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Global Economics ((Appreciation/Depreciation-appreciation occurs when one…

- - - - Absolute PPP-theory that posits that the exchange rate between two countries will be the same to the ratio of the price levels for those countries
        
        Real Exchange Rate - tells how how many US baskets are needed to purchase one European basket of goods
        
        Real Depreciation/Real Appreciation - if the real exchange rate rises (more home goods are needed in exchange for foreign goods), it is said that home has experience a real depreciation; the opposite is true for real appreciation
        
        Undervalued/Overvalued-if the real exchange rate qUS/EUR is below 1%, then foreign goods are relatively cheap: x% cheaper than home goods. In this case, the home currency ($) is said to be strong, so that Euro is undervalued by x%; the opposite holds true for overvaluation.
        
        Inflation/Hyperinflation-Inflation is the rate at which price levels change; rate of growth of the price level. Hyperinflation occurs when prices increase by over 50% a month
        
        Relative PPP - implies that the rate of depreciation of the normal exchange rate equals the difference between the inflation rates of the two countries.
        
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- - - - Nominal Rigidity -- also known as price stickiness
        
        Overshooting - a way to explain and think about high levels of volatility in exchange rates; the model argues that the foreign exchange rate will temporarily overreact to changes in monetary policy to compensate for sticky prices of goods
        
        Trilemma - concept in international economics stating stating that it is impossible to have all three at the same time - a fixed foreign exchange rate, free capital movement, and independent monetary policy.
- - - - Trade Balance - difference between the value of a country's imports and exports for a given period.
        
        Bet Factor Income from Abroad (NFIA) - difference between a nation's GNP and GDP
        
        Net Unilateral Transfers - Items in the current account of the balance of payments of a country's accounting books that correspond to gifts from foreigners or pension payments to foreign residents who once worked in the particular country.
        
        Gross National Disposable Income (GNDI) - Gross (or net) national disposable income measures the income available to the nation for final consumption and gross (or net) saving.
        
        Current Account - records a nation's transactions with the rest of the world , specifically its net trade in goods and services, its net earnings on cross-border investments, and net transfer payments, over a period of time
        
        Financial Account - component of a country's balance of payments that covers claims on or liabilities to non-residents specifically with regard to financial assets.
        
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- - - - Present Value - the value in the present of a sum of money, in contrast to some future value it will have when it has been invested at compound interest
        
        Sudden Stop - an abrupt reduction in net capital flows into an economy
        
        Precautionary Saving - saving (non-expenditure of a portion of income) that occurs in response to uncertainty regarding future income.
        
        Foreign Reserve- are used to back liabilities and influence monetary policy. These reserves can include banknotes, deposits, bonds, treasury bills and other governmental securities.
        
        Sovereign Wealth Fund - comprises pools of money derived from a country's reserves set aside for investment to benefit the country's economy and citizens.
        
        Marginal Product of Capital - is the additional output resulting, ceteris paribus from the use of an additional unit of physical capital.
        
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- - - - Expected Real Interest Rate - equals the nominal interest rate minus the expected rate of inflation.
        
        Keynesian Cross - diagram demonstrates the relationship between aggregate demand (shown on the vertical axis) and real GDP (shown on the horizontal axis, measured by output).
        
        IS Curve - The investment/saving (IS) curve is a variation of the income-expenditure model incorporating market interest rates (demand)
        
        LM Curve - liquidity preference/money supply equilibrium (LM) curve represents the amount of money available for investing (supply).
        
        Monetary Policy --consists of the actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates.
        
        Fiscal Policy - refers to the use of government spending and tax policies to influence things such as aggregate demand, employment, inflation
        
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- - - - Asymetric Shock - When an economic event affects one economy or part of an economy more than another.
        
        Fear of Floating - a reaction to the benefits that a fixed floating system brings; fixed rates may be the only transparent and credible way to attain and maintain a nominal anchor, a goal that may be particularly important in emerging markets and developing countries with weak institutions, a lack of central bank independence, strong temptations to use the inflation tax, and poor reputations for monetary stability.
        
        Fixed Exchange Rates Systems -- involving multiple countries; a notable system was Bretton Woods
        
        Reserve Currency System - Fixed exchange rate systems like these are based on a reserve currency system in which N countries (1, 2, …, N) participate. The Nth country, called the center country, provides the reserve currency, which is the base or center currency to which all the other countries peg.
        
        Cooperative Arrangements - One form of cooperation is based on mutual agreement and compromise between center and noncenter countries on the setting of interest rates. The other form of cooperation is based on mutual agreements about adjustments to the levels of the fixed exchange rates themselves.
        
        Devaluation - an official lowering of the value of a country's currency within a fixed exchange rate system
        
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- - - - Maastricht Treaty - one of two treaties forming the constitutional basis of the European Union (EU),
        
        Optimal Currency Area - is a geographical region in which it would maximize economic efficiency to have the entire region share a single currency
        
        Inflation Bias - the outcome of discretionary government policy that, under perfect foresight in the labor market, leads to a higher than optimal level of inflation and no transitory income increase.
        
        Marshall Plan - American economic support given to Europe after WW2 as a way to help to fix its economy.
        
        Treaty of Rome - is one of two treaties forming the constitutional basis of the European Union (EU)
        
        Exchange Rate Mechanism - was a system introduced by the European Economic Community on 13 March 1979, as part of the European Monetary System (EMS), to reduce exchange rate variability and achieve monetary stability in Europe, in preparation for Economic and Monetary Union and the introduction of a single currency, the euro
        
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- - - - Twin Crisis- term in economics that refers to a simultaneous crises in banking and currency
        
        Domestic Credit - refers to lending or credit that a country or territory's central bank makes available to borrowers within the same territory.
        
        Central Bank Balance Sheet - The domestic debt and foreign reserves purchased by the central bank are its assets, B + R. The money supply issued by the central bank M is its liabilities.
        
        Floating Line/Fixed Line -- when the Central Bank balance sheet has no reserves, assuming it will then have a floating exchange rate (called the floating line); alternately, a fixed link occurs when the balance sheet shows sufficient reserves, indicating a fixed exchange rate.
        
        Currency Board - A fixed exchange rate that always operates with reserves equal to 100% of the money supply is known as a currency board system.
        
        Backing Ratio - indicates the fraction of the money supply that is backed by reserves on the central bank balance sheet
        
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