MPS- Marginal Propensity to Save- a part of every 1 zl which will be save when my income

rises= fraction of 1 by which savings rises when income rises

MPC- Marginal Propensity to Consume- fraction of 1 zl which will be consumed when my
income rises.
Multiplier-1/1-MPC’- ratio of the change in aggregate output to the change in the aggregate
demand which causes the output change.It arises from the affects of increases in income on
consumption demand. The higher the MPC the larger the increase in consumption demand
resulting from any given increase inoutput, and therefore the larger the mu;tiplier. When the
tax rate is high, any given change in income results in only a small change in household
disposable income and thus only a small change in consumption demand. The m. is therefore
small when the tax rate is high. (The higher the rate of proportional taxation, the smaller the
multiplier.).
PPP- Purchasing power parity rate-the exchange rate that maintains the relative prices of
goods in two countries. When exchange rates follow PPP, depreciation of the currency exactly
offsets differences in inflation in the two countries. With the relative prices of goods
remaining constant, import and export demands are not affected by the combined exchange
rate and price level changes.
Gold parity- the exchange rate calculated from the relative price of gold in the two countries.
Under the gold standard the exchange rate in fact stayed v. close to the gold parity, differing
only by the small amount it cost to transport gold between countries.
The gold standard- is a regime of fixed exchange rates. Under the gold standard, countries or
central banks fixed the value of their currencies in terms of gold and the central bank buys or
sells gold in unlimited amounts at the price. It has three features:
1.the government fixes the price of gold in terms of its currency
2.the government maintains convertibility of the home currency into gold. The gov. will buy
or sell home currency for gold at the par value (par value of gold- is the price of gold in
terms of monej fixed by the gov.)
3.the gov. follows a rule that links money creation to its holding of gold. The gov. can issue
dollar bills only by buying gold from the public- behind the dollar bills stands an equivalent
value of gold.
dollar standard- under the dollar standard, countries or central banks fixed the value of their
currencies in terms of dollars. Under the dollar standard , currencies were supposed to be
convertible into dollars rather than gold. At the officially fixed exchange rate, central bank
would buy or sell dollars from the public in exchange for their own currency.
International reserves- are a country’s holding of foreign currency and other assets that can
be used to meet demands for foreign currency.
Sterilization- a central bank sterilizes the impact of reserve losses (gains) on the money
supply when it undertakes open market purchases (sales) that exactly balance the changes in
the reserves.
Sterilization of gold or reserve losses occurs when the central bank of a deficit country offsets
the automatic decline in money by an open market purchase of bonds, that exactly balance the
changes in the reserves.
Appreciation- natural rise in the value of currency, increase of exchange rates in foreign
countries.
Depreciation- falling demand on currency- market determines the price. The higher the
demand on currency, the higher the rate of currency.
As our currency depreciates, our goods become cheaper for foreigners and makes foreign
goods more expensive relative to our own and therefore reduces the quantity demanded of
imports. The depreciation tends to raise exports and reduce import. The depreciation also
reduces the prices of our goods in foreign currency to foreigners.
Revaluation- increase of rate of exchange made by Central bank or government.
Devaluation- reduction in the value of a currency against other currencies drop of exchange
rate made by central bank or gov. After dev. imported goods are more expensive.After the
devaluation, the devaluing country’s goods should be cheaper relative to the foreign country’s
goods.
Money- sth that is generally accepted in exchange for goods and making payments. Money
includes banknotes and coins, also cheques and credit cards.
Functions of money:
1.a medium of exchange (acceptability)- the main f., people must be willing to accept it in
exchange for goods and services
2.a measure of value-makes it possible to compare the value of different goods and services
3.a store of value-money is not perishable and is suitable way to amass wealth
4.a standard of deferred payment-it allows the amount of credits (future payments) to be
stated
5.a legal tander- it means that by law, units of money have to be accepted to settle a debt
6.standard in unilateral transaction.
7. means of payment
Characteristics:
1.stability-value should not change rapidly over short period of time
2.transferability-must be exchangeable for goods and services in a simply way
3.durability-must not be perishable and it has to service many transactions without wearing
out
4.divisibility-must permit precise evaluation of goods and services
5.portability-the holder of money must be able to carry it easily
6..Recognizability-all units of money must have the same size , weight, shape and content to
ensure immediate recognizability which contributes to the acceptability of money.
7. Should be difficult to be counterfeited- in order to ensure the user’s confidence, money
must be well protected against counterfeiters.
8.Must be commonly accepted
Exchange rate-is the price of one country’s currency measured in terms of another country’s
currency (Fixed exchange rates-do not change in a long period of time, Flexible e.r- are
changing every day, hour)
Credit cards- (e.g. Access or Visa); the basic idea of c.is that of revolving credit-the holder
can take a credit up to a prescribed limit, each month. They are standardized, rectangular and
magnetized pieces of plastic. They bear an identification No, an account No, the name of the
user, an expiry date and they are signed by the user. The cards are sent to holders on a free of
charge bases and a credit limit is granted. The users receive monthly statements and no
interest is charged provided that the full debt is settled each month.
Cheque cards- are issued to current account holders. They carry the name of the customer
and his account number. The cust. has to sign the card on a special strip of paper.
Charge cards (e.g. American Express, Diners Club)- they are similar in size and form to
credit cards. The user of a charge card makes purchases on credit and at the end of the
accounting period (usually monthly) is sent a bill for full and complete payment for purchases
made. Contrary to credit cards there is no preset spending limit.
Token monies- are those means of payments whose value of purchasing power as money
exceeds the cost of production and the value in alternative uses.
A hundred dollar bill, for instance, is worth far more as money than as 3x6 inch piece of
high-quality paper. Coins, too,can be token monies when their value as money exceeds the
worth of the copper of nikel of which they are made.
It is a good that has a larger value as money than as a commodity. Paper money, for example I
a token money. T.m.is accepted either because people believe they can in turn use it to make
payments or because the government has specifically declared it to be legal tender.
Commodity money- is used as a medium of exchange and also is bought and sold as an
ordinary good. C.m. are as valuable in commercial and other uses as they are as money. When
cocoa was used as both money and a drink, it had the same value in both uses. Ask what
would happened had cocoa been more valuable as money. Than no one would have drunk it.
If it had been more valuable as a drink, people would not have used it as money. Thus it had
the same value in both uses. Similarly, when gold was used as money, it had the same value
as money and in its industrial uses.
C.m is a good that has the same value as a monetary unit and as commodity. C.m. can
become token monies when the monetaty value of the good rises above its commodity value.
IOU money- is a medium of exchange based on the debt of a private firm or person. A bank
deposit is IOU money because it is a debt of the bank. The bank is obliged to provide dollar
bills in exchange for a deposit. Traveler’s checks,too, are IOU money. They are a debt of the
company that issued the check and is obliged to pay dollars in exchange for the checks
whenever asked.
Near monies- money that are recognize as means of payment but do not fully posses all the
features of money and functions that money must filfull, i.e. shares, bonds), you can use them
in the shop rather than on stock exchange or bank.
Fiscal policy- the government’s decisions about spending and taxes. It determines the money
flow, circulation in the country and the decisions concerning collection of money- taxas,
spending, eg.to guarantee payments of transfers.
Fiscal policy issues:
1. stabilization policy-consists of gov. actions to control the level of output to keep GNP
close to its potential level
2. the significance of the gov. budget deficit
3. national debt-consists of all gov. debt outstanding
Monetary policy- Central bank stabilization of the currency, money, determining necessary
reserves, controlling the money stock, keeping inflation law, reducing surpluses.
budget deficit- it is the excess of government outlays over its receipts. When the gov. is
running a deficit, it is spending more than is taking in.
A situation when government outlays exceed taxes, when the gov. expenditures are higher
than its incomes, or when the incomes are low. It is higher during recession, when national
income falls and is lover during expansion when national income increasesMonetary policy-
determines the creation of money by making it available for private business etc, determines
the issue of the money, all questions concerning currency and stability of currency: interests
rate, stabilizing money, controlling money-this is the task of National bank.
budget-is a description of the spending and financing plans of an individual, business or
government. The gov. b. describes what goods and services the gov. will buy during the
coming year, what transfers it will make, and how it will pay for them. Usually the gov. plans
to pay most of its spending by making the public pay taxes. But taxes often do not pay for all
purchases of goods and services and transfers. When gov. outlays exceed taxes, there is a gov.
budget deficit. When taxes exceed outlays, there is a gov. budget surplus.
The balance of trade- difference between the amount the country spends on visible imports
and the amount it receives from visible exports; record of all trade : export and import. It only
takes into consideration the visible export and import: how many goods, exports to
export/import.
There is a current account deficit (surplus) when exports exceed imports and a current account
deficit when imports exceed exports.
The current account of the balance of payments is the excess of exports over imports.
The balance of payment- is a systematic record of all transactions between the residents of
the country (households, firms and the gov.) and the rest of the world.
Difference between the total amount a country spends on imports and other payments abroad
and the total amount it receives from exports and other receipts.
There is a current account deficit (surplus) when spending exceeds (is less than) income.
Okun’s law- describes systematic relationship between economic activity and
unemployment.
Unemployment rises during recessions and falls during recoveries and expansions. Each time
there is a recession, the unemployment rate rises. Once the recovery and expansion begin, the
unemployment rate comes down again. During recession output falls and some of that decline
in output translates into a reduction in the demand for labor. Thus, unemployment is linked to
GDP.
O.L states that annual GDP growth of 3% keeps the unemployment rate constant. For every 2
percentage point increase in growth over a year, the unempl. rate declines by 1 percentage
point. For every 2 percentage point decrease in growth below 3% over a year, the unempl. rate
rises by 1%.
Higher rates of growth reduce unemployment, lower rates of growth make the unemployment
rate increase.
The unemployed- 1.those eho want to work and whose willingness to do so has been
demonstraded by a recent efford to find a job.
2A person is reported as unemp. if he did not work in the last week but had looked for work
during the past 4 weeks
The natural rate of unemployment – the unemployment rate that correspondes to practical
full employment in the economy.
some unemployment exists because people are counted as unemployed while they wait to
report for a job they have already found. Other unemployment exists because people who
have lost their jobs are looking for new ones or because people have entered the labour force
to look for a job. And some unemployment exists because people are taking it easy for a while
to think about their future, helped along by unemployment benefits.
Since people take time finding new jobs and in moving between jobs, there is always some
unemployment.
The n.r.of u. or the full-employment rate of unemployment is 5 to 6 percent. Policies to
reduce the natural rate focus on the very high unemployment rates among teenagers. The role
of the min. wage in causing teenage unemployment is controversial. The min. wage does
cause higher unemployment, especially among teenagers.
.It is detrmined by:
-the nature of teenage unemployment
-the types of work patterns people have over their lifetimes with young people taking short-
term jobs
-the unemployment benefits that affect the amount of time for which people who become
unemployed remain unemployed
-the rate at which firms and the jobs in them die
Managed floating- dirty fl- exchange rates are determined , influenced by the central bank, it
is an intervention that affects the level of the exchange rate rather than just smoothing out
fluctuations.
free floating- clean fl.-when currency changes every hour, depending on the supply and
demand, no gov. intervention to prevent depr. or apr.