2019 CFA PROGRAM CURRICULUM LEVEL I VOLUMES 1-6 đ â 2018, 2017, 2016, 2015, 2014, 2013, 2012, 2011, 2010, 2009, 2008, 2007, 2006 by CFA Institute All rights reserved This copyright covers material written expressly for this volume by the editor/s as well as the compilation itself It does not cover the individual selections herein that first appeared elsewhere Permission to reprint these has been obtained by CFA Institute for this edition only Further reproductions by any means, electronic or mechanical, including photocopying and recording, or by any information storage or retrieval systems, must be arranged with the individual copyright holders noted CFA®, Chartered Financial Analyst®, AIMR-PPS®, and GIPS® are just a few of the trademarks owned by CFA Institute To view a list of CFA Institute trademarks and the Guide for Use of CFA Institute Marks, please visit our website at www.cfainstitute.org This publication is designed to provide accurate and authoritative information in regard to the subject matter covered It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service If legal advice or other expert assistance is required, the services of a competent professional should be sought All trademarks, service marks, registered trademarks, and registered service marks are the property of their respective owners and are used herein for identification purposes only ISBN 978-1-946442-07-9 (paper) ISBN 978-1-946442-31-4 (ebk) 10 Please visit our website at www.WileyGlobalFinance.com ECONOMICS CFA® Program Curriculum 2019 • LEVEL I • VOLUME CONTENTS How to Use the CFA Program Curriculum Curriculum Development Process Organization of the Curriculum Features of the Curriculum Designing Your Personal Study Program Feedback v v vi vi vii ix Economics Study Session Economics (1) Reading 14 Topics in Demand and Supply Analysis Introduction Demand Analysis: The Consumer Demand Concepts Own-Price Elasticity of Demand Income Elasticity of Demand Cross-Price Elasticity of Demand Substitution and Income Effects Normal and Inferior Goods Supply Analysis: The Firm Marginal Returns and Productivity Breakeven and Shutdown Analysis Understanding Economies and Diseconomies of Scale Summary Practice Problems Solutions 5 6 14 15 18 19 23 23 28 43 48 51 58 Reading 15 The Firm and Market Structures Introduction Analysis of Market Structures Economists’ Four Types of Structure Factors That Determine Market Structure Perfect Competition Demand Analysis in Perfectly Competitive Markets Supply Analysis in Perfectly Competitive Markets Optimal Price and Output in Perfectly Competitive Markets Factors Affecting Long-Run Equilibrium in Perfectly Competitive Markets Monopolistic Competition Demand Analysis in Monopolistically Competitive Markets Supply Analysis in Monopolistically Competitive Markets Optimal Price and Output in Monopolistically Competitive Markets Factors Affecting Long-Run Equilibrium in Monopolistically Competitive Markets 63 63 64 64 66 68 69 76 77 indicates an optional segment 81 83 84 85 85 86 ii Reading 16 Reading 17 Contents Oligopoly Demand Analysis and Pricing Strategies in Oligopoly Markets Supply Analysis in Oligopoly Markets Optimal Price and Output in Oligopoly Markets Factors Affecting Long-Run Equilibrium in Oligopoly Markets Monopoly Demand Analysis in Monopoly Markets Supply Analysis in Monopoly Markets Optimal Price and Output in Monopoly Markets Price Discrimination and Consumer Surplus Factors Affecting Long-Run Equilibrium in Monopoly Markets Identification of Market Structure Econometric Approaches Simpler Measures Summary Practice Problems Solutions 87 88 94 95 96 97 98 99 101 102 104 105 106 106 108 110 114 Aggregate Output, Prices, and Economic Growth Introduction Aggregate Output and Income Gross Domestic Product The Components of GDP GDP, National Income, Personal Income, and Personal Disposable Income Aggregate Demand, Aggregate Supply, and Equilibrium Aggregate Demand Aggregate Supply Shifts in Aggregate Demand and Supply Equilibrium GDP and Prices Economic Growth and Sustainability The Production Function and Potential GDP Sources of Economic Growth Measures of Sustainable Growth Summary Practice Problems Solutions 117 118 119 120 127 Understanding Business Cycles Introduction Overview of the Business Cycle Phases of the Business Cycle Resource Use through the Business Cycle Housing Sector Behavior External Trade Sector Behavior Theories of the Business Cycle Neoclassical and Austrian Schools Keynesian and Monetarist Schools The New Classical School 197 197 198 198 202 208 209 211 211 212 215 indicates an optional segment 131 136 137 148 150 162 173 173 176 179 184 189 194 Contents iii Unemployment and Inflation Unemployment Inflation Economic Indicators Popular Economic Indicators Other Variables Used as Economic Indicators Summary Practice Problems Solutions 219 219 223 237 237 242 245 247 253 Study Session Economics (2) 257 Reading 18 Monetary and Fiscal Policy Introduction Monetary Policy Money The Roles of Central Banks The Objectives of Monetary Policy Contractionary and Expansionary Monetary Policies and the Neutral Rate Limitations of Monetary Policy Fiscal Policy Roles and Objectives of Fiscal Policy Fiscal Policy Tools and the Macroeconomy Fiscal Policy Implementation: Active and Discretionary Fiscal Policy The Relationship between Monetary and Fiscal Policy Factors Influencing the Mix of Fiscal and Monetary Policy Quantitative Easing and Policy Interaction The Importance of Credibility and Commitment Summary Practice Problems Solutions 259 260 262 262 275 278 International Trade and Capital Flows Introduction International Trade Basic Terminology Patterns and Trends in International Trade and Capital Flows Benefits and Costs of International Trade Comparative Advantage and the Gains from Trade Trade and Capital Flows: Restrictions and Agreements Tariffs Quotas Export Subsidies Trading Blocs, Common Markets, and Economic Unions Capital Restrictions The Balance of Payments Balance of Payments Accounts Balance of Payment Components 333 333 334 334 337 341 345 354 354 357 357 360 364 367 367 369 Reading 19 indicates an optional segment 294 295 300 300 308 314 318 319 320 321 322 325 330 iv Reading 20 Contents Paired Transactions in the BOP Bookkeeping System National Economic Accounts and the Balance of Payments Trade Organizations International Monetary Fund World Bank Group World Trade Organization Summary Practice Problems Solutions 372 375 379 380 382 383 386 389 393 Currency Exchange Rates Introduction The Foreign Exchange Market Market Functions Market Participants Market Size and Composition Currency Exchange Rate Calculations Exchange Rate Quotations Cross- Rate Calculations Forward Calculations Exchange Rate Regimes The Ideal Currency Regime Historical Perspective on Currency Regimes A Taxonomy of Currency Regimes Exchange Rates, International Trade, and Capital Flows Exchange Rates and the Trade Balance: The Elasticities Approach Exchange Rates and the Trade Balance: The Absorption Approach Summary Practice Problems Solutions 397 397 399 404 410 413 416 416 419 423 430 431 432 434 441 443 447 451 455 458 Glossary G-1 Index I-1 indicates an optional segment Economics STUDY SESSIONS Study Session Study Session Economics (1) Economics (2) TOPIC LEVEL LEARNING OUTCOME The candidate should be able to demonstrate knowledge of microeconomic and macroeconomic principles The next study sessions introduce fundamental microeconomic and macroeconomic concepts relevant to financial analysis and investment management Microeconomic factors such as a firm’s competitive (or non-competitive) environment and its pricing strategy may be critical inputs for cash flow forecasting and bottom up security selection approaches Economic output, global trade flows, monetary and fiscal policies, and the business cycle are key considerations for conducting top own investment analysis and economic forecasting Candidates should be familiar with the material covered in the following prerequisite economics readings available in Candidate Resources on the CFA Institute website: ■■ Demand and Supply Analysis: Introduction ■■ Demand and Supply Analysis: Consumer Demand ■■ Demand and Supply Analysis: The Firm © 2018 CFA Institute All rights reserved E cono m ics STUDY SESSION Economics (1) This study session begins by introducing fundamental concepts of demand and supply analysis for individual consumers and firms Also covered are the various market structures (perfect competition, oligopoly, monopoly) in which firms operate Key macroeconomic concepts and principles then follow, including aggregate output and income measurement, aggregate demand and supply analysis, and analysis of economic growth factors The study session concludes with coverage of the business cycle and its effect on economic activity READING ASSIGNMENTS Reading 14 Topics in Demand and Supply Analysis by Richard V Eastin, PhD, and Gary L Arbogast, PhD, CFA Reading 15 The Firm and Market Structures by Richard Fritz, PhD, and Michele Gambera, PhD, CFA Reading 16 Aggregate Output, Prices, and Economic Growth by Paul R Kutasovic, PhD, CFA, and Richard Fritz, PhD Reading 17 Understanding Business Cycles by Michele Gambera, PhD, CFA, Milton Ezrati, and Bolong Cao, PhD, CFA © 2018 CFA Institute All rights reserved I-4 Index Costa Rica exchange rate regime, 436 exports from, 342 government spending, 130 underground economy, 124 cost function, 24 cost-push inflation, 233–235 costs accounting, 28 administrative, 368 average, 36–37 average fixed, 31–35 average total, 31–37, 45–46 average variable, 30, 36–37, 39–40 economic, 28, 38, 77 fixed, 31–35, 41–42 of inflation, 281–283 of international trade, 343–347 labor, 158–160 long-run average, 102 long-run marginal, 102 marginal defined, 23 and marginal revenue/profit maximization, 29–30 in monopolies, 36–37, 102 and other costs/output, 31–35 in perfect competition, 36–37 menu, 219–220, 282 opportunity, 24, 77 and output, 31–35 and production, 23–25 quasi-fixed, 33 shoe leather, 282 sunk, 28 total, 24, 31–35 total fixed, 31–35, 41–42 total variable, 31–35, 41–42 unit labor, 234, 241 variable, 30–35 cost structures in monopolies, 99–100 and price collusion, 93 countervailing duties, 359 Cournot, Augustin, 90 Cournot assumption, 90–91 Cournot equilibrium, 91, 93, 94 CPI see consumer price index CPI-U, 229, 230 crawling band currency regimes, 436, 440 crawling peg currency regimes, 436, 439–440 creative destruction theory, 213–214 credibility of central banks, 288–289 of monetary and fiscal policy mix, 323 credit crisis (2008), 303, 307, 308 credits, BOP system, 370–371 Croatia, 436 cross-price elasticity of demand for consumers, 15–18 in perfect competition, 73 cross-rates, currency, 419, 421–425 cross-sectional regression analysis, 106 crowding out, 309 currency in business cycles, 212 foreign central bank purchases of, 375–376 FX conventions for, 401–402 currency board system (CBS), 436, 438–439 currency codes, FX market, 401 currency exchange rates, 399–462 calculations, 418–432 cross-rate, 421–425 and exchange rate quotations, 418–421 forward, 425–432 currency regimes, 432–443 active and passive crawling pegs, 439–440 arrangements with no separate legal tender, 437–438 CBS, 438–439 fixed parity, 439 fixed parity with crawling bands, 440 free-floating, 440–441 historical perspective on, 434–436 ideal, 433 managed float, 440 target zone, 439 taxonomy of, 436–443 foreign exchange market, 399–418 about, 399–400 currency conventions, 401–402 functions, 406–412 nominal vs real exchange rates, 402–406 participants in, 412–415 size and composition of, 415–418 and international trade, 443–453 absorption approach to trade balance, 449–450 elasticities approach to trade balance, 445–449 practice problems, 457–459 quotations, 418–421 solutions to problems, 460–462 currency quotes, 418–421 currency regimes, 432–443 arrangements with no separate legal tender, 437–438 CBS, 438–439 with crawling bands/pegs, 439–440 fixed parity, 439 free-floating, 440–441 historical perspective on, 434–436 ideal, 433 managed float, 440 target zone, 439 currency reserves foreign, 279, 294 requirements, 267, 268, 284–285, 367 current account, BOP, 371, 377–381 current government spending, 311 customers, segregation of, 103 customs union, 362 cyclical companies, 165 cyclical economic indicators, 244–245 cyclically adjusted budget deficit, 317 Cyprus, 362n.18, 436 Czech Republic, 287 D deadweight loss, 356, 357 De Beers Consolidated Mines Limited, 97 debits, BOP system, 370–371 debt government, 262, 316 national, 307–309 ratio of consumer installment debt to income, 242 debt burden, 308 decreasing returns to scale, 46 defensive companies, 165 deficit budget (fiscal), 304 and business cycles, 129 and fiscal policy, 317–318 and foreign capital, 138 and national debt, 307–309 and Ricardian equivalence, 316 in current account, 377–381 trade, 130, 338 deflation defined, 226 and inflation targeting, 290 and liquidity traps, 298 and quantitative easing, 298–299 Delta Air Lines, 88 demand aggregate (see aggregate demand [AD]) concepts, 6–8 derived, 355 elastic, 10, 12–14, 71 elasticity of demand, 8–18 calculating, from demand function, 16–18 cross-price elasticity of demand, 15–18 defined, income elasticity of demand, 14–16 own-price elasticity of demand, 9–14 excess, 339 inelastic, 10, 11, 13–14, 71 law of demand, 6, 18–19, 21, 75 long-run vs short-run, 12 for money, 271–274 in monopolistic competition, 84–85 in monopoly, 36–37, 98–99 in oligopoly, 88–94 in perfect competition, 36–37, 69–76 perfectly elastic, 12 perfectly inelastic, 11 under perfect vs imperfect competition, 36 unit elastic, 10 demand and supply analysis, 5–61 consumers, 6–23 demand concepts, 6–8 elasticity of demand, 9–18 substitution and income effects, 18–23 firms, 23–48 marginal returns, 23–28 scale and profit maximization, 43–48 shutdown analysis, 28–43 in microeconomics, 5–6 for money, 272–274 practice problems, 51–57 solutions to problems, 58–61 demand curves aggregate, 145–148 defined, Index I-5 effect of income elasticity on, 15 elasticity of linear, 11 kinked, 89–90, 95 and law of demand, 18 of leaders in oligopoly, 95 as marginal value curve, 75 in monopolies, 98–99 in monopolistic competition, 84–85 negatively sloped, under imperfect competition, 40–41 in oligopolies, 88–90, 95 in perfect competition, 77–78 demand functions defined, 6–7 elasticities from, 16–18 inverse, demand-pull inflation, 233, 235–236 demand schedules, 71–73 demand shock to inflation rate, 297 demographics, housing sector and, 211 Denmark, 436, 441 depreciation in absorption approach, 450 currency, 420 and economic vs accounting costs, 28 in elasticities approach, 445–449 depressions, 201 derived demand, 355 Detroit “Big Three” automakers, 100 Deutsche Bank, 412, 414 Deutsche Bundesbank, 278, 435 developed countries business investment by, 177 foreign exchange reserves, 414 international trade and unemployment, 344 developing countries business investment by, 177 exchange rate targeting, 293–296 foreign exchange reserves, 414 labor supply, 176 monetary policy of, 292–293 reserve requirements, 285 terms of trade for, 337–338 trade-to-GDP ratio, 340 diffusion index, 242n.a, 244 diminishing marginal productivity, 174–175 diminishing returns, law of, 79 direct currency quote, 418 direct exchange rate, 418 direct taxes, 311, 314 dirty floating, 440 discount rate, 284 discounts, forward, 425 discouraged worker, 223 discretionary goods, 12 diseconomies of scale, 44–47 disinflation, 226, 227 disposable income and balance of payments, 378 defined, 209 and MPC, 315 personal, 134 dollar (Australia) see Australian dollar dollar (Canada) see Canadian dollar dollar (Hong Kong) see Hong Kong dollar dollar (New Zealand), 401, 418, 419n.4 dollar (Singapore), 401 dollar (United States) see US dollar dollar–Canada exchange rate, 418, 421–422 dollarization, 437–438 dollar–yen exchange rate, 418, 422–423 domestic content provisions, 356 double coincidence of wants, 265 Douglas, Roger, 287 downturn, 203–204 capital spending in, 206 housing sector in, 210 inventory–sales ratio in, 207 resource use in, 204–206 duopoly markets, 90–93 DuPont, 73 durable goods, 209 Duracell, 64 E early expansion phase (business cycle), 201–203 East Asian Financial Crisis (1990s), 384 Eastern Europe see also specific countries current account imbalance, 380 trade-to-GDP ratio, 340 East Timor, 437 easy fiscal policy, 321 easy monetary policy, 321 eBay, 98 ECB see European Central Bank econometric approach, in market structure identification, 106 economic activity, in business cycle, 200–202 economic costs, 28, 38, 77 Economic Cycle Research Institute (ECRI), 239 economic depreciation see depreciation economic growth, 173–185 and aggregate demand, 155 in China, 179 in Mexico, 182 production function and potential GDP, 174–175 and real GDP, 173 RTAs and spillovers of, 364 sources of, 176–179 sustainable, 173, 179–185 and trade, 340–341 economic indicators, 239–246 cyclical measures as, 244–245 defined, 239 diffusion index of, 244 leading, lagging, and coincident, 239–243 economic loss, 40 economic moat, 68 economic profit, 28, 29, 77, 85, 86 economics, economic sectors external trade, 130–131, 211–213 financial, 383 in GDP, 127–131 government, 129–130 household, 119–120, 128 housing, 210–211 information technology, 178 public sector spending, 263 Economic sentiment index, 242 economic stabilization, fiscal policy and, 304 economic unions, 362–366 economies of scale from international trade, 343, 344 and monopolies, 97 for profit maximization, 44–47 economy aggregate output and income in, 119–120 barter, 123, 265 business cycles as short-term movements, 199–200 closed, 338, 377–378 and government debt, 262 IMF monitoring of, 382 influence of fiscal and monetary policy on, 262–264 open, 338, 343, 377, 378 underground, 123–124 ECRI see Economic Cycle Research Institute Ecuador, 436, 437 education, human capital and, 176 efficiency, of tax policy, 311 EFSF see European Financial Stability Facility Egypt, 437 elastic demand, 10, 12–14, 71 elasticities approach to trade balance, 445–449 elasticity(-ies) defined, of demand, 8–18 and budget constraints, 71 calculating, from demand function, 16–18 cross-price, 15–18, 73 defined, income, 14–16, 72–73 in oligopolies, 88 own-price, 9–14 in perfect competition, 70–74 and trade balance, 445–449 of linear demand curve, 11 of supply, electric utilities, 66, 97 El Salvador, 436, 437 employed (term), 222 employees on non-agricultural payrolls, 241 employment, business cycle and, 202, 204–205 EMU see European Economic and Monetary Union endogeneity, problem of, 106 Energizer, 64 entry fee, 104 equilibrium Cournot, 91, 93, 94 long-run macroeconomic, 163 in monopolistic competition, 86–87 in monopoly, 104–105 in oligopoly, 96 in perfect competition, 81–82 in money market, 144–145 Nash, 92–93, 96 I-6 Index equilibrium GDP, 163–173 inflationary gap, 167–168 long-run equilibrium, 163 recessionary gap, 163–167 stagflation, 169–170 equilibrium prices for money, 272–273 in perfectly competitive markets, 77–78 ERM see European Exchange Rate Mechanism Essay on the Principle of Population (Malthus), 174 Estonia, 362n.18 Ethiopia, 166 EU see European Union euro, 401, 435–436 cross-rate calculations with, 421–422 as currency anchor, 436 EUR/GBP exchange rates, 418, 419n.4 exchange rate quotes with, 418–420 forward calculations with, 425–426 GBP/EUR exchange rate, 403, 408 intervention in FX market to support, 440 USD/EUR currency pair, 416 USD/EUR exchange rate, 409 euro–Canada exchange rate, 419, 421–422 Euro–Coin statistic, 245 euro–dollar exchange rate, 421–422, 425–426 euro exchange rate, 418 Europe see also specific countries and regions economic indicators, 245 interest rates, 298n.11 labor supply, 176 stagflation, 236 terms of trade, 338 trade balance with US, 130–131 European Central Bank (ECB) CPI used by, 230 and currency regime of EMU, 438 and European Union, 362n.18 independence of, 288 inflation targeting, 287, 289 intervention in FX market, 440 monetary policy of, 185 money measures of, 270 objectives of, 280 European Commission, 105 European Community currency regimes, 436 customs union, 362 European Economic and Monetary Union (EMU), 383–384, 436, 438 see also Eurozone European Economic Community, 435 European Exchange Rate Mechanism (ERM), 294, 435 European Financial Stability Facility (EFSF), 366 European Union (EU) economic indicators for, 239 EFSF of, 366 ERM of, 294 export subsidies, 359 imports in, 337 inflation targeting, 289 price index, 230 quotas from, 359 RTAs for, 362 underground economy, 124n.4 Eurostat, 230 euro–Sterling exchange rate, 419 Euro Stoxx Equity, 242 euro–Swiss exchange rate, 419, 420 euro–yen exchange rate, 419 Eurozone economic indicators, 239, 242 and EU, 362n.18 money measures, 270 Eurozone Manufacturing Purchasing Managers Index, 242 Eurozone Service Sector Future Business Activity Expectations Index, 242 evaluation of fiscal policy, 319–320 of monetary policy, 301–302 excess demand, 339 excess supply, 339 exchange, money as medium of, 265 exchange rate quotations, 418–421 exchange rate regimes, 432–443 see also currency regimes exchange rates, 401 see also currency exchange rates and aggregate demand, 155 and short-run aggregate supply, 158, 160 exchange rate targeting, 293–296 exogenous policy tools, aggregate demand and, 140 expansionary fiscal policy, 302–304, 317 expansionary monetary policy, 154, 296–297 expansion phase (business cycle), 200–203 see also recovery housing sector in, 210 inventory–sales ratio in, 208 investor preferences, 203 resource use in, 205 expectations about future prices, 158, 160 about inflation, 236–237 and aggregate demand, 153 in economic indicators, 241 expected inflation, 281, 283 expenditure(s) aggregate, 119 capital, 311 and consumer surplus, 74–76 government, 221, 303–306 personal consumption, 229 and price elasticity of demand, 445–448 R&D, 178 total and aggregate income, 137–144 and consumer surplus, 75–76 and own-price elasticity of demand, 13–14 and trade balance, 444–445 expenditure approach to GDP, 120–122, 127, 128, 131–133 exports in balance of trade, 374 in business cycles, 212 defined, 337 exchange rate and prices of, 155 net, 140, 338 terms of trade for, 337–338 voluntary export restraints, 356, 359 export subsidies, 356, 359–361 external competition, price collusion and, 93 external trade sector cyclical behavior of, 211–212 in GDP, 130–131 Exxon Mobil, 107 F Facebook, 98 factor markets, 128 factor-proportions theory, 354–355 factors of production (inputs), 23–24 fairness, of tax policy, 312 Fannie Mae, 299 FCA see Financial Conduct Authority FDI see foreign direct investment Federal Banking Supervisory Office, 278 Federal Commission, 279 Federal Deposit Insurance Corporation, 279, 437–438 federal funds rate (fed funds rate), 241, 284 Federal Open Market Committee (FOMC), 284 Federal Reserve Act, 292 Federal Reserve Bank of Chicago, 244 Fiat, 100 fiat money, 277 final goods, 121 final sales, 207 financial account, BOP, 372 financial assets abroad sub-account, BOP, 372 financial capital in Heckscher–Ohlin model, 354–355 and international trade, 336 in long-term economic growth, 175 Financial Conduct Authority (FCA), 278n.6 financial markets, in economy, 128 financial sector, IMF analysis of, 383 Financial Services Agency, 279 Financial Services Authority (FSA), 277–279 Finland disinflation, 227 EU membership, 362n.18 exchange rate regime, 436 inflation targeting, 287 firms demand and supply analysis, 23–48 marginal returns, 23–28 scale and profit maximization, 43–48 shutdown analysis, 28–43 and market structure, 66–67 in microeconomics, monopolist, 100–101 theory of the firm, first-degree price discrimination, 102–103 fiscal deficit see budget deficit fiscal multiplier, 314–315 Index I-7 fiscal policy, 302–320 and aggregate demand, 153, 302–303 balanced budget multipliers, 315–316 and deficits/national debt, 307–309 defined, 263 evaluating, 319–320 fiscal multiplier, 314–315 and government receipts/expenditures, 303–306 implementation of, 316–319 and inflation, 168 influence on economy, 262–264 of Keynesian school, 215 and monetary policy, 320–324 and Ricardian equivalence, 316 roles and objectives, 302–310 and tax policy, 312 tools, 310–316 types of, 310 Fisher, Irving, 274 Fisher effect, 274–275 Fisher index, 228–229 fixed costs average, 31–35 quasi-, 33 total, 31–35, 41–42 fixed-income investments, 184–185 fixed parity currency regimes, 436, 439 flexible exchange rates, 435 floating exchange rates, 433 FOMC see Federal Open Market Committee foreign currency reserves, at central banks, 279, 294 foreign direct investment (FDI), 341–342 foreign exchange market (FX market), 399–418 about, 399–400 currency conventions, 401–402 functions, 406–412 nominal vs real exchange rates, 402–406 participants in, 412–415 size and composition of, 415–418 foreign investments direct, 341–342 income from, 376 portfolio, 341 foreign-owned financial assets subaccount, BOP, 372 foreign portfolio investment (FPI), 341 forward discounts, 425 forward exchange rates, 408, 425–432 and spot rates, 410–412, 428–430 and swap/interest rates, 426–430 forward points, 425, 429–430 forward premiums, 425 forwards (forward contracts), in FX market, 408 FPI see foreign portfolio investment fractional reserve banking, 266–268 franc (Switzerland), 401, 418, 420 France banking supervision, 278 business investment, 177 consumption expenditures, 139 disinflation, 227 EU membership, 362n.18 exchange rate regime, 436 expected inflation, 282 exports of goods, 337 government debt, 262 government spending, 129 labor productivity, 181 public sector spending, 263 trade balance with US, 130 underground economy, 124 Freddie Mac, 299 free-floating currency regimes, 440–441 free trade, 338, 343–344 free trade areas (FTAs), 362 frictionally unemployed (term), 222 Friedman, Milton, 217, 234, 435 Friedman, Thomas, 64 FSA see Financial Services Authority FTAs see free trade areas full employment, 164 full employment equilibrium GDP, 163–164 full employment level of output, 150 functions, defined, future prices, short-run aggregate supply and, 158, 160 futures (futures contracts), in FX market, 408 FX market see foreign exchange market FX swaps, 409–410 G G–7, 239, 344 G-10, 278–279 gains from trade, 349–352 from voluntary exchange, 343 game theory, 92–94 Gary, Elbert, 96 gasoline market, concentration in, 107 GATS see General Agreement on Trade in Services GATT see General Agreement on Tariffs and Trade GDP see gross domestic product GDP deflator, 125–127 GE see General Electric General Agreement on Tariffs and Trade (GATT), 382, 385 General Agreement on Trade in Services (GATS), 385 General Electric (GE), 105 General Motors (GM), 46 Germany automobile industry, 86 banking supervision, 278 BOP paired transactions, 374–376 business investment, 177 consumption expenditures, 139 CPI, 229 currency regime, 435 current account imbalance, 377, 380 cyclically adjusted budget deficit, 317 disinflation, 227 effects of global recession, 166 EU membership, 362n.18 exchange rate regime, 436, 440 foreign direct investment, 341, 342 government liabilities/debt, 308 government revenues/expenditures, 303, 304 government spending, 129 gross domestic product forecasts, 184–185 potential, 183 hyperinflation, 226 investment spending, 140 labor productivity, 181 leading economic indicator, 243 net borrowing/lending, 305 trade balance with US, 130 underground economy, 124 Ghana, 287 Giffen, Robert, 21 Giffen goods, 21 gilts, 298–299 global economic developments, IMF analysis of, 383 global financial crisis (2007-2009), 211, 226, 236, 383 Global Integrated Monetary and Fiscal Model, 322 globalization, 338–339, 342–343 global supply chains, 343 GM see General Motors GNP see gross national product gold standard, 277, 434 goods capital, 128 discretionary, 12 durable, 209 elasticity of demand for, 12 final, 121 Giffen, 21 inferior, 15, 19–23 intermediate, 121 manufacturers’ new orders for, 240 non-discretionary, 12 nondurable, 209 normal, 15, 19–23 substitution and income effects on, 19–23 value of, 123–124 Veblen, 21 goods markets, 128 Google, 64 government(s) in FX market, 413 regulation of monopolies, 105–106 revenue from alternative trade policies, 360 government-controlled authorization, 97, 104 government debt, 262, 316 see also national debt government expenditures and business cycle theories, 221 and fiscal policy, 303–306 government receipts, fiscal policy and, 303–306 government sector, in GDP, 129–130 government services, in GDP, 123 government spending, 129–130 and aggregate demand, 137–138, 155 current, 311 and fiscal policy, 153 and taxes, 314–315 Great Depression, 213, 226, 381–382 I-8 Index Greece EU membership, 362n.18 exchange rate regime, 436 exports of service, 337 fiscal crisis (2010), 365–366, 383–384, 386–388 government debt, 262 government spending, 130 labor productivity, 181 national debt, 307 public sector spending, 263 underground economy, 124 Greenspan, Alan, 216 gross domestic product (GDP), 120–136 in business cycles, 212 components of, 127–131 and cyclically adjusted budget deficit, 317 equilibrium, 163–173 inflationary gap, 167–168 long-run equilibrium, 163 recessionary gap, 163–167 stagflation, 169–170 external sector, 130–131 and foreign direct investment, 341–342 GNP vs., 336–337 and government liabilities/debt, 308–309 and government revenues/ expenditures, 303–304 government sector, 129–130 household and business sectors, 128 long-run growth rate vs fluctuations in, 150–151 measuring, 120–123 and net borrowing/lending, 305 nominal, 124–127 and other income measures, 131–136 potential, 159 and demand-pull inflation, 235 and long-run equilibrium GDP, 163 measuring growth of, 179–181, 183–184 production function of, 174–175 and price indexes, 231 and production function, 174–175 real, 124–127 and economic growth, 173 identifying recession with, 203–204 and international trade, 344 in Japan, 172–173 and shifts in aggregate supply/ demand, 170–173 sustainable growth in, 183–184 trade-to-GDP ratio, 339–342 values of goods and services, 123–124 gross investment, aggregate demand and, 139 gross national product (GNP), 120n.2, 336–337 growth, economic see economic growth growth theory, 174–175 Guatemala, 287 H Harley-Davidson, 84 harmonised index of consumer prices (HICP), 230 headline inflation, 230–231 Heckscher–Ohlin model, 343, 354–355 hedging, in FX markets, 407 Herfindahl, O C., 107 Herfindahl–Hirschman Index (HHI), 107–108 HICP see harmonised index of consumer prices Hirschman, A O., 107 HKMA see Hong Kong Monetary Authority Honda, 86 Honeywell, 105 Hong Kong SAR Asian financial crisis, 343 effects of global recession, 166 exchange rate regime, 436, 438–439 exchange rate targeting, 294 Hong Kong dollar, 401 AUD/HKD exchange rate, 404–406, 410–412 exchange rate regime for, 438–439 Hong Kong Monetary Authority (HKMA), 438–439 horizontal demand schedule, 71–72 horizontal equity, 312 host country, for FDI, 341 hours worked, 224 household saving rate, 134, 152, 209 household sector, 119–120, 128 household wealth, aggregate demand and, 151–152 housing prices, 152, 155 housing sector, cyclical behavior of, 210–211 HSBC, 414 human capital, 159, 160, 176 Hungary exchange rate regime, 437 government debt, 262 hyperinflation, 226 inflation targeting, 287 public sector spending, 263 hyperinflation, 226–227 I IBM, 344 IBRD see International Bank for Reconstruction and Development Iceland, 287, 437 IDA see International Development Association ideal currency regime, 433 ILO see International Labour Organization IMF see International Monetary Fund IMM see International Monetary Market impact lag, 318 imperfect competition see also monopolistic competition breakeven analysis in, 40–41 marginal revenue in, 29–30 revenue in perfect vs., 35–36 implementation, fiscal policy, 316–319 implicit price deflator for GDP, 125–127 import license, 359 imports in balance of trade, 374 in business cycles, 211, 212 defined, 337 exchange rate and prices of, 155 terms of trade for, 337–338 import-substitution policy, 352n.10 incentives for monopolist firms, 100–101 in tax policy, 312 income aggregate (see aggregate income) and consumer installment debt, 242 and consumer spending, 209 convergence of, 175 disposable, 134, 209, 315, 378 from foreign investments, 376 and GDP, 131–136 national, 133, 377 personal, 133–134 real, 18–19 income approach to GDP, 120, 131–133 income effects on elasticity of demand, 12 on Giffen and Veblen goods, 21 and law of demand, 18–19 on normal and inferior goods, 19–23 in perfectly competitive markets, 69 with price decrease, 20–23 income elasticity of demand calculating, 16 for consumers, 14–15 in perfect competition, 72–73 income inequality, 344 income sub-account, BOP, 371 increasing marginal returns, 23 increasing returns to scale, 45 independence, of central banks, 288, 323 independent float currency regimes, 437 Index of Leading Economic Indicators (LEI), 239, 242 India business investment, 177 capital goods expenditures, 128 comparative advantage, 348–352, 354, 355 CPI, 229 effects of global recession, 166 exchange rate regime, 437 exports from, 337, 354 foreign direct investment, 341, 342 globalization of production, 342 labor supply, 176 reserve requirements, 285 trade balance with US, 131 underground economy, 124 Indian rupee, 401 indicators, economic see economic indicators indirect currency quote, 418 indirect exchange rate, 418 indirect taxes, 311, 313 Indonesia Asian financial crisis, 343 business investment, 177 exchange rate regime, 437 inflation targeting, 287 industrial countries, terms of trade for, 337 industrial loans, 241 Index I-9 Industrial Production Index, 241 inelastic demand, 71 defined, 10 perfectly inelastic demand, 11 price changes and total expenditure with, 13–14 infant industry argument, 356 inferior goods defined, 15, 19 substitution and income effects on, 19–23 inflation and business cycles, 205, 225–239 core, 230–231 cost-push (wage-push), 233–235 costs of, 281–283 defined, 167, 225 deflation, hyperinflation, disinflation, 226–227 demand-pull, 235–236 expectations about, 236–237 expected, 281, 283 and GDP deflator, 125–127 headline, 230–231 monetary policy and inflation rate, 297 and New Classical school, 219 and nominal interest rates, 274–276 in phases of business cycle, 202 price indexes constructing, 227–229 usage of, 229–231 in stagflation, 169–170 targets for, 289–290 types of, 233–236 and unemployment, 221–222 unexpected, 281–283 inflationary gap, 167–168 inflation rate, 167n.19, 225–226, 297 Inflation Reports, 289 inflation targeting, 287–293 credibility of, 288–289 exceptions to, 291–292 and independence of central banks, 288 and monetary policy in developing countries, 292–293 transparency of, 289–291 by US Federal Reserve system, 292 inflation uncertainty, 282–283 information technology (IT) sector, 178 innovation and international trade, 344 and perfect competition, 83 input prices, short-run aggregate supply and, 158, 160 input productivity, 23 inputs (factors of production), 23–24 Institute of Supply Management (ISM), 244 Intel, 342 interbank FX market, 415–416 interest, 119, 296 interest rates and AD curve, 146–147 and equilibrium price for money, 272–273 and housing sector behavior, 210 in monetary policy, 153–154 and monetary transmission mechanism, 285–287 and money, 275 neutral, 296 nominal, 274–276 official, 284 real, 140 and swap rates/foreign exchange rates, 426–430 intermediate goods, 121 International Bank for Reconstruction and Development (IBRD), 384–385 International Development Association (IDA), 384–385 International Labour Organization (ILO), 223 International Monetary Fund (IMF) bailouts by, 383–384 capital restrictions study, 368 exchange rate regime classification, 436 founding of, 382 and globalization, 339 Greek bailout, 366, 386–388 mandates of, 383 monetary and fiscal policy model, 322 International Monetary Market (IMM), 408 International Organization for Standardization (ISO), 401 international trade, 335–398 and aggregate demand, 155 balance of payments, 369–381 BOP accounts, 370–371, 377–379 components of, 371–373 imbalances since 1996, 379–381 paired transactions, 374–376 for United States, 372–373 benefits and costs, 343–347 and capital flows, 356–369 comparative advantage, 347–355 absolute vs., 347–354 Ricardian and Heckscher–Ohlin models, 354–355 and currency exchange rates, 443–453 absorption approach to trade balance, 449–450 elasticities approach to trade balance, 445–449 global investors’ concerns, 335–336 patterns and trends, 339–343 practice problems, 392–395 solutions to problems, 396–398 terminology, 336–339 trade organizations, 381–388 function and objectives, 386–388 International Monetary Fund, 382–384 World Bank Group, 384–385 World Trade Organization, 385–386 trade restrictions/agreements, 356–369 capital restrictions, 366–369 export subsidies, 359–361 quotas, 359 tariffs, 356–361 trading blocs, common markets, and economic unions, 362–366 International Trade Organization (ITO), 382 inter-temporal trade, 377, 378 intra-industry trade, 343 inventory and business cycle, 204, 205 cyclical levels of, 207–208 and GDP, 127 inventory–sales ratio, 207–208, 241 inverse demand function, investment and economic growth, 176–177 net, 139–140 saving–investment differential, 141–143 investment spending, aggregate demand and, 139–140, 146–147 investment strategies AD and AS curves as basis for, 171–172 during decreases in aggregate demand, 164–165 for inflationary gaps, 168 for shifts in aggregate supply, 169–170 iPod, 65 Iran, 436 Iraq, 436 Ireland budget deficit, 379 business investment, 177 effects of Greek fiscal crisis, 366 EU membership, 362n.18 exchange rate regime, 436 exports from, 342 labor productivity, 181 wealth effect, 152 IS curve, 137–144 ISM see Institute of Supply Management ISM new order index, 240 ISO see International Organization for Standardization Israel, 287, 437 Italy banking supervision, 278 business investment, 177 capital goods expenditures, 128 consumption expenditures, 139 disinflation, 227 EU membership, 362n.18 exchange rate regime, 436 expected inflation, 282 globalization of production, 342 government debt, 262 government spending, 129, 130 housing sector, 211 investment spending, 140 labor productivity, 181 national debt, 309 public sector spending, 263 trade balance with US, 130 underground economy, 124 ITO see International Trade Organization IT sector see information technology sector I-10 Index J Japan aggregate demand and supply in, 172–173 banking supervision, 279 budget deficit, 317 business investment, 177 comparative advantage, 355 consumption expenditures, 139 CPI, 229 current account imbalance, 377, 380 deflation, 226, 298 disinflation, 227 economic indicators, 242–244 effects of global recession, 165, 166 exchange rate regime, 437, 440 globalization of production, 342 government debt, 262, 308 government liabilities, 308 government revenues/expenditures, 303, 304 government spending, 129 gross domestic product, 155 forecasts of, 184–185 potential, 183–184 housing sector, 211 and inflation targeting, 292 interest rates, 298n.11 labor productivity, 181 labor supply, 176 monetary policy, 299–301 money measures, 270 national debt, 309 natural resources, 178 net borrowing/lending, 305 public sector spending, 263 trade balance with US, 131 underground economy, 124 VERs on exports, 359 Japanese yen, 401 cross-rate calculations with, 422–423 exchange rate quotes with, 418–419 JPY/USD currency pair, 416 J-curve effect, 449 Jordan, 294 K Kazakhstan, 359 Kenya, 166 Keynes, John Maynard, 215, 216, 274, 434 Keynesian school, 214–215, 303 kinked demand curve analysis, 89–90, 95 Kiwi exchange rate, 418 krona (Sweden), 401 krone (Norway), 401 Kuwait, 436 Kydland, Finn E., 217 L labor average product of, 25–28 as factor of production, 24 in Heckscher–Ohlin model, 354 in long-term economic growth, 175 marginal product of (see marginal returns) productivity of, 160, 180–184 in Ricardian model, 354 supply of, 159, 160, 176 total product of, 25–28 labor costs and aggregate supply, 158–160 unit, 234, 241 labor force, 176, 222 labor markets, 218 Laffer, Arthur, 312 lagging economic indicators, 239, 241–242 large country (term), 356 Laspeyres index, 228 late buying, in housing sector, 211 late expansion phase (business cycle), 201–203 Latin America see also specific countries currency regimes, 436 exchange rate regimes, 439–440 trade-to-GDP ratio, 340 Latvia, 362n.18 law of demand defined, exceptions for, 21 in perfect competition, 75 and substitution/income effects, 18–19 law of diminishing marginal returns, 23 law of diminishing returns, 79 layoffs, 223–224 Leading Credit Index, 240 leading economic indicators, 239–243 Lebanon, 294, 436 legal tender, 277, 436, 437 LEI see Index of Leading Economic Indicators lenders of last resort, 277 lending facilities, IMF, 383 leveraged accounts, in FX market, 412 Liberia, 437 Libor see London Interbank Offered Rate Libya, 436 liquidity, broad measure of, 270 liquidity traps, 298 Lithuania, 362n.18, 435n.14 LMC see long-run marginal cost LM curve, 144–145 loans to borrowers abroad, 374 commercial and industrial, 241 Logitech, 344 London Interbank Offered Rate (Libor), 430 long-run aggregate supply, 159–161 defined, 148–149 and human capital, 159, 160 and labor, 159 and natural resources, 159–161 and physical capital, 159, 160 and productivity/technology, 160 long-run aggregate supply (LRAS) curve, 148–150 long-run average cost (LRAC), 102 long-run average total cost (LRAC) curve, 44–48 long-run cost curves average, 44–48 scale and profit maximization on, 43–44, 47–48 time frame for, 43 long-run demand, elasticity of, 12 long-run equilibrium macroeconomic, 163 in monopolies, 104–105 in monopolistic competition, 86–87 in oligopolies, 96 in perfect competition, 81–82 long-run marginal cost (LMC), 30, 102 long-term unemployed (term), 222 loss deadweight, 356, 357 economic, 40 LRAC see long-run average cost LRAC curve see long-run average total cost curve LRAS curve see long-run aggregate supply curve LRATC see long-run average total cost curve Luxembourg customs union, 362 EU membership, 362n.18 exchange rate regime, 436 M M0 money measure, 270 M1 money measure, 269, 270 M2 money measure, 269, 270 M2 money supply, 242, 243 M3H money measure, 270 M3 money measure, 270 M4 money measure, 270 macroeconomics, 117–197 aggregate demand, 137–148 AD curve, 145–148 defined, 136 IS curve, 137–144 LM curve, 144–145 shifts in, 150–157 aggregate output and income, 119–136 in economy, 119–120 in gross domestic product, 120–136 aggregate supply about, 148–150 defined, 136 shifts in, 150–151, 157–162 defined, economic growth, 173–185 production function and potential GDP, 174–175 sources, 176–179 sustainable growth, 179–185 equilibrium GDP and prices, 163–173 business cycle and AD/AS curves, 170–173 inflationary gap, 167–168 long-run equilibrium, 163 recessionary gap, 163–167 stagflation, 169–170 microeconomics vs., 118 new classical, 217 practice problems, 190–194 solutions to problems, 195–197 Malaysia Asian financial crisis, 343 capital restrictions, 368–369 exchange rate regime, 437 Maldives, 295 Malta, 362n.18, 436 Index I-11 Malthus, Thomas, 174 managed float currency regimes, 437, 440 manufacturers, new orders of, 240 manufacturing sales, 241 marginal costs (MC) defined, 23 interactions of other costs and output with, 31–35 long-run, 30, 102 and marginal revenue/profit maximization, 30 in monopolies, 36–37, 102 in perfectly competitive markets, 36–37, 79–80 marginal product, 23 marginal product of labor (MPL), 25–28 see also marginal returns marginal propensity to consume (MPC), 139, 314–316 marginal propensity to save (MPS), 139, 315 marginal returns, 23–28 and definition of productivity, 23–25 increasing, 23 law of diminishing, 23 and total/average product of labor, 25–28 marginal revenue (MR) and marginal cost/profit maximization, 29–30 in monopolies, 98–102 in monopolistic competition, 85–87 in oligopolies, 90, 91, 94, 96 in perfect competition, 70, 78–79 and price elasticity, 73–74 marginal value curve, 75 market concentration, 105–106 market demand function, 16 market functions, in FX markets, 406–412 market power, 97, 105 markets capital, 383, 406–407 common, 362–366 factor, 128 financial, 128 foreign exchange, 399–418 about, 399–400 currency conventions, 401–402 functions, 406–412 nominal vs real exchange rates, 402–406 participants in, 412–415 size and composition of, 415–418 geographic limitations of, 64 goods, 128 labor, 218 over-the-counter, 408 market structures, 63–115 analysis of, 64–68 determining factors for, 66–68 identification of, 105–108 importance of, 63–64 monopolistic competition, 83–87 demand analysis, 84–85 long-run equilibrium, 86–87 optimal price and output, 85 supply analysis, 85 monopoly, 97–105 about, 97–98 demand analysis, 98–99 long-run equilibrium, 104–105 optimal price and output, 101–102 price discrimination and consumer surplus, 102–104 supply analysis, 99–100 oligopoly, 87–96 demand analysis and pricing strategies, 88–94 long-run equilibrium, 96 optimal price and output, 95–96 supply analysis, 94–95 perfect competition, 68–83 demand analysis, 69–76 long-run equilibrium, 81–82 optimal price and output, 77–81 supply analysis, 76–77 practice problems, 110–113 solutions to problems, 114–115 types of, 64–66 Marshall-Lerner condition, 445–449 maturity of forward contracts, 426n.5 and forward points, 429–430 MC see marginal costs Medium Term Financial Strategy (MTFS), 276 menu costs, 219–220, 282 Mercedes, 86 merchandise trade sub-account, BOP, 371 MERCOSUR see Southern Cone Common Market mergers, market concentration and, 105–106 Mexican peso, 401, 421 Mexico business investment, 177 consumption expenditures, 139 economic growth in, 182 effect of global recession, 166 exchange rate regime, 437 government spending, 129 inflation targeting, 287 labor productivity, 181 labor supply, 176 NAFTA, 362, 364–365 trade balance with US, 131 underground economy, 124 microeconomics defined, demand and supply analysis in, 5–6 macroeconomics vs., 118 Microsoft, 98 Microsoft Word, network effects for, 98 Middle East see also specific countries foreign exchange reserves, 414 natural resources, 178 terms of trade, 338 trade-to-GDP ratio, 340 minimum efficient returns to scale, 46 Minsky, Hyman, 216 Minsky moment, 216 Mitchell, Arthur F., 200 MNCs see multinational corporations Monetarist school, 217, 271, 276, 303 monetary accommodation, 322 monetary base, 438 monetary policy, 262–302 and aggregate demand, 153–154 central banks roles and responsibilities, 277–280 tools of, 283–285 and concept of money, 264–276 contractionary and expansionary policies, 296–297 and currency regime, 433 defined, 263 of developing countries, 292–293 evaluating, 301–302 exchange rate targeting, 293–296 and fiscal policy, 320–324 and inflation, 168 inflation targeting, 287–293 central bank independence, 288 credibility, 288–289 exceptions to inflation-targeting rule, 291–292 and monetary policy in developing countries, 292–293 transparency, 289–291 influence on economy, 262–264 limitations, 297–301 and New Classical school, 219 objectives, 280–283 of United Kingdom, 276 monetary transmission mechanism, 285–287, 297–298 monetary unions, 362, 365–366, 436 money, 264–276 creation process, 266–269 defined, 153, 269–270 demand for, 271–274 Fisher effect, 274–275 functions of, 265–266 and interest rates, 275 New Classical school models with, 219–221 New Classical school models without, 218–219 quantity theory of, 144, 270–271 supply and demand relationship, 272–274 surplus of, 235–236 velocity of, 144, 236 money creation, 266–269 money market, equilibrium in, 144–145 money multiplier, 268 money neutrality, 270–271, 274 money supply and aggregate demand/supply, 154 changes in, 272–274 and interest rates, 275 M2, 242, 243 real, 144–146 monopolist firms, 100–101 monopolistic competition, 83–87 see also imperfect competition benefits of trade for, 343–344 characteristics of, 67 defined, 65 demand analysis, 84–85 long-run equilibrium, 86–87 optimal price and output, 85 supply analysis, 85 I-12 Index monopoly, 97–105 about, 97–98 breakeven point in, 38–39 characteristics of, 67 defined, 66 demand, average, and marginal costs under, 37 demand analysis, 98–99 long-run equilibrium, 104–105 marginal revenue in, 29 optimal price and output, 101–102 price discrimination and consumer surplus, 102–104 supply analysis, 99–100 Montenegro, 436 Morgan, J P., 96 mortgage crisis (2007-2008), 277–278 MPC see marginal propensity to consume MPL see marginal product of labor MPS see marginal propensity to save MR see marginal revenue MSCI developed equity market index, 368–369 MTFS see Medium Term Financial Strategy Multi Fiber Agreement, 345 multinational corporations (MNCs), 341–342 N NAFTA see North American Free Trade Agreement NAIRU see non-accelerating inflation rate of unemployment Napoleonic Wars, 307 narrow money, 269 NARU see natural rate of unemployment Nash, John, 92 Nash equilibrium, 92–93, 96 NASSCOM, 354n.11 National Bureau of Economic Research (NBER), 203, 240 National Bureau of Statistics of China, 121 national debt, 307–309 see also government debt national income, 133, 377 National Income and Product Accounts (NIPA), 120 nationalization, of monopolies, 104 national welfare and export subsidies, 360 and tariffs, 357 natural level of output, 150 natural monopolies, 97–98, 104 natural rate of unemployment (NARU), 150, 234 natural resources see also raw materials and aggregate supply, 160, 161 and economic growth, 178 NBER see National Bureau of Economic Research Neoclassical school of economic thought, 213–214 Neo-Keynesians, 219 net exports, 140, 338 Netherlands banking supervision, 279 customs union, 362 EU membership, 362n.18 exchange rate regime, 436 imports in, 337 Netherlands Antilles, 294 net investment, 139–140 Netscape, 98 net tax rate, 314 network effects, in monopolies, 98 neutral rate of interest, 296 new classical macroeconomics, 217 New Classical school of economic thought, 217–221 New Keynesians, 219 new product bias, of price index, 228 New Zealand business investment, 177 current account imbalance, 380 exchange rate regime, 437 export subsidies, 359 inflation targeting, 287, 289–291 Policy Targets Agreement, 290–291 New Zealand dollar, 401, 418, 419n.4 Nintendo, 342 NIPA see National Income and Product Accounts nominal exchange rates, 402–406 nominal GDP, 124–127 nominal interest rates, 274–276 nominal wages, 157, 160 non-accelerating inflation rate of unemployment (NAIRU), 234 non-discretionary goods, 12 nondurable goods, 209 nonfinancial assets, purchase of, 376 non-price competition, 67 non-renewable resources, 178 normal goods defined, 15, 19 substitution and income effects on, 19–23 normal profit, 33 North Africa, trade-to-GDP ratio, 340 North American Free Trade Agreement (NAFTA), 362, 364–365 Northern Rock Bank, 277–278 Norway, 287, 437 Norwegian krone, 401 numeraire, 434n.10 O objectives of central banks, 280–281 of monetary policy, 280–283 of trade organizations, 386–388 OECD see Organisation for Economic Co-Operation and Development Office of the Comptroller of the Currency, 279 Office of the Superintendent of Financial Institutions, 278 official interest rate (official policy rate), 284 oil, supply and price of, 158 oligopoly, 87–96 characteristics of, 67 defined, 66 demand analysis and pricing strategies, 88–94 long-run equilibrium, 96 optimal price and output, 95–96 supply analysis, 94–95 Oman, 295 OPEC see Organization of Petroleum Exporting Countries open economies, 338 benefits of trade, 343 investment in, 378 national income identity, 377 open market operations, 283 operational independence, 287, 288 opportunity costs, 24, 77 optimal output in monopolies, 101–102 in monopolistic competition, 85 in oligopolies, 95–96 in perfect competition, 77–81 optimal price in monopolies, 101–102 in monopolistic competition, 85 in oligopolies, 95–96 in perfect competition, 77–81 options, in FX market, 410 orders, size/frequency of, 93 Organisation for Economic Co-Operation and Development (OECD) capacity utilization, 153 cyclically adjusted budget deficit, 317 economic indicators, 239 GDP reported by, 120 government liabilities/debt for, 308 government revenues/expenditures by, 303, 304 net borrowing/lending by, 305 spillover effects for, 364 trade-to-GDP ratio, 340, 341 Organization of Petroleum Exporting Countries (OPEC), 88, 93 Osborne, George, 379 OTC markets see over-the-counter markets output aggregate, 119–136 in economy, 119–120 in gross domestic product, 120–136 and costs, 31–35 full employment/natural level, 150 optimal in monopolies, 101–102 in monopolistic competition, 85 in oligopolies, 95–96 in perfect competition, 77–81 recessionary gap in, 205 value of final output method for GDP, 121–122, 132 outsourcing, 342 overall payroll employment, 224 over-the-counter (OTC) markets, 408 own price (term), own-price elasticity of demand, 9–14 calculating, 9–11 defined, extremes of, 11–12 predicting, 12–13 and total expenditure, 13–14 Index I-13 P Paasche index, 229 paired transactions, in BOP system, 374–376 Pakistan, 337 Panama, 436, 437 Papaconstantinou, George, 387 Paraguay, 362 participation ratio, 222 passive crawling peg currency regime, 439 patents, 97 payments see also balance of payments (BOP) system central banks in payments system, 279 forms of, 119 transfer, 129, 310–311 PCE see personal consumption expenditures PCE index, 229 PDI see personal disposable income peak phase (business cycle), 200–203, 207 per capita real GDP, 124 perfect competition, 68–83 breakeven point in, 38–39 characteristics of, 67 defined, 65 demand, average, and marginal costs under, 36–37 demand analysis, 69–76 and consumer surplus, 74–76 cross-price elasticity of demand, 73 elasticity of demand, 70–72 income elasticity of demand, 72–73 and innovation, 83 long-run equilibrium, 81–82 marginal revenue in, 29–30 and oligopoly, 96 optimal price in, 77–81 output optimization in, 77–81 revenue in imperfect vs., 35–36 shutdown decision in, 39–40 supply analysis, 76–77 perfectly elastic demand, 12 perfectly inelastic demand, 11 perfect price elasticity, 72 perfect price inelasticity, 72 personal consumption expenditures (PCE), 229 personal disposable income (PDI), 134 personal income, 133–134 Peru, 124, 287, 437 peso (Mexico), 401 Philippines Asian financial crisis, 343 exchange rate regime, 437 exports from, 342 inflation targeting, 287 physical capital aggregate supply, 160 defined, 139 and economic growth, 176–177 and labor productivity, 180 and long-term aggregate supply, 159, 160 pips, 425 Plaza Accord, 440 Poland, 287, 437 policy rate, 284 Policy Targets Agreement, 290–291 Porsche, 86 Porter, Michael E., 68 Porter’s five forces, 68 portfolio demand for money, 271 Portugal EU membership, 362n.18 exchange rate regime, 436 GDP vs GNP, 337 government debt, 262 Greek fiscal crisis 2010, 365–366 public sector spending, 263 potential GDP, 159 and demand-pull inflation, 235 and long-run equilibrium GDP, 163 measuring growth of, 179–181, 183–184 production function of, 174–175 pound (United Kingdom) see British pound PPF see production possibilities frontier PPI see producer price index PPP see purchasing power parity PRA see Prudential Regulation Authority precautionary money balances, 271 premiums, forward, 425 Prescott, Edward C., 217 price(s) aggregate, 273–274 and alternative trade policies, 360 asset, 444 autarkic, 338, 349 equilibrium, 77–78, 272–273 and equilibrium GDP, 163–173 aggregate supply and demand, 170–173 inflationary gap, 167–168 long-run equilibrium, 163 recessionary gap, 163–167 stagflation, 169–170 harmonised index of, 230 housing, 152, 155 input, 158, 160 optimal in monopolies, 101–102 in monopolistic competition, 85 in oligopolies, 95–96 in perfect competition, 77–81 relative, 231 stability of, 280 of stock, 155 substitution and income effects with, 20–23 two-sided, 419–420 world, 338, 339, 349 price collusion, 87–88, 93 price controls, 367 price currency, 401, 418 price discrimination, in monopolies, 102–104 price elasticity of demand see also elasticity(-ies) in oligopolies, 88 in perfect competition, 70–72 and trade balance, 445–449 price indexes, 227–233 constructing, 227–229 sub-indexes, 231 usage of, 229–231 price-specie-flow mechanism, 434 price takers, 66, 71–72 price wars, 88, 96 pricing by dominant firms in oligopolies, 94–95 and market structure, 66–67 in oligopolies, 88–94 two-part tariff, 103–104 prime lending rate, average, 241 producer price index (PPI), 230 producer surplus, 357, 360 product differentiation and market structure, 67 in monopolistic competition, 83–84 and price collusion, 93 production and alternative trade policies, 360 in autarky, 349 breakeven point of, 36–39 and costs, 23–25 globalization of, 342–343 scaling up vs scaling down, 44 production function, 174–175 production possibilities frontier (PPF), 350–351 productivity and aggregate supply, 160 in cost-push inflation, 234–235 defined, 23–25 diminishing marginal, 174–175 and economic growth, 175 indicators of, 224 of labor, 160, 180–184 and long-term aggregate supply, 160 and marginal returns, 23 total factor, 174, 178 profit accounting, 28 economic, 28, 29, 77, 85, 86 as form of payment, 119 in monopoly, 99–100, 102 normal, 33 profit maximization under imperfect competition, 40–41 and marginal revenue/costs, 29–30 points of production for, 36–37 and scale, 43–48 promissory note, 266 Provopoulos, George, 387 Prudential Regulation Authority (PRA), 278n.6 public sector spending, 263 purchasing managers indexes, 244 purchasing power parity (PPP), 402, 404 Q Qatar, 295 quality bias, 228 quantitative easing (QE), 322–323 and business cycle theories, 221 and deflation, 298–299 in Japan, 300 quantity equation of exchange, 270 quantity theory of money, 144, 270–271 quasi-fixed costs, 33 I-14 Index quota rents, 359 quotas, 359 defined, 356 and tariffs, 360–361 in textile industry, 345 R rand (South Africa), 401 raw materials, 158, 160 see also natural resources Rayovac, 64 R&D see research and development real (Brazil), 401 real business cycle models (RBCs), 218–220 real exchange rates, 402–406 real GDP, 124–127 and economic growth, 173 identifying recession with, 203–204 and international trade, 344 in Japan, 172–173 and shifts in aggregate supply/demand, 170–173 real income, 18–19 real interest rate, 140 real money accounts, in FX market, 412 real money supply, 144–146 receipts, government, 303–306 recession, 164n.16 defined, 201 identifying, 203–204 investor preferences, 202–203 recessionary gap, 163–167, 205 recognition lag, 318 recovery capital spending in, 206 unemployment rate in, 223 refinancing rate, 284 regional trading agreements (RTAs), 362–366 regression analysis, 106 regulation, of monopolies, 105–106 relative price, 231 renewable resources, 178 rent as form of payment, 119 in GDP, 123 repo rates, 284 repurchase agreements, 284 research and development (R&D), 178, 344 reserve banking systems, 153–154, 266–268 Reserve Bank of Australia, 280 Reserve Bank of India, 230 Reserve Bank of New Zealand, 287, 289, 290 Reserve Bank of New Zealand Act, 287, 290 reserve requirements, 367 of central banks, 268, 284–285 and monetary policy, 284–285 and money creation, 267 resources capital spending, 205–207 consumer behavior and use of, 208–210 cyclical use of, 204–210 inventory levels, 207–208 natural, 159–161, 178 non-renewable, 178 renewable, 178 restrictions, trade see trade restrictions retail accounts, in FX market, 413 retail sales, consumer spending and, 209 retaliation, price collusion and, 93 returns law of diminishing, 79 marginal, 23–28 and definition of productivity, 23–25 law of diminishing marginal returns, 23 and total/average product of labor, 25–28 to scale, 45, 46 revenue average, 35 marginal and marginal cost/profit maximization, 29–30 in monopolies, 98–102 in monopolistic competition, 85–87 in oligopolies, 90, 91, 94, 96 in perfect competition, 70, 78–79 and price elasticity, 73–74 total in oligopoly, 90 under perfect and imperfect competition, 35–36 and price elasticity, 73–74 in shutdown analysis, 41–42 revenue sufficiency, of tax policy, 312 Rhone-Poulenc, 105 Ricardian equivalence, 316 Ricardian model, 343, 354–355 Ricardo, David, 316, 354 Riksbank, 289 risk premium, for inflation, 275 Robinson, Joan, 65 Roche, 105 Rolex, 98 Romania, 287 RTAs see regional trading agreements ruble (Russia), 401 rupee (Indian), 401 Russia, 343, 359, 436 Russian ruble, 401 S sales and consumer spending, 209 final, 207 inventory–sales ratio, 207, 241 manufacturing, 241 trade, 241 sales and purchases of non-produced, non-financial assets sub-account, BOP, 372 San Marino, 436 SATC curve see short-run average total cost curve Saudi Arabia, 294, 436 saving household, 134, 137 marginal propensity to save, 139 and trade balance, 444–445 wealth effect on, 152 saving–investment differential, 141–143 saving rate, household, 134, 152, 209 Say, J B., 213 Say’s law, 213 scale diseconomies of, 44–47 economies of, 44–47 and profit maximization for firms, 43–48 scaling down, 44 scaling up, 44 Schumpeter, Joseph A., 83, 213–214 Schwab, Charles M., 96 SDR see special drawing right second-degree price discrimination, 103 second-order conditions, for profit maximization, 30 sectors, economic see economic sectors seigniorage, 439 sellers, number/size of, 93 sell-side participants, FX market, 412, 414–415 Serbia, 287 services change in CPI for, 242 consumer spending on, 209 GDP and value of, 123–124 services sub-account, BOP, 371 Shell, 107 shoe leather costs, 282 short-run aggregate supply, 157–158 business taxes and subsidies, 158 defined, 148–149 exchange rate, 158 expectations about future prices, 158 input prices, 158 nominal wages, 157 short-run aggregate supply (SRAS) curve, 148–149, 157–158 short-run average total cost (SATC) curve, 44, 45 short-run cost curves average total cost curve, 44, 45 profit maximization for firms on, 43–44 time frame for, 43 total cost curve, 43–44 short-run cost schedule, in perfect competition, 80 short-run demand, elasticity of, 12 short-run equilibrium, in perfect competition, 81 short-run marginal cost (SMC), 30, 36–37 short-run total cost (STC) curve, 43–44 shutdown analysis, 28–43 breakeven analysis, 38–41 economic vs accounting cost, 28 interaction of costs and output, 31–35 marginal revenue, marginal cost, and profit maximization, 29–30 profit maximization, breakeven, and shutdown points, 36–37 revenue under perfect vs imperfect competition, 35–36 shutdown decision, 39–40 shutdown point, 36–37, 40 Index I-15 Singapore Asian financial crisis, 343 effects of global recession, 165, 166 exchange rate regime, 437 external trade sector, 211 Singapore dollar, 401 Singha Co., 88 Slovak Republic, 362n.18, 436 Slovenia, 362n.18, 436 small country (term), 356 SMC see short-run marginal cost Smith, Adam, 354 Smithsonian Agreements, 435 social policies, taxes and, 313 Solow, Robert, 175 source country, FDI, 341 South Africa, 287, 337, 437 South African rand, 401 Southeast Asia, 368–369 see also specific countries Southern Cone Common Market (MERCOSUR), 362 South Korea Asian financial crisis, 343 business investment, 177 disinflation, 227 effects of global recession, 166 exchange rate regime, 437, 441 government spending, 129 inflation targeting, 287, 289 labor productivity, 181 national debt, 309 natural resources, 178 underground economy, 124 South Korean won, 401 sovereignty, regional trade agreements and, 365 sovereign wealth funds (SWFs), 414 S&P 500 Index earnings, 400 as leading indicator, 240, 242 Spain business investment, 177 disinflation, 227 EU membership, 362n.18 exchange rate regime, 436 gold standard for, 434n.11 government spending, 130 Greek fiscal crisis 2010, 365–366 inflation targeting, 287 labor productivity, 181 underground economy, 124 wealth effect, 152 special drawing right (SDR), 387n.29 specialization, international trade and, 343 speculation, in FX markets, 407 speculative demand for money, 271 speculative money balances, 271 spending business, 153, 202 capital, 205–207, 314 consumer, 153, 202, 208–210 consumption, 138–139 government, 129–130 and aggregate demand, 137–138, 155 current, 311 and fiscal policy, 153 and taxes, 314–315 investment, 139–140, 146–147 public sector, 263 spillover effect, of education, 176 spot exchange rates, 410–412, 428–430 spot transactions, in FX market, 407 SRAS curve see short-run aggregate supply curve SRATC see short-run average total cost curve Stackelberg model, 94 stagflation and aggregate supply, 169–170 defined, 226 and inflation expectations, 236 Standard & Poor’s, ratings of, 365 statistical discrepancies, in GDP, 132 Statistics Canada, 121, 132, 133 STC curve see short-run total cost curve Sterling exchange rate, 418 Sterling–yen exchange rate, 419 stock prices, aggregate demand and, 155 Strauss-Kahn, Dominique, 386 structural budget deficit, 317 Subaru, 86 sub-indexes, price, 231 Sub-Saharan Africa growth spillovers, 364 trade-to-GDP ratio, 340 subsidies export, 356, 359–361 in monopolies, 104 and short-run aggregate supply, 158, 160 substitutes, 15, 16, 71, 73 substitution, import, 352n.10 substitution bias, 228 substitution effects on elasticity of demand, 12 on Giffen and Veblen goods, 21 and law of demand, 18–19 on normal and inferior goods, 19–23 in perfectly competitive markets, 69 with price decrease, 20–23 sum of value added method, for GDP, 121–122, 132 sunk costs, 28 supply see also demand and supply analysis aggregate and AS curve, 148–150 defined, 136 and global recession, 165–167 and imports/exports, 338–339 investment strategies for shifts in, 169–170 long-run, 148–150, 159–161 in perfectly competitive market, 81 in real business models, 218–219 shifts in, 150–151, 157–162 shifts in demand and, 170–173 short-run, 148–149, 157–158 and stagflation, 169–170 elasticity of, excess, 339 money, 154 changes in, 272–274 and interest rates, 275 M2, 242, 243 real, 144–146 in monopolies, 99–100 in monopolistic competition, 85 in oligopolies, 94–95 in perfect competition, 76–77 supply chains, global, 343 supply curves aggregate, 148–150, 157–162, 171–172 in monopolistic competition, 85 supply shock to inflation rate, 297 surpluses budget, 304 consumer and alternative trade policies, 357, 360 in monopoly, 102–104 in perfect competition, 74–76 and tariffs, 357 in current account, 377, 379–381 of money, 235–236 producer, 357, 360 trade, 338 Survey of Current Businesses (US Department of Commerce), 121 sustainable growth, 173, 179–185 and fixed-income investments, 184–185 and labor productivity, 181–182 measures of, 182 rate of growth in potential GDP, 183–184 swap funding, 409–410 swap points, 426 swap rates, 426–430 swaps, FX, 409–410 swarming, 83 Sweden banking supervision, 279 disinflation, 227 exchange rate regime, 437 government spending, 130 inflation targeting, 287, 289 labor productivity, 181 underground economy, 124 Swedish Financial Supervisory Authority, 279 Swedish krona, 401 SWFs see sovereign wealth funds Swiss franc, 401, 418, 420 Swiss franc exchange rate, 418 Swiss National Bank, 413 Switzerland banking supervision, 279 exchange rate regime, 437 growth spillover, 364 Syria, 436 T Taiwan Asian financial crisis, 343 comparative advantage, 352–353 effects of global recession, 166 globalization of production, 342 Tankan Survey, 242, 244 target independence, 288 target zone currency regimes, 436, 439 tariffs, 356–361 analysis of, 358–359 defined, 356 GATT, 382, 385 and quotas/VERs, 360–361 two-part tariff pricing, 103–104 I-16 Index taxes and aggregate demand, 140, 153, 155 attributes of tax policy, 311–312 direct, 311, 314 and fiscal policy, 303–304, 312 and government spending, 314–315 indirect, 311, 313 net tax rate, 314 and short-run aggregate supply, 158, 160 and social policies, 313 tax reform, 312 TCs see total costs technology and aggregate supply, 160 and comparative advantage, 354 and economic growth, 175–178 and labor productivity, 180 and long-term aggregate supply, 160 telephone utilities, 100, 105 television broadcasting, 65 temporary workers, use of, 224 terms of trade, 337–338 textile industry, 345–346 TFC see total fixed cost TFP see total factor productivity ThaiBev, 88 Thailand Asian financial crisis, 343 beer industry, 87, 88 currency regime, 437 exchange rate targeting, 294 globalization of production, 342 inflation targeting, 287 Thatcher, Margaret, 276 theory of the consumer, theory of the firm, third-degree price discrimination, 103 tight fiscal policy, 321 tight monetary policy, 321 TIPS see Treasury Inflation-Protected Securities tobacco industry, 87–88 total costs (TCs) average with economies of scale, 45–46 interactions of other costs and output with, 31–35 in perfect competition vs monopoly, 36–37 fixed, 31–35, 41–42 and other costs/output, 31–35 of production, 24 variable, 31–35, 41–42 total expenditure(s) and aggregate income, 137–144 and consumer surplus, 75–76 and own-price elasticity of demand, 13–14 total factor productivity (TFP), 174, 178 total fixed cost (TFC) interactions of other costs and output with, 31–35 in shutdown analysis, 41–42 total product of labor, 25–28 total revenue (TR) in oligopoly, 90 under perfect and imperfect competition, 35–36 and price elasticity, 73–74 in shutdown analysis, 41–42 total value, consumer surplus and, 75 total variable cost (TVC) interactions of other costs and output with, 31–35 in shutdown analysis, 41–42 Toyota, 86 TR see total revenue trade see also international trade and alternative trade policies, 360 free, 338, 343–344 gains from, 349–352 inter-temporal, 377, 378 intra-industry, 343 terms of, 337–338 trade agreements common markets, 362 economic unions, 362 export subsidies, 359–361 trading blocs, 362–366 trade balance absorption approach, 449–450 balance of trade deficit, 130, 338 in business cycles, 211–212 and capital account, 444 elasticities approach, 445–449 and GDP, 130–131 and saving/expenditures, 444–445 trade creation, 363–364 trade diversion, 364 trade organizations, 381–388 function and objectives, 386–388 International Monetary Fund, 382–384 World Bank Group, 384–385 World Trade Organization, 385–386 trade protection, 338 trade restrictions, 356–369 capital restrictions, 366–369 quotas, 359–361 tariffs, 356–361 trade sales, 241 trade sector, 130–131, 211–212 trade surplus, 338 trade-to-GDP ratio, 339–342 trading blocs, 362–366 transactions, BOP, 369 transactions money balances, 271 transfer payments, 129, 310–311 transparency, of inflation targeting, 289–291 Treasury Inflation-Protected Securities (TIPS), 230 triangular arbitrage, 423 trough phase (business cycle), 200, 201 Turkey business investment, 177 exchange rate regime, 437 inflation targeting, 287 labor productivity, 181 turnover, in FX market, 415–416 TVC see total variable cost two-part tariff pricing, 103–104 two-sided prices, 419–420 two-week repo rate, 284 U UBS, 412, 414 Ukraine, 226, 437 ULC see unit labor cost uncertainty, inflation, 282–283 underemployed, 222 underground economy, 123–124 unemployed, 222 unemployment analyzing, 224–225 and business cycles, 221–225 and international trade, 344 natural rate of, 150, 234 non-accelerating inflation rate of, 234 and overall payroll employment, 224 and real business cycle models, 218 and regional trade agreements, 364–365 in stagflation, 169–170 unemployment insurance, 240 unemployment rate, 223–224 unexpected inflation, 281–283 unilateral transfers sub-account, BOP, 371 United Kingdom banking supervision, 279 budget deficit, 379 business investment, 177 comparative advantage, 348–351, 355 currency regime, 434, 435, 437 cyclically adjusted budget deficit, 317 disinflation, 227 excess demand/supply of cars, 339 exchange rate targeting, 293, 294 expected inflation, 282 fiscal policy, 314 government cash flows, 305–306 government liabilities/debt, 262, 308 government revenues/expenditures, 303, 304 housing prices and saving rate, 152 inflation targeting, 287–289 investment spending, 140 labor productivity, 181 monetary policy, 276, 293 money measures, 270 national debt, 307, 309 net borrowing/lending, 305 public sector spending, 263 wealth effect, 152 United Nations Conference on Trade on Employment, 382 United Nations Monetary and Financial Conference, 382 United States antitrust violations, 105 balance of payments, 372–373 banking supervision, 279 business investment, 177 capital goods expenditures, 128 capital-to-labor ratio, 175 consumption expenditures, 139 CPI, 229, 230 currency regime, 434, 437 current account deficit, 377, 380, 381 cyclically adjusted budget deficit, 317 deflation/disinflation, 226, 227 economic indicators, 240–242, 244–245 Index I-17 expected inflation, 282 external trade sector, 211–212 fiscal policy in 2009-2010, 314 foreign direct investment, 341, 342 globalization of production, 342 global recession, 165–167 government liabilities/debt, 262, 308 government revenues/expenditures, 303, 304 government spending, 129 gross domestic product, 120–121 forecasts, 184–185 potential, 183 imports in, 337 and inflation targeting, 292 investment spending, 140 and ITO charter, 382 labor productivity, 181 labor supply, 176 money measures, 269 NAFTA, 362, 364–365 national debt, 309 national income, 133n.7 natural monopolies, 104 net borrowing/lending, 305 public sector spending, 263 quantitative easing, 298, 299 stagflation, 169, 236 television broadcasting, 65 textile industry, 345–346 tobacco industry, 87–88 underground economy, 124 unemployment rate, 223 VERs in, 359 wealth effect, 152 US Bureau of Labor Statistics (BLS), 223, 345 US Department of Commerce, 120–121 US dollar, 401 CAD/USD currency pair, 416 CNY/USD exchange rate, 403–404 cross-rate calculations with, 421–422 as currency anchor, 436–437, 439, 440 exchange rate quotes with, 418–421 as exchange rate target, 294 foreign exchange reserves, 413–414 forward calculations with, 425–426 gold standard for, 434 JPY/USD currency pair, 416 USD/AUD currency pair, 416 USD/EUR currency pair, 416 USD/EUR exchange rate, 409 USD/GBP currency pair, 416 US Federal Reserve banking supervision by, 279 “Beige Book,” 244 CPI-U use by, 230 and dollarized currency regimes, 437–438 independence of, 288 inflation targeting by, 292 intervention in FX market, 440 measures of money, 269 monetary policy, 153–154, 169, 185 objectives of, 280 quantitative easing by, 298, 299 in recession (2007-2009), 167 United States Steel Corporation (US Steel), 96 US Treasury, 167 US v DuPont, 73n.4 unit elastic (unitary elastic), 71 unit elastic demand (unitary elastic demand), 10 unit labor cost (ULC), 234, 241 Uruguay, 362, 439–440 V value and consumer surplus, 74–76 of goods and services in GDP, 123–124 marginal value curve, 75 measure of, 266 store of, 265–266 total, 75 value of final output method, 121–122, 132 variable costs average defined, 30 in perfect competition vs monopoly, 36–37 and shutdown decision, 39–40 defined, 30 total, 31–35, 41–42 variety, monopolistic competition and, 86, 87 Veblen, Thorstein, 21 Veblen goods, 21 velocity of money, 144, 236 Venezuela, 436 VERs see voluntary export restraints vertical demand schedule, 72 vertical equity, 312 Vietnam, 436 virtuous circle, 352 volatility, of exchange rates, 432, 435 Volkswagen, 86 voluntarily unemployed (term), 223 voluntary exchange, 343 voluntary export restraints (VERs), 356, 359–361 von Hayek, F., 214 von Mises, L., 214 W wage-push inflation (cost-push inflation), 233–235 wages, nominal, 157, 161 Wal-Mart, 46 wealth household, 151–152 store of, 265–266 wealth effect, 151–152 White, Harry Dexter, 434 wholesale price index (WPI), 230 won (South Korea), 401 World Bank Group foreign currency of, 413 founding of, 382 and globalization, 339 and IMF, 382 mandates of, 384 World Development Report, 340 World Development Report, 340, 364 World Investment Indictors, 342 The World Is Flat (Friedman), 64 world price, 338, 339, 349 World Trade Organization (WTO) agreements under, 363 founding of, 382 functions of, 385–386 and globalization, 339 quotas on non-members, 359 termination of Multi Fiber Agreement, 345 World War I, 226, 307, 367 World War II, 226, 307 WPI see wholesale price index WTO see World Trade Organization Y yen (Japan) see Japanese yen yuan (China) see Chinese yuan Yugoslavia, 226 Z Zimbabwe, 226–227 WILEY END USER LICENSE AGREEMENT Go to www.wiley.com/go/eula to access Wiley’s ebook EULA ...© 20 18, 20 17, 20 16, 20 15, 20 14, 20 13, 20 12, 20 11, 20 10, 20 09, 20 08, 20 07, 20 06 by CFA? ?Institute All rights reserved This copyright covers material written expressly for this volume by the editor/s... Quantitative Easing and Policy Interaction The Importance of Credibility and Commitment Summary Practice Problems Solutions 25 9 26 0 26 2 26 2 27 5 27 8 International Trade and Capital Flows Introduction ... elasticity coefficient Using our hypothetical original price of €1.48, we can find the quantity associated with that particular price by inserting 1.48 into the demand function as given in Equation 3: