No Bull Economics Lessons

Macroeconomics & Microeconomics Concepts You Must Know

Essential Questions

How do you show the effects of a decrease in aggregate income using the foreign exchange market?

Posted on January 17, 2015 at 11:25 AM Comments comments (0)

Suppose one economy is in recession while another country’s economy is strong. The country in recession won’t be able to import as many goods since income is low. Therefore, it will supply less currency to the foreign exchange market. When this happens, the value of currency will appreciate.


AP Macroeconomics Unit 6 International Trade

How do exchange rates work?

Posted on January 17, 2015 at 11:20 AM Comments comments (0)

An exchange rate is determined by supply and demand in the foreign exchange market. It is how much of one country’s currency it takes to buy one unit of another country’s currency.


For example, it might cost 0.73 euro to buy $1 US this month. If it costs 0.5 euro to buy $1 US next month, the euro has appreciated in value because it takes fewer euros to buy $1 US. This means that the dollar has depreciated against the euro.


With the exchange rates from the example above, $1.37 US will buy 1 euro this month. Next month, it costs $2 US to buy 1 euro. Again, the euro appreciated and the US dollar depreciated. Exchange rates and the value of a currency are all relative.


AP Macroeconomics Unit 6 International Trade

What are some barriers to international trade?

Posted on January 17, 2015 at 11:20 AM Comments comments (0)

In the long run, the gains from international trade are greater than the losses. In the short run, trade can hurt domestic producers and cause domestic unemployment, which can lead to the implementation of trade barriers by policy makers.


One type of trade barrier is a tariff; a protectionist tool that taxes imports. This raises the costs of foreign goods to keep domestic industries alive. However, higher prices hurt consumers.


Other tools of protectionist policy include import quotas (legal limits), complicated licensing procedures, and high quality standards.


A more unfortunate barrier to trade is a global military conflict that cuts off supply lines between trade partners; or perhaps, a war between two trading partners.


AP Macroeconomics Unit 6 International Trade

How does a trade deficit affect a nation's economy in the short run?

Posted on January 17, 2015 at 11:15 AM Comments comments (0)

A trade deficit occurs when a nation’s imports are greater than its exports. Net exports are negative and the current account is showing a deficit. When a trade deficit increases in the short run, aggregate demand shifts to the left. The price level decreases, real GDP falls, and unemployment rises.


If a nation’s exports are greater than its imports, it has a trade surplus or current account surplus. When net exports increase, aggregate demand will increase.


In the long run, exports and imports will balance out.


AP Macroeconomics Unit 6 International Trade

What is the difference between a current account transaction and a capital account transaction?

Posted on January 17, 2015 at 11:10 AM Comments comments (0)

The balance of payments system keeps record of all foreign transactions. There are two main accounts in the balance of payments system, the current account and capital account.


The current account consists of imports, exports, and foreign transfer payments.


The capital account (or financial account) consists of real assets and financial assets. A real asset is property or a factory. A financial asset is a stock or bond.


When foreign money flows into our current account as a result of an export, our current account is credited. When our currency leaves the capital account after purchasing a foreign apartment complex, the capital account is debited. If one account shows a surplus, the other will show a deficit. In the end, the two accounts should balance.


AP Macroeconomics Unit 6 International Trade

What is a balance sheet?

Posted on May 24, 2014 at 9:35 AM Comments comments (0)

A balance sheet (or t-account) keeps record of a commercial bank's assets and liabilities after each banking transaction.


An example of a liabilitiy is a demand deposit (checkable deposit) because the bank must pay its depositors on demand.  An example of an asset is a loan issued by the bank because the debtor must repay the loan amount to the bank.


This No Bull Review video explains how to record a bank's transactions using a balance sheet.  It also discusses the role of required reserves and excess reserves in money creation.


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AP Macroeconomics Unit 4 Monetary Policy

What happens when the Fed buys or sells bonds?

Posted on May 24, 2014 at 9:25 AM Comments comments (0)

When the Fed buys treasury bonds, the money supply increases and interest rates fall.  This increases investments and consumption spending. Aggregate demand increases, price level increases, and real GDP increases, and unemployment falls. 


When the Fed sells government bonds, the money supply decreases and interest rates rise.  Investment and consumption decreases, aggregate demand decreases, price level falls, real GDP falls, and unemployment rises.


The No Bull Review video below simplifies monetary policy and open market operations in less than 1 minute.  It includes all of the necessary graphs associated with monetary policy action.


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AP Macroeconomics Unit 4 Monetary Policy

How do you graph a foreign exchange market?

Posted on April 18, 2014 at 11:00 AM Comments comments (0)

To graph a foreign exchange market, you need to two different currencies to compare. For example, the market for US dollars needs to show how much of a foreign currency is needed to buy 1 US dollar.


In the market for US dollars, the quantity of dollars goes on the x-axis. On the y-axis, you put the foreign currency price of the US dollar.


In the No Bull Review graph below, we see the market for US dollars and how many euros it takes to buy a US dollar. This graph is showing a rightward shift of demand for dollars. This causes the US dollar to appreciate relative to the euro (and the euro depreciates relative to the dollar). It now takes more euro to purchase 1 US dollar, and fewer US dollars to purchase 1 euro.


The value of a currency will appreciate when its demand shifts to the right or its supply shifts to the left. The value of a currency will depreciate when its demand shifts to the left or its supply shifts to the right.


AP Macroeconomics Unit 6 International Trade

What factors will depreciate the value of currency?

Posted on April 18, 2014 at 10:55 AM Comments comments (0)

The international value of currency will depreciate (decrease in value relative to another currency) due to the following factors:

 

1. Interest rates decrease - Foreigners will demand fewer bonds when interest rates fall (because foreigners will make less money off our interest-bearing assets).

 

2. Tastes and preferences for goods decrease - If foreigners demand fewer products produced over here, then the currency will depreciate.


3. Inflation increases - If prices are relatively higher over here than overseas, then foreigners will not want our goods and we will want cheaper goods overseas.

 

4. Incomes increase - If this economy is strong and foreign economies are weak, foreign economies cannot afford our goods. However, we can afford to purchase foreign goods.

  

AP Macroeconomics Unit 6 International Trade

What factors will appreciate the value of currency?

Posted on April 18, 2014 at 10:45 AM Comments comments (0)

The international value of currency will appreciate (increase in value) due to the following factors:


1. Interest rates increase - Foreigners will demand more bonds when interest rates rise (because foreigners will make more money). There will be more demand for currency so the currency will appreciate.


2. Tastes and preferences for goods increase - If foreigners demand products produced over here, then there will be more demand for currency and the currency will appreciate.


3. Inflation decreases - If prices are relatively lower here than overseas, then foreigners will demand goods over hear. There will be more demand for currency so the currency will appreciate.


4. Incomes decrease - If this economy is weaker than foreign economies, this economy cannot afford to buy as many foreign goods. This economy will supply fewer units of currency to the foreign exchange market so the currency will appreciate.


AP Macroeconomics Unit 6 International Trade

How do you graph a contractionary monetary policy?

Posted on April 18, 2014 at 10:40 AM Comments comments (0)

When graphing a contractionary monetary policy (AKA tight monetary policy), it is a good idea to draw a money market graph and an AD/AS graph. A tight monetary policy makes most sense during periods of high inflation. The Fed will sell bonds on the open market (or increase discount rate or increase reserve ratio)

 

In the money market, you want to show a leftward shift of the vertical money supply curve. This will raise interest rates and decrease investment and consumer spending. As a result of the decrease in spending aggregate demand will shift to the left, decreasing RGDP, price level, and employment.

 

The No Bull Review graph below shows a contractionary monetary policy in the money market. As you can see, the policy raises the nominal interest rate.


AP Macroeconomics Unit 4 Monetary Policy

How do you graph an expansionary monetary policy?

Posted on April 18, 2014 at 10:35 AM Comments comments (0)

When graphing an expansionary monetary policy (AKA easy monetary policy), it is a good idea to draw a money market graph and an AD/AS graph. An expansionary monetary policy makes most sense during a recession. The Fed will buy bonds on the open market (or decrease discount rate or decrease reserve ratio)


In the money market, you want to show a rightward shift of the vertical money supply curve. This will reduce interest rates and increase investment and consumer spending. As a result of the increase in spending aggregate demand will shift to the right, increasing RGDP, price level, and employment.


The No Bull Review graph below shows an expansionary monetary policy in the money market. As you can see, the policy lowers the nominal interest rate.


AP Macroeconomics Unit 4 Monetary Policy

What are the tools of monetary policy?

Posted on April 18, 2014 at 10:25 AM Comments comments (0)

The Federal Reserve (central bank) has several tools of monetary policy that influences money supply and interest rates. Here are the major monetary policy tools:


1. Open Market Operations: When the Fed buys and sells government bonds (or securities) to change the money supply and interest rates. The Fed targets the federal funds interest rate (bank-to-bank interest rate for short-term loans) through open market operations. If the Fed wants to increase money supply and reduce interest rates, then it buys bonds. If the Fed wants to reduce the money supply and increase interest rates, then it sells bonds.


2. Discount Rate: The Fed can increase or decrease the interest rate it charges banks for short-term loans. When the Fed lowers the discount rate, the money supply increases. When it raises the discount rate, the money supply decreases.


3. Reserve Requirement: The Fed can reduce the reserve ratio, which means banks can lend more of its excess reserves to increase the money supply. It can also raise the reserve ratio, which reduces a bank's excess reserves and the money supply.


Wild Card. Interest Paid on Bank Reserves: As a result of the Great Recession (2007-2009), the Fed began paying interest on bank reserves held at the Fed. As of 2014, this tool is still considered experimental and we do not know the true effects of this policy tool.


AP Macroeconomics Unit 4 Monetary Policy

How do inflation expectations affect the Phillips curve?

Posted on April 17, 2014 at 12:15 AM Comments comments (0)

Inflation expectations are a determinant of the short-run aggregate supply curve. When the short-run aggregate supply curve shifts one direction, the short-run Phillips curve shifts the opposite direction.


If inflation expectations rise, SRAS shifts leftward raising the price level and unemployment (stagflation). To illustrate an increase in inflation and unemployment with a Phillips curve, shift the short-run Phillips curve to the right (see the No Bull Review diagram below).



If inflation expectations fall, SRAS shifts rightward lowering the price level and unemployment. To illustrate a decrease in inflation and unemployment with a Phillips curve, shift the short-run Phillips curve to the left.


Inflation expectations do not affect the vertical long-run Phillips curve.


AP Macroeconomics Unit 5 Macroeconomic Theory

How does the economy self-correct from inflation?

Posted on April 17, 2014 at 12:10 AM Comments comments (0)

If an economy is experiencing inflation in the short run, classical economists would say that the government should do nothing and the economy will correct itself in the long run. 

 

In the long run, workers will demand higher nominal wages, thus raising inflation expectations and the costs of production. The short-run aggregate supply curve will shift to the left toward the long-run aggregate supply curve until the long-run equilibrium is achieved. The price level increases, real GDP decreases, and unemployment increases.

 

AP Macroeconomics Unit 3 AD/AS & Fiscal Policy

How does the economy self-correct from a recession?

Posted on April 17, 2014 at 12:05 AM Comments comments (0)

If an economy is experiencing a recession in the short run, classical economists would say that the government should do nothing and the economy will correct itself in the long run.


In the long run, workers will be forced to take nominal wage cuts, thus lowering inflation expectations and the costs of production. The short-run aggregate supply curve will shift to the right toward the long-run aggregate supply curve until full employment is restored. The price level decreases, real GDP increases, and unemployment decreases.


AP Macroeconomics Unit 3 AD/AS & Fiscal Policy

What is a contractionary fiscal policy?

Posted on April 17, 2014 at 12:00 AM Comments comments (0)

From the Keynesian economic perspective, a contractionary fiscal policy is appropriate if the economy is experiencing inflation in the short run. The government can decrease spending and/or increase income taxes to shift aggregate demand to the left. This will decrease real GDP, decrease the price level, and increase the unemployment rate.

 

This No Bull Review video explains the concept of a contractionary fiscal policy and shows you how to graph the policy using the AD/AS model.

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AP Macroeconomic Unit 3 AD/AS & Fiscal Policy

What is an expansionary fiscal policy?

Posted on April 16, 2014 at 11:55 AM Comments comments (0)

From the Keynesian perspective, an expansionary fiscal policy is appropriate if the economy is experiencing a recession in the short run. The government can increase spending and/or decrease income taxes to shift aggregate demand to the right. This will increase real GDP, increase the price level, and decrease the unemployment rate.


This No Bull Review video explains the concept of an expansionary fiscal policy and shows you how to graph the policy using the AD/AS model.

You need Adobe Flash Player to view this content.


AP Macroeconomics Unit 3 AD/AS & Fiscal Policy

How do interest rates affect the value of currency?

Posted on April 16, 2014 at 11:45 AM Comments comments (0)

Interest rates are an important determinant to the international value of a country's currency and net exports.


When interest rates increase, foreigners demand more interest-bearing bonds and more currency to purchase the bonds. This appreciates the value of the currency, which makes the country's goods look more expensive to foreigners. Exports will decrease and imports will increase.


When interest rates decrease, foreigners demand fewer interest-bearing bonds and less currency to purchase the bonds. This depreciates the value of the currency, which makes the country's goods look cheaper to foreigners*. Exports will increase and imports will decrease.

*This also makes imported economic resources to appear more expensive, which raises the costs of production in certain industries. Depending on the scale, this can be detrimental to the short-run aggregate supply curve.


AP Macroeconomics Unit 6 International Trade

How does savings affect the loanable funds market?

Posted on April 16, 2014 at 11:40 AM Comments comments (0)

The loanable funds market shows the relationship between the real interest rate and quantity of loanable funds.


More savings: If there is an increase in savings by the private sector, the supply of loanable funds increases (shifts right) causing the real interest rate to fall. When the real interest rate decreases, investment spending increases. This is good for the growth of capital stock and long run economic growth.


Low real interest rates also depreciate the value of currency as foreigners are not attracted to the lower returns on bonds. When the currency depreciates, net exports increase as the goods look cheaper to foreigners.


Less savings: If there is a decrease in savings by the private sector, the supply of loanable funds decreases (shifts left) causing the real interest rate to rise. When the real interest rate increases, investment spending decreases. This is bad for the growth of capital stock and slows down the rate of long run economic growth.


High real interest rates also appreciate the value of currency as foreigners are more attracted to the higher returns on bonds. When the currency appreciates, net exports decrease as the goods look more expensive to foreigners.


AP Macroeconomics Unit 5 Macroeconomic Theory


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