AP Macroeconomics Studyguide. Growth Item 1 Decline Beyond economic means of production

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1 AP Macrecnmics Studyguide Basic Terms fr Ecnmics - Ecnmics: the study f hw scarce resurces are used t satisfy unlimited wants. - Resurces: we never have enugh t satisfy all f ur wants. - Scarcity: the lack f a prduct r resurce. - Shrtage: a shrt term lack f a prduct r resurce. - Necessities: gds which satisfy basic human needs. - Luxuries: gds which cnsumers want, but dn t need - Cnsumer Gds: prducts used fr immediate cnsumptin. Fr example: cars, fd, tys. - Prducer Gds: prducts used t make cnsumer gds. Fr example: hammer and cranes. - Three Factrs f Prductin: Land: natural resurces such as trees, water, r minerals Labr: mental and physical labr such as autwrkers r scientists. Capital: factries, machines (prducer gds), and mney. - Ratinal Self Interest: ecnmists believe that peple chse ptins that give them the greatest satisfactin. Peple use available infrmatin, weigh csts and benefits, and make a self-interested chice. - Macrecnmics: macrecnmics is the study f the ecnmy as a whle. - Psitivist Ecnmics: fcus n measurable utcmes. - Nrmative Ecnmics: the questin f what we shuld d. The analysis f the ecnmy as an ethical value judgment. Prductin Pssibilities Curves and Tradeffs - Prductin Pssibility Curve (PPC) and Tradeffs Grwth Item 1 Decline Beynd ecnmic means f prductin Inefficiency, prducing under the capacity f prductin Item 2 The Prductin Pssibility Curve shws the tradeff between spending prjects r prductin f ne gd t anther. A shift n the PPC signifies either ecnmic grwth r ecnmic decline. Sme Assumptins f the Prductin Pssibilities Curve: 1. Resurces are fully emplyed. 2. Prductin takes place ver a specific time perid. 3. The resurce inputs, in bth quantity and quality, used t prduce the gds are fixed ver this time perid. 4. Technlgy des nt change ver this time perid. Why d we care abut Tradeffs?

2 There is a scarce amunt f resurces available s decisins are needed t be made t maximize utility f said resurces. The csts f ding ne thing ver the ther is cnsidered the pprtunity cst. The pprtunity cst is the value f the fregne gd, r the next best alternative. Hw des the curve shift? There are tw key factrs: 1. Change in the amunt f prductive resurces in the ecnmy. 2. Changes in technlgy and prductivity. Adam Smith Key arguments: Divisin f labr means that prductin is mre efficient Peple shuld pursue self-interests because cmpetitin is gd since it means cheaper prducts. The gvernment shuld keep its hands ff the ecnmy This is als knwn as laissez faire Invisible Hand prfits drive the ecnmy with self-interests. Free trade is crucial natins benefit by specializing in prductin f gds and by trading fr items that they are less efficient in prducing. Therefre, it wuld be lgical t let cuntries d what they d best fr what they need. Tw types f advantages in free trade: Abslute: Ecnmists lk at the amunt f labr hurs/csts it will take t prduce a prduct. Cmparative: Thery f Cmparative Advantage: even natins with abslute advantages still benefit frm trade. Bth natins trading wuld benefit frm trading prducts if they specialized in items that they have the lwest pprtunity cst t prduce. Calculating Opprtunity Csts The pprtunity cst f a prduct is: Opprtunity Cst = Frgne Gd (The Other Gd) Gd Yu Are Calculating Oppurtunity Csts Fr Basic Micrecnmics Supply and Demand - Demand Definitin: the willingness and ability fr cnsumers t pay fr gds and services. Law f Demand: As prices g up, the demand ges dwn As prices g dwn, the demand ges up The Graph

3 P 1 Price D Q 1 Quantity - Supply Factrs that Influence the Shifts in Demand: Nn-price factrs like peple s tastes shifts the curve. Substitute prducts, r prducts that replace anther prduct, can find an increase demand r a decrease in demand depending n the csts f the prduct that it is substituting. Cmplementary prducts, r prducts that g with anther prduct, can find an increase in demand if the prduct it cmplements has an increase f demand. The Incme Effect: as cnsumers incmes fluctuate, s des the level f demand. Increase in wages increase the demand fr gds Decrease in wages decrease the demand fr gds Ppulatin shifts can als effect the level demand fr a prduct. Future expectatins f prices can lead t a change in the demand fr gds. Definitin: the quantity f gds that prducers will supply at varius prices. The Law f Supply: As prices g up, the quantity supplied will increase AS price ges dwn, the quantity supplied will decrease. The Law f Supply hlds true because businesses are mtivated by prfits. The Graph: P 1 S Price Q 1 Quantity Factrs that Influence the Shifts in Supply:

4 The Price f Inputs: When the cst f land, labr, tax/tariff, and capital change in the prcess f prductin. High csts f input reduce the amunt supplied whereas lw csts f input increase the amunt supplied. Technlgical imprvements make the prductin prcess mre efficient and thus increases the level f supply An increase in the amunt f sellers r businesses in a market will lead t an increased level f supply. The cnverse f this is als true. Increase f qutas, tariffs, and taxes influence supply as well: Higher taxes increase csts and reduce supply Lwer taxes decrease the csts f prductin and increase the supply. - Equilibrium Definitin: The pint where the supply curve and the demand curve intersects. This is als knwn as the Market Clearing Price The Graph: P 1 S Equilibrium Pint Price D Q 1 Quantity - Gds and Utility and Hw That Effects Demand and Supply: Nrmal Gds: prducts fr which the demand increases when the incme f peple increase. This als applies cnversely when the incme lwers. Inferir Gds: prducts that decrease in demand, even when the incme f peple rise. Diminishing Marginal Utility: As a persn increase cnsumptin f a prduct, there is a decline in the marginal utility that persn gets frm cnsuming each additinal prduct. Diminishing Marginal Returns: This happens when a factr f prductin is increased and at sme pint, each additinal unit prduced will decline. Fr example, adding mre wrkers when prductin is near 100% will decrease marginal utput. - Indeterminate Shifts in Supply and Demand: When bth the supply and the demand curves mve simultaneusly, the mvement f prices and quantities can be indeterminate because we dn t knw which ne is mre decisive than the ther. Example f the Indeterminate Graph Shift:

5 S 1 S 2 P 1 Price D 1 D 2 Q 1 Quantity Gvernment Plicy and Macrecnmics - Price Adjustments Price Ceiling: A gvernment plicy which sets the legal maximum price that may be charged fr that gd. Ceilings cause a shrtage in the gd. Price Level S P 1 P Ceiling D Q s Q 1 Q D Quantity Price Level Price Flr: A gvernment plicy that sets the minimum price that can be charged fr a prduct. Price flrs lead t a surplus in the gds. S P flr P 1 D Q D Q 1 Q s - Externalities and Gvernment Actin Negative Externalities: Definitin: The negative csts paid by sciety fr a private exchange. The gvernment can fix this with higher standards, taxatin, r fines which wuld increase the cst f prductin fr the negative prduct. Fr example: The emissin f CO 2 by a cal pwer plant. Psitive Externalities:

6 Definitin: The psitive csts paid by sciety fr a private exchange. The gd may be under prduced, s the gvernment can subsidize r implement tax breaks t reduce the csts f prducing the gd. Fr example: The prductin f electric cars t reduce emissins. - Unemplyment Impacts: Lwer incme, pverty, and scial prblems like divrce and alchlism. Unemplyment als means that resurces are underutilized and the utput f sciety is als decreased. Definitin: Thse that are in the civilian labr frce wh are lking fr wrk but cannt find a jb. Wh is in the Civilian Labr Frce? YES, PART OF LABOR FORCE Private Sectr Jb Wrkers Peple wrking public sectr jbs Unemplyed peple actively seeking fr wrk Calculating the Unemplyment Rate: Unemplyment Rate: Unemplyed Wrkfrce NO, NOT PART OF LABOR FORCE Military Persnnel Peple taking care f the hme unpaid High schl students under 18 wrking part time Thse wrking under the table x 100% Different Types f Emplyment: Underemplyed: Thse that have jbs, but will wrk part time r belw their skill level. Discuraged Wrkers: Thse that have given up lking fr jbs. Nte: **They are nt in the labr frce. Overemplyed: Thse that are wrking tw jbs r ver 40 hurs per week. Different Types f Unemplyment: Frictinal: Temprary unemplyment f wrkers that are mving frm ne jb t the next. Seasnal Unemplyment: thse that are emplyed fr a specific seasn and are nw unemplyed. Fr example: Farm Wrkers. Structural Unemplyment: Unemplyment due t the decline f industries s that the skill levels that these wrkers pssess render useless fr emplyment. Fr example: the cllapse f the steel industry leaves steel wrkers unable t find jbs that require the ability t use the cmputer. Cyclical Unemplyment: Unemplyment due t jb lss caused by a recessin. Full and Natural Rate f Emplyment: There will always be thse that are unemplyed due t frictinal unemplyment. The natural rate f unemplyment excludes cyclical unemplyment and includes frictinal and structural unemplyment. - Inflatin and Deflatin

7 Inflatin: Definitin: A shrt term rise in prices f a specific cmmdity. Impacts: It reduces the purchasing pwer f the cnsumer as the dllars in their pcket are wrth less. Deflatin: Definitin: A shrt term decrease in prices f a specific cmmdity. Impacts: It increases the purchasing pwer f the cnsumer as the dllars in their pcket are wrth mre. It als hurts the prducers. The Cnsumer Price Index: Definitin: The gvernment uses the Cnsumer Price Index (CPI) t measure the change in basic cnsumer prices ver time using a market basket, r the price f essential cmmdities. Frmula: CPI = Current Prices Base Prices x 100 Using the CPI t find the Inflatin Rate: CPI 100 = inflatin rate % Anticipated and Unanticipated Inflatin: Anticipated Inflatin: The rate f inflatin that cnsumers, the gvernment and business believe will ccur. Unanticipated Inflatin: It causes prblems as prices rise r decline mre than expected. Unanticipated inflatin helps debtrs and hurt banks and ther mney lenders. Inflatin and Interest Rates: Definitin: The nminal interest rate is the price f brrwing mney in current dllars. Real Interest Rate: Frmula: - GDP, r Grss Dmestic Prduct Definitin: Real Interest Rate = nminal interest rate anticipated rate f inflatin GDP = Cnsumptin + Gvernment Spending + Investment + Net Exprt Per Capita GDP: The amunt f GDP prduced in a cuntry per persn Frmula: GDP Ppulatin This allws ecnmists t cmpare between ntins and ppulatins. Per capita GDP des nt tell us abut the incme distributin f the sciety. GDP Deflatr: Frmula: GDP Deflatr = GDI, r Grss Dmestic Incme Frmula: Nminal GDP Real GDP x 100

8 GDI = Wages + Prfits + Rents Say s Law: The Relatin Between GDP and GDI Definitin: Supply creates its wn demand Prducing gds generates the demand t purchase ther gds. Prduct Market: C+I+G+NX Hme Factr Markets: Incme Land (Rent), Labr (Wages), and Capital (Prfits) Businesses Impacts f GDP Increase: Grwth f GDP may bring negative externalities like pllutin which adversely effects the quality f life f a peple. Ecnmic grwth des nt mean a fairly distributed incme t pr sectrs f sciety. Ecnmic grwth has the ptential f increasing the standard f living fr a natin s citizens. - Ecnmic Grwth and The Business Cycle Causes f Ecnmic Grwth: Prductivity increase via labr increase. Increased savings will allw grwth in the future f a cuntry. Grwth and imprvements in technlgy Increase Research and Develpment and Innvatin Increase investment in human capital. An pen ecnmy. Ppulatin Grwth and Immigratin. Expansin and Cntractin Cycles: Expansin ccurs when the GDP grws, unemplyment falls, and prices tends t rise. Cntractin ccurs when the GDP falls, unemplyment rises and prices ften falls. Prsperity The Ecnmy Peak Cntractin Trugh Expansin

9 - The Macr Mdel Aggregate Demand: AD = Cnsumptin + Investment + Gvernment Spending + Net Exprts Increased aggregate demand leads t demand pull inflatin. This is cmmn during times f ecnmic grwth. What ccurs is an increase in price levels withut an increase in. Decrease in aggregate demand wuld lead t a lwer price level. Graph: Price Level LRAS (Lng Run Aggregate Supply) AD (Aggregate Demand) SRAS (Shrt Run Aggregate Supply) Y Real GDP **The LRAS represents an ecnmy where all inputs: land, labr and capital are used t full efficiency Grwth in the Ecnmy Within the Macr Mdel Price Level LRAS 1 LRAS 2 Y Real GDP Supply Shck and Demand Pull Inflatin Supply Shck (Cst Push Inflatin) Demand Pull Inflatin Price Level LRAS2 LRAS1 Price Level AD 2 AD 1

10 Effects f Mvements in the Macr Mdel: Interest Rate Effect: Price rise means the value f mney ges dwn, therefre, the demand t brrw mney increases and drives up interest rates. If interest rates fall, the prices will als fall. Open Ecnmy Effect: If the price levels g up, ur net exprts drp. If ur price levels drp, then ur exprts increase. Change in prices lead t a change in. Wealth Effect aka Real Balance Effect: If price level rises, peple s purchasing pwer ges dwn and if price levels fall, peple s purchasing pwer ges up. - The Classical Mdel Assumptins: Pure cmpetitin exists Wages and prices are flexible Peple act n their wn self interest Peple dn t have mney illusin, meaning that they understand nminal vs. real value Prblems in the ecnmy are temprary and will crrect themselves. Graph: Price Level LRAS AD 1 AD 2 Saving and Investment When peple save mney, there is a leakage in the circular flw and planned cnsumptin can fall shrt f real GDP. Classical ecnmists argue that dllars saved will be matched by business investment equally. Savings Price f Credit r Mney C 1 C 2 Investment Quantity f Savings and Investment Price f credit (interest rate) ensures that they demand and supply f credit are equal.

11 Price Level Unemplyment and the Classical Mdel Unemplyment wuld cause wage rates t fall t the pint where unemplyed wrkers will be hired under the classical mdel. In the Classical Mdel, peple aren t unemplyed fr lng perids f time as the mdel wuld eventually shift twards full emplyment nce mre. - The Keynesian Mdel Assumptins: Keynes argued that wages weren t as flexible as the classical mdel suggested due t labr unins and cntracts. Keynes argued that the minimum wage sets up the price flr. He als argued that changes in aggregate demand dn t change the price level. Graph: The Sticky Price Mdel PL 1 SRAS AD 1 AD 2 Y 1 Y 2 Aggregate Demand and Under the Keynesian View Any change in aggregate demand will change, thus the is demand determined. Under the Keynesian view, change in des nt lead t a change in the price level. In a depressed ecnmy, increased spending can increase utput withut raising prices. Gvernment spending wuld inevitably raise the Net Exprt, Cnsumptin, and Investment. C I NX G - The Mdern SRAS New Mdified Assumptins: Price and can increase tgether Prices can have adjustments SRAS can exceed full emplyment. Any change in the endwments f factrs f prductin will cause bth the SRAS and LRAS t shift. Hw the Aggregate Supply Increases: Discvery f raw materials, increased cmpetitin, reduced trade barriers, reduced business regulatin, decreased business tax, and reductin t the input price. Shrt lived events will nly shift SRAS, nt LRAS

12 Price Level Graph: LRAS SRAS AD 1 AD 2 Cntractinary (Recessinary) Gap: Price Level LRAS SRAS PL 1 PL 2 AD 1 AD 2 Y 2 Y 1 Inflatinary (Expansinary) Gap: Price Level LRAS PL 2 PL 1 AD 2 AD 1 SRAS Cst Push Inflatin (Inflatin frm the decrease in supply) Price Level LRAS SRAS 2 SRAS 1 Y 1 Y 2 Inflatin/ Deflatin Graphs Secular Deflatin (Price level drp because f grwth) Price Level LRAS 1 LRAS 2 Demand Pull Inflatin (Inflatin frm an increase in demand) Price Level LRAS SRAS AD AD AD 1 AD 2

13 - Average Prpensity t Cnsume and Save Average Prpensity t Cnsume = Real Cnsumptin Real Dispsable Incme Average Prpensity t Save + Average Prpensity t Cnsume = 1 Average Prpensity t Save = - Marginal Prpensity t Cnsume and Save Marginal Prpensity t Cnsume = Real Savings Real Dispsable Incme Real Cnsumptin Real Dispsable Incme Real Savings Marginal Prpensity t Save = Real Dispsable Incme Marginal Prpensity t Save + Marginal Prpensity t Cnsume = 1 - Keynesian Multiplier Definitin: The rati f change in equilibrium level f real natinal incme t the change in autnmus expenditures. Multiplier Equatin: Multiplier = 1 - Keynesian Incme Mdel = 1 1 MPC MPS Cnsumptin 45 line Autnmus Cnsumptin Dissaving Equilibrium Pint AE **Where AE = C + I + G +NX ** AE = All Expenditures Savings Interest Rate Y 1 Natinal Dispsable Incme Investment and Keynes Investment is ne f the cmpnent f cnsumptin. When the interest rates are lw, investment increases, and the cnverse is true as well. There is a dwnward slpe in the investment curve. Graph: i 3 i 1 i 2 I 3 I 1 I 2 Investment

14 Causes f Investment Shifts: Future expectatins f sales by business peple Change in the prductivity in technlgy. Increase r decrease in taxes. Impacts f Increased Investment: Increased investment leads t increased cnsumptin, increased, and increased natinal incme. Inventry and Investment If cnsumers decrease the purchase f a gd, then firm will slw dwn prductin which wuld lead t decreased. If the business senses that their inventry is shrt, then they will hire and increase prductin, increasing. Gvernment Spending and Keynes It is cnsidered autnmus (nt determined by levels f dispsable incme.) Gvernment spending is a majr part f the US GDP Freign Sectr and Keynes: Net Exprts = exprts imprts Trade surpluses (exprts mre than imprts) wuld lead t an increase in Trade deficits (imprts mre than exprts) wuld lead t a decrease in The freign sectr is als cnsidered autnmus spending - Fiscal Plicy Gals: Sustained ecnmic grwth as measured by ur GDP The GDP is the ttal amunt f gds and services prduced in the US each year. Lwering inflatin in the United States Full emplyment Fiscal Plicy: Definitin: The attempt by the gvernment t meet specific ecnmic gals such as increasing GDP, lwer inflatin, and lwer unemplyment. Fiscal plicy includes increases r decreases in taxes and spending that is carried ut by the Cngress. Main tls fr Fiscal Plicy: Taxatin and Gvernment Spending. Stimulatry r Expansinary Fiscal Plicy (Used during ecnmic dwnturn) 1. Increase gvernment spending Impact: Increases aggregate demand 2. Cut taxes Impact: Stimulate cnsumer spending and business investment. Cntractinary Fiscal Plicy (Used during ecnmic grwth t lwer inflatin) 1. Cut gvernment spending Impact: Decreases aggregate demand 2. Increase Taxes

15 Tax Multiplier Frmula: Impact: Reduces purchasing pwer f cnsumers and business investment. Tax Multiplier = MPC MPS Tax cuts and gvernment spending increase aggregate demand during a recessin. Keynesians believe that gvernment spending is mre pwerful than tax cuts. This is true because a prtin f the tax cut incme will be saved whereas gvernment spending is subject t the multiplier. Autmatic Stabilizers Unemplyment cmpensatin fr wrkers laid ff during a recessin. This allws the gvernment t prvide incme t maintain cnsumptin. The prgressive tax plicy allws fr a decrease in gvernment taxes during recessins and increase in gvernment taxes during ecnmic expansin as incmes g dwn during dwnturns and increase during upswings. Deficit Spending Impacts Keynesian Belief: Classical Critique: Deficit during the recessin will be paid ff with surpluses during ecnmic grwth. There is a fear that gvernment spending wuld lead t the crwding ut f private investment and wuld lead t mre ecnmic prblems. Types f Annual Budgets: Deficit: When gvernment spends mre than it takes in. Surplus: When the gvernment has mre revenue than it spends. Balanced: When revenue is equal t payments fr prgrams. - Mney and Mnetary Plicy Mney Definitin f Mney: A medium f exchange that sellers will accept. A unit f accunting t place a specific price n prducts. A strage f value that can be set aside fr future purchases. A liquid asset that culd be used fr a variety f transactins. M1 Mney: Currency, cins, checking accunts, traveler s checks. **Nte that credit card is nt mney. M2 Mney: Near mney such as savings depsits, CD s, mney markets. M3 Mney: CD s ver 100,000 dllars and Eur dllars held by Americans. The Federal Reserve Independent f the branches f the gvernment. The Functins f the Fed: The Fed prvides a system f check clearing.

16 Nminal Interest Rate The Fed hlds reserves f banks. The Fed supervises member banks. The Fed is the lender f last resrt. The Fed regulates the mney supply. Mney Supply Graph MS (Mney Supply) MD (Mney Demand) Quantity f Mney Mnetary Plicy Expansinary Mnetary Plicy (during ecnmic dwnturn): The Federal Reserve can raise the mney supply in 3 ways: Buy bnds n the pen market which infuses cash int the mney supply. Lwer the discunt rate, which is the interest rate that the Fed charges member banks. Lwer the Reserve Rate, which is the amunt that banks must keep and nt lan ut. Cntractinary Mnetary Plicy (during ecnmic grwth): The Federal Reserve can decrease the mney supply in 3 ways: Sell bnds n the pen market Raise the discunt rate, which is the interest rate that the Fed charges member banks. Raise the Reserve Rate, which is the amunt that banks must keep and nt lan ut. The Mney Multiplier 1 Mney Multiplier = Reserve Rate When bnds are sld, it is negative When bnds are bught, it is psitive. Discunt and Federal Funds Rates Discunt Rate: The interest rate at which the Fed charges member banks t brrw mney Federal Funds Rate: The interest rate at which banks brrw each ther s reserves. If the gvernment reduces the Federal Funds Rate, banks brrw less.

17 Real Interest Rate Lanable Funds Graphs S (The amunt f lanable funds in banks) D (Demand f funds) Quantity f Mney The Equatin f Exchange MV = PQ M = Actual Mney Held by Public, V = Incme Velcity (times the dllar is spent), P = Price Level, Q = (quantity f fds and services) Usually we assume that the velcity f mney and the are stable and d nt change. Unemplyment and Its Effects n Inflatin: Phillips Curve: Inflatin Rate LRPC (Lng Run Phillips Curve; This is at the natural rate f unemplyment) SRPC (Shrt Run Phillips Curve) Natural Rate f Unemplyment Ecnmists argue that there is a tendency fr the ecnmy t g twards the natural rate f unemplyment. The natural rate is at the LRAS. If the unemplyment rate is higher than the natural rate, then the ecnmy is in recessin If the unemplyment rate is lwer than the natural rate, then the ecnmy is in expansin. Wait Unemplyment: Includes factrs that keep the labr market frm perating in a perfectly cmpetitive market including unin activities, gvernment licensing, minimum wages and unemplyment insurance. - Internatinal Macrecnmics: Trade Terms: Imprt Quta: a limit n the amunt f a prduct that can be imprted. Imprt Tariff: a tax n a specified prduct. Infant Industries: thse industries just getting started. Open Ecnmy: an ecnmy with freign trade. Free Trade:

18 Free Trade Prs: Cuntries benefit frm trading fr gd and services that they dn t have. Cuntries benefit by prducing what they are mst efficient in prducing (Cmparative Advantage). US prducers benefit frm exprting items t freign cuntries. US cnsumers benefit frm the lwer csts f freign prducts. Free Trade Cns: Increase imprts hurt dmestic industries which leads t dmestic unemplyment. Tariffs r qutas may be cnstituted t prtect wrkers in the hme cuntry. Tariffs r qutas may be used t prtect infant industries. Natins always want t maintain prductive diversity. Sme natins dump prducts r restrict US imprts. The Balance f Trade: A natin s balance f trade = exprts imprts. Surplus: Definitin: A natin that exprts mre than imprts will have a trade surplus. Deficit: Definitin: A natin that imprts mre than exprts will have a trade deficit. Causes: Exprts may be inferir quality. Cuntry may nt have many prducts t exprt. A natin s currency may be verpriced, making imprts cheaper. A natin may have higher incmes than its trading partner. Prer natins cannt affrd richer natin s prducts. The Balance f Payment: Balance f Payment: An accunting f funds that flw int and ut f a cuntry cmprised f the capital and the current accunt. Current Accunt: a prtin f payments cmprised f the trade balance f gds and services. Capital Accunt: A prtin f the balance payments cmprised f freign purchases f US assets minus US purchase f freign assets plus the change in fficial reserves. Capital Accunt + Current Accunt = 0 Current Accunt Capital Accunt

19 If we run a trade deficit, we have a deficit in the current accunt and a surplus in the capital accunt. Investments are part f the capital accunt, but incme frm the investments are part f the current accunt. The Currency Exchange in Freign Trade Currency Appreciatin Currency 1 Per Currency 2 Currency Depreciatin Currency 1 Per Currency 2 S S 1 S 2 D 1 D 2 D Quantity f Currency 2 Effects n Trade: - Wrth mre than ther currencies - Imprts are cheaper - Hurts exprts, makes trade deficits, lwers GDP Circumstances f Appreciatin: When a cuntry exprts r sells gds t anther cuntry. Quantity f Currency 2 Effects n Trade: - Wrth less than ther currencies - Makes exprts strnger - Imprts are mre expensive, inputs fr prductin bught abrad are mre expensive Circumstances f Depreciatin: When a cuntry imprts r buys gds t anther cuntry. Price Levels and Interest Rates in Net Exprts High price levels discurage freign investrs frm buying US prducts, leading t a drp in net exprts. Lwer price levels encurage freign investrs t buy US prducts, leading t an increase in net exprts. Higher interest rates encurage investrs t invest in the US, leading an increase in the capital accunt and reducing the net exprt. Lwer interest rates discurage investrs t invest in the US, leading a decrease in the capital accunt and increasing the net exprt.