to the quantity of U.S. dollar supplied
real exchange rates
exchange rates adjusted for international differences in aggregate price level
Exchange rate regime
a rule governing policy toward the exchange rate
Fixed exchange rate
when government keeps the exchange rate against some currency at or near a particular target
Floating exchange rate
when the government lets the exchange rate go wherever the market takes it
exchange market intervention
Government purchases or sales of currency in the foreign exchange market
foreign exchange reserves
stocks of foreign currency that they can use to buy their own currency to support its price
foreign exchange controls
Licensing system that limits the rights of individuals to buy currency
devaluation
Reducing the value of a currency that is set under a fixed exchange rate regime
revaluation
An increase in the value of a currency that is set under a fixed exchange rate regime