Global economic

Circular reference study guide
Y=C+I+G+NX aggregate demand function
Biggest explanatory is C = consumption.
C=70% of y in USA
Balance of Payments
-Current account deficits in (U.S)
-lead to lower values
-rapid devaluation cause Capital Flight
-Increase Interest rate due to dumping US bonds
High budget deficits caused both above
- Downward spiral $ cause current account to goes back to balance & stabilize
- Fisher effect i = r_bar + I
i=nominal interest rate, r_bar = real interest rate, I = inflation
- PPP- purchasing power parity, d/$
- Federal Reserve, 2 scenario for U.S. Economy
Life is good scenario 1, A) Fed policy? raise real interest, reduce money supply, lower inflation & strenghten currency. Reduce M1, M2.
Life is bad scenario 2, B) Fed policy? raise Consumption back to 70% from 63%