Principles of macro economics

Week 1 – introduction

Y = GDP contains:
C = consumption, goods and services purchased by consumers.
I = With investments the book refers to the purchase of new capital goods (new machines). (Financial
investments are the investments in financial assets)
G = government spendings and purchases. (G and T are both part from the fiscal policy.)
Net exports: E – IM (exports – imports).
Inventory investments are the goods a country produces more than it sells. If this is ignored. Y=Z.

Also, Z(demand) = C + I + G + X – IM

C = c0 + c1YD YD = disposable income.

YD = Y – T = income – tax

Endogenous variables: the variable that depends on another variable(s) and is therefore explained
with the model.
Exogenous variables: the variable that is stated in the formula.
A bar above a specific variable tells us that it is stated and cannot be changed.
xpa
Private saving = Y – T – C
Public saving = T - G

The term [c0 + I + G - c1T] is the part of the demand for goods that does not depend on output. For
this reason, it is called autonomous spending.

Because demand equals income, the graph of these variables is 45 degree, Z = Y.

The function of ZZ : Z = (c0 + I + G - c1T) + c1Y, is an upward sloping line which slope depends on the
c1. This number is always between 0-1. Because demand and production are not fixed but change
with income. A change in Z always causes a greater change in Y-Y’ than the initial change in c0. This is
called the multiplier effect.
 First increase of c0 = 1
 Z increases with 1
 Y increases with 1 because Z = Y.
 Z increases with c1*1
 Y increases with c1*1
 Z increases with c1*c1*1.

Financial markets
: if nominal income were to increase by 10%, it is reasonable to think that the euro value of
transactions CHAPTER 4 FINANCIAL MARKETS: I 77 in the economy would also increase by roughly
10%. So, we can write the relation between the demand for money, nominal income, and the interest
rate as: Md= (EURO)YL(i)

an increase in the supply of money by the central bank leads to a

decrease in the interest rate. The decrease in the interest rate
increases the demand for money so it equals the now larger money
supply.
Principles of macro economics

If a central bank wants to increase the amount of money in the economy, it buys bonds and pays for
them by creating money.

By buying bonds, bonds prises go up, so interest price will fall because when a lot of people want a
bond, the government can pay low interest prices, people are more encouraged to invest in their
own and consume more, which will stimulate economic activity which drives up inflation.
Principles of macro economics

In words: for a given money supply, an increase in nominal income

leads to an increase in the interest rate. The reason: at the initial
interest rate, the demand for money exceeds the supply. The
increase in the interest rate decreases the amount of money people
want to hold and re-establishes equilibrium.

Expansionary open market operation: the central bank increases (expands) the supply of money.
Contractionary open market operation: the central bank decreases (contracts) the supply of money.

The interest rate of a bond can be calculated by i=(new-old)/old  (return of money – Pb)/Pb

Liquidity trap: when low interest rates do not result in higher spendings, so despite the low interest
rates, people still hold money in reserves and money assets

The IS-relation is a condition on the goods market: what firms want to invest must be equal to what
people and the government want to save.

Investment on the supply side (firm) depends on two variables: I=I(Y,i)

 Interest rate
 Levels of sales

the increase in the interest rate decreases investment. The decrease in investment leads to a
decrease in output, which further decreases consumption and investment, through the multiplier
effect.

LM is a relation for the financial market. It states that interest rates are
fixed: i=i.

Fiscal policy:
A reduction in the budget deficit, achieved either by increasing taxes, or by decreasing spending, or
both, is called a fiscal contraction or a fiscal consolidation. The other way around is called fiscal
expansion.
Monetary policy
monetary expansion is a decrease in interest rates. The other way around is called monetary
contraction.

Make sure you remember equation (6.4). It says that the real interest rate is (approximately) equal to
the nominal interest rate minus expected inflation.
Principles of macro economics

Risk premium: the extra amount of money someone has to pay for compensating the extra amount
of risk.
x = (1 + i) p/(1 - p) So, for example, if the interest rate on a riskless bond is 4% and the
probability of default on the risky bond is 2%, then the risk premium required to give the same
expected rate of return as on the riskless bond is 2.1%. Fill in i=0.04 and p=0.02 gives x=0.021

The leverage ratio of a bank is defined as the ratio of assets to capital. 100/20=5.

A bank can go bankrupt when the following occasions are happening:

 Investors are in doubt whether their investment will be profitable and decide to take out
their investments. So, the assets are taken back.
 The amount of capital of the bank is all taken out and more is demanded to pay back to
investors. This is impossible because lenders do not want to pay back the money now.
 Banks are selling their assets at a dislocated low price: fire sales
 And so on.

To extend the IS-LM model:

First, we must distinguish between the nominal interest rate and the real interest rate. Second, we
must distinguish the policy rate set by the central bank and the interest rates 124 THE CORE THE
SHORT RUN faced by borrowers. As we saw, these interest rates depend both on the risk associated
with borrowers and on the state of health of financial intermediaries. The higher the risks, or the
higher the leverage ratio of intermediaries, the higher the interest rate borrowers have to pay. We
capture those two aspects by rewriting the IS-LM in the following way:
IS relation: Y = C(Y - T) + I(Y,i – pe + x) + G
LM relation: i = i

Chapter 7 about unemployment

The reason economists rather look at employment than unemployment is because the term
unemployed people do not include the discouraged workers, which are the people who are not
actively searching for work but accept one if offered.

Two assumptions when unemployment rate is high:

 When unemployment is high, it usually indicates a weakened economy. Businesses may be
struggling, leading them to cut costs and reduce their workforce. In such situations, workers
face a higher probability of becoming unemployed due to several reasons:
 Unemployed workers face a lower probability of becoming employed; equivalently, they can
expect to remain unemployed for a longer time.

Collective bargaining: bargaining between firms and unions

Wages are based on the unemployment rate, when unemployment rate is high, wages are rather low
because bargaining power is low because there are many other who want to work. In a work
environment where there are many other jobs where the worker can go to, the worker also has more
bargaining power.

Economists call the theories that link the productivity or the efficiency of workers to the wage they
are paid efficiency wage theories.

We can capture these thoughts in the following formula for wage:

W = Pe F(u, z)
Principles of macro economics

Pe= expected price level

U = unemployment rate
Price level affect nominal wages because but both workers and firms care about real wages, not
nominal wages.

Production function: Y=AN

Y = production
A = productivity
N = number employed

Price function: P = (1 + m)W

P = price
W = wage
m =markup
firms want to make profit (m) so the prices are wages + m*W (a part of the wage).
If dividing both sides by nominal wage we get: P/W = 1 + m
Then invert both sides: W/P = 1/(1 + m)
Note what this equation says: price-setting decisions determine the real wage paid by firms. An
increase in the mark-up leads firms to increase their prices given the wage they have to pay;
equivalently, it leads to a decrease in the real wage.
So, the higher the mark-up set by firms, the lower your (and everyone else’s) real wage will be. This is
what is said what the W/P = 1/(1+m) equation says.

W = Pe (1 – au + z) =  W = Pe F(u,z)
a is a parameter
With the assumption that expected inflation equals current inflation level P=Pe we get
P = Pe (1 + m)(1 - au + z)
pi = pie + (m + z) – au
pt = pet + (m + z) - aut
original Phillips curve: high level of unemployment  low inflation level

Expected inflation is a very important factor in determining the inflation rate. Over time another
important factor was developed, last year’s inflation rate, the more important this factor is, the
higher 0 with a line. When 0 is positive we use:

When 0 equals 1 we use:

This is not a relation between inflation rate and unemployment rate, but it is a relation between
change in inflation and unemployment rate.

accelerationist Phillips curve: to indicate that a low unemployment rate leads to an increase in the
inflation rate and thus an acceleration of the price level.

The natural rate of unemployment is the unemployment rate at which the actual price level is equal
to the expected price level.

If you take this equation: and include the assumption that inflation
rate equals actual inflation rate, then this equation follows: 0 = (m + z) - aut

Solving this gives:

Principles of macro economics

It says, the higher the markup and z, the higher the natural unemployment rate.

It says that, if unemployment is at the natural rate, then inflation

will be equal to expected inflation. If unemployment is below the natural rate, inflation will be higher
than expected.

By definition (see Chapter 7), the natural rate of unemployment is the unemployment rate at which
the actual price level is equal to the expected price level.

Phillips curve sets out unemployment against inflation.

Benefits of inflation:
 Safety margin away from deflation.
 Redistribution between sectors/persons without nominal correction.

Demand shock is a change in IS or LM

Supply shock is a change in wage setting price setting

Upward shift of the ps curve along the ws curve results in a downward shift of the Phillips curve.

Borrowing and investing:

(1 + i) = (1-p) (1 + i + x) + p(0)
Principles of macro economics

P is the probability that the bond does not pay at all (the bond issuer is bankrupt) and has a zero
return; i is the nominal policy interest rate; x is the risk premium.
Borrower rate = r + x
The maturity transfer by commercial banks is: The situation that commercial banks borrow short and
lend long.
Principles of macro economics

Lecture 5 – chapter 11
There are two reasons why we cannot only use exchange rates for comparing output per person
amongst countries with different currencies:
 exchange rates fluctuate a lot
 In some countries the purchasing power is lower than in other countries, so in country a
there can be bought a lot more for 100 dollar than in country B for 100 dollar.

Purchasing power across countries and time is called purchasing power parity.

Three remarks on measuring growth:

 Because the ratio of consumption to output is rather similar across countries, the ranking of
countries is roughly the same, whether we use consumption per person or output per
person.
 Some countries work fewer hours than others. Those countries can be as productive as other
countries but simply just work fewer hours. So, output per person is lower.
 Measuring happiness is also good.

Graph with investment per worker, output per worker, depreciation per worker.
Saving do matter, that’s mainly for the short run.
If we want to maintain high growth rates, we have to keep savings increasing.

Solow growth model:

 Has a concave shape because,
 Higher savings would increase growth in the short term, but will then fall back to the original
place of innovation. Because if you would keep increasing investments, you would get an
consumption surplus which is not demanded.
 Capital accumulation would not make much sense because output would not grow too much
and would not pay out because the expenses will be higher compared the increase in output.
 You can achieve growth through innovation.
 Steady state position: when investment is the equals deprivation.
 Growth of y = growth of techniques + growth of workers

The aggregate production function is Y = F (K, N). Aggregate output (Y ) depends on the aggregate
capital stock (K ) and aggregate employment (N).

constant returns to scale: If the scale of operation is doubled – that is, if the quantities of capital and
labour are doubled – then output will also double.

Decreasing returns to labour: if an increase in labour, results in a smaller and smaller return of
output.

Where does work come from?

 Increases in output per worker (Y/N) can come from increases in capital per worker (K/N). As
(K/N) increases – that is, as we move to the right on the horizontal axis – (Y/N) increases.
 Or it can lead from an improvement in the state of technology.
Resulting we can think of growth coming from two sources: from capital accumulation and from
technological progress. We will see, however, that these play different roles in growth.
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Principles of macro economics

The expected present discounted value of a sequence of future payments is the value today of this
expected sequence of payments.

Graph on value of money regarded to interest rates.

The expected present discounted value of this expected sequence of payments is given by:

This figure has two implications:

 An increase in €z or an increase in future €ze an increase in V
 An increase in i or an increase in future ie  a decrease in V.
Inflation is assumed to be constant which result in the same formula but then squared (1+i)x
For example, with an interest rate equal to 10%, the weight on a payment 10 years from today is
equal to 1/(1 + 0.10)^10 = 0.386, so that a payment of €1,000 in 10 years is worth €386 today.

Assuming the money that is being paid per year is constant, we can replace it to the front and this
results:

Suppose you have just won €1 million from your state lottery and have been presented with a 6-foot
€1,000,000 cheque on TV. Afterwards, you are told that, to protect you from your worst spending
instincts as well as from your many new ‘friends’, the state will pay you the €1 million in equal yearly
instalments of €50,000 over the next 20 years. What is the present value of your prize today? Taking,
for example, an interest rate of 6% per year, the preceding equation gives V = :50,000(0.688)>(0.057)
= or about :608,000. Not bad, but winning the prize did not make you a millionaire.

If the payment per year is forever, this equation can be recalled:

For example, the present value of a constant sequence of payments €z is simply equal to the ratio of
€z to the interest rate i. If, for example, the interest rate is expected to be 5% per year forever, the
present value of a consol that promises €10 per year forever equals :10/0.05 = :200. If the interest
rate increases and is now expected to be 10% per year forever, the present value of the consol
decreases to :10/0.10 = :100.

To find out what the real value is of V, divide €V by the price levels.
Principles of macro economics

Bond prices are dependent on several factors. 1. Maturity, is the length of time over which the bond
promises to make payments to the holder of the bond. Bonds of different maturities each have a
price and an associated interest rate called the yield to maturity, or simply the yield. 2. Risk, the risk
that the issuer of the bond (it could be a government or a company) will not pay back the full amount
promised by the bond.

Arbitrage implies that the price of a two-year bond today is the present value of the expected price
of the bond next year.

Firms finance themselves in four ways:

 Internal finance: this is what they use from their own profits.
 External finance: this is what they receive through banks and loans.
 Debt finance: this is what they receive from bonds and loans.
 Equity finance: exchanging money for stocks of their firm.

Stocks pay dividends every year out of the profit of the company. Calculating what next yeas value of
a stock is can be used with this formula:

eventually turning into this with the risk taken

into consideration:
Principles of macro economics

To reason why the stock prices fully depend on future expectations assume that because the
economy is in a recession, the ECB will decrease the interest rate. Three things can happen to the
stock prices:
1. Stock prices increase after the announcement, this will happen when the move of the ECB is
unexpected. Investors were not able to anticipate on this decision so who buys first, makes
the most profit.
2. Stock prices will not react after the announcement. This will happen if the move was
expected and investors already anticipated on it, then the stock prices already went up to the
point at which investors expect to make profit.
3. Stock prices may go down. If stock market participants believe that the central bank is acting
because it knows something they don’t, namely that the economy is much worse than they
thought, they might conclude that, on net, lower interest rates will not be enough to offset
the bad news. They might then lower their forecasts of output and of dividends, leading to a
decrease in stock prices.

Movements of stock prices do not only come from news for two reasons: the first is that there is
variation over time in perceptions of risk; the second is deviations of prices from their fundamental
value, namely bubbles or fads.
rational speculative bubbles: This process suggests that stock prices may increase just because
investors expect them to.
Fads: if a stock price is different from its value for no reason.
Principles of macro economics

Lecture 16
Human wealth: after-tax labour income was likely to be over their working life and compute the
present value of expected after-tax labour income
Non-human wealth:
 Financial wealth: the value of stocks and bonds and their demand and savings account.
 Housing wealth: the value of the house they own minus the mortgage still due and the goods
the consumer may own.
When this is all added up, they have their total wealth. After this they decide how to consume and
how much they spend.

Consumption depends on total wealth, income and taxes:

Expectations affect consumption in 2 ways:

 Expectations affect consumption indirectly through non-
human wealth.
 Expectations affect consumption indirectly through human
wealth

This dependence of consumption on expectations has, in turn, two

main implications for the relation between consumption and income:
 Consumption is likely to respond less than one-for-one to
fluctuations in current income
 Consumption may move even if current income does not
change.

Investment
When investing in a machine, it loses its usefullness with & per year because there will come new
more efficient ways to produce, so the value of the profit decreases with (1-&) per year.
Denote expected profit per machine in year t + 2 by Πe t + 2. Because of depreciation, only (1 - d) of
the machine is left in year t + 2, so the expected profit from the machine is equal to (1 - d)Πe t + 2.
The present value of this expected profit as of year t +2 is equal to:

Putting the pieces together gives us the present value of expected profits from buying the machine in
year t, which we shall call VΠe t:

Under the assumption that the future profit and real interest rates will be the same as the present,
function 16.3 becomes:
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The present value of expected profits is simply the ratio of the profit rate – that is, profit per unit of
capital – to the sum of the real interest rate and the depreciation rate. Replacing (16.5) in
equation (16.4), investment is given by:

Investment depends on the ratio of profit to the user cost. The higher the profit, the higher the level
of investment. The higher the user cost, the lower the level of investment.

In conclusion: investment depends both on the expected present value of future profits and on the
current level of profit.

How investment and consumption are treated in this section may look similar, but there are
differences:
 The theory of consumption developed previously implies that, when consumers perceive an
increase in income as permanent, they respond with, at most, an equal increase in
consumption. The permanent nature of the increase in income implies that they can afford to
increase consumption now and in the future by the same amount as the increase in income.
Increasing consumption more than one-for-one would require cuts in consumption later, and
there is no reason for consumers to want to plan consumption this way.
 Now consider the behaviour of firms faced with an increase in sales they believe to be
permanent. The present value of expected profits increases, leading to an increase in
investment. In contrast to consumption, however, this does not imply that the increase in
investment should be, at most, equal to the increase in sales. Rather, once a firm has decided
that an increase in sales justifies the purchase of a new machine or the building of a new
factory, it may want to proceed quickly, leading to a large but short-lived increase in
investment spending. This increase in investment spending may exceed the increase in sales.

Capital per output is an important principle to understand, this means that the per 1 sold product, 5
capital is invested. Firms often want to keep this ratio somewhat the same. So, if output increases,
invested capital must increase too. If the expected output is believed to permanently increased, firms
often want to invest on beforehand.
Principles of macro economics

Chapter 17

Static expectations: Y1e = fixed

Adaptive expectations Y1e = Yt+1
Rational expectations Y1e = F( sum of all information available)

If you take all the new inputs in consideration in the IS-LM model, the correlation between the
current output (Y) and current interest rate (r) is much weaker, so the IS curve is limited??

Problem with an analysis of IS-LM is that you can interpret the changes in different ways. An
reduction of the current interest rate can suggest that the market will be booming so people start
investing, or that the ECB has number on economic growth that we do not have and they think we
will experience an economic shrinkage.

Start equi, so natural u level etc

Increase tax
IS curve to left
Lower position Phillips curve
Anables ecb to decrease interest rate
Medium rum lm cut shift down
Same output
Higher savings and investments
Ultimately the announcement of the government can lead to IS shift to the right
Because is people expect that investments are going to increase
I am going to invest now because that will happen eventually
Increase consumption because output will improve
 Is only right if people have this knowledge

Essential variables in the IS curve:

 Timing: cutting expenses versus increasing taxes.
 Composition: cutting expenses versus increasing taxes.
 The (financial markets analysis of the) initial situation.
 Monetary policy response.

Lets define private spending as a function of consumption and investment:

Principles of macro economics

We can then write the IS relation as

 An increasing function of income Y: higher income (equivalently, output) increases both

consumption and investment.
 A decreasing function of taxes T: higher taxes decrease consumption.
 A decreasing function of the real policy rate r: a higher real policy rate decreases investment.
 A decreasing function of the risk premium x: a higher risk premium increases the borrowing
rate and decreases investment.

The new IS curve is much steeper than we have seen before. This has two reasons:
1. This is because a change in the current policy rate
does not change the expected policy rate, and
therefore does not change the investment plans.
2. The multiplier is likely to be small. The size of the
multiplier depends on the size of the effect that a
change in current income has on spending. A change
in current income, with an unchanged expectation of
the future income, is unlike to have a large effect on
spending. The reason: changes in income that are
not expected to last have only a limited effect on
either consumption or investment. Consumers who
expect their income to be higher for only a year will
increase consumption, but by much less than the
increase in their income. Firms that expect sales to
be higher for only a year are unlikely to change their
investment plans much, if at all.

As you can see, do the expectations of the change in policy rate affect the IS quite a lot: At a given
current real policy rate, prospects of a lower future real policy rate and of higher future output both
increase spending and output, shifting the IS curve to the right, from IS to IS″. The new equilibrium is
given by point C. Thus, although the direct effect of the monetary expansion on output is limited, the
full effect, once changes in expectations are considered, is much larger

With for example an expansionary monetary policy,

the real policy (LM) decreases. It depends in the
expected r what happens to the IS curve.
Principles of macro economics

If we look at the current period, so what happens now in response to a deficit reduction, there are 3
possibilities:
- Current government spending (G) goes down, leading the IS curve to shift to the left. At a
given interest rate (r), the decrease in government spending leads to a decrease in total
spending and so a decrease in output. This is the standard effect of a reduction in
government spending, and the only one considered in the basic IS-LM model.
- Expected future output (Y ′e ) goes up, leading the IS curve to shift to the right. At a given
interest rate, the increase in expected future output leads to an increase in private
spending, increasing output.
- The expected future interest rate (r ′e ) goes down, leading the IS curve to shift to the right.
At a given current interest rate, a decrease in the future interest rate stimulates spending and
increases output.

Eventually it is hard to tell what the exact outcome of the IS curve will be, but we can look at other
aspects of the economy or a firm that assists with indicating what the outcome will be:
- Timing matters, the government can cut spendings immediately, but can also spread the
reductions in the upcoming years. This will affect the economy differently. Lower cuts now
and larger in the future, favours spending today. But too much will affect the credibility of the
government’s plan to increase reductions in the future.
- Composition matters, will G decrease much or will T rise much?
- The initial situation matters, if an economy has lost control of its budget, firms do not have
high expectations for the future. When a government takes back control by announcing a
programme of reducing the deficit, firms will have more confidence in the future and start
investing and spending.
- Monetary policy, will they help offset the direct adverse effect on demand in the short run?
Principles of macro economics

Chapter 18
How much a country exports depends on the geographical placement, the barriers, and how big it is.
A small country such as the Netherlands must specialise.

Real exchange rate: relative prices.

Appreciation: increase in the exchange rate.
Depreciation: decrease in the exchange rate.

The real exchange rate is the price of European goods in terms of British goods, which we shall call e
(the Greek lowercase epsilon), is thus given by:

GNP = GDP + NI (netto import export)

Equation (18.2) is called the uncovered interest parity relation or simply the interest parity condition.
The assumption that financial investors will hold only the bonds with the highest expected rate of
return is obviously too strong, for two reasons:
- It ignores transaction costs. Buying and selling UK bonds requires three separate transactions,
each with a transaction cost.
- It ignores risk. The exchange rate a year from now is uncertain. For the EU investor, holding
UK bonds is, therefore, riskier, in terms of euros, than holding German bonds.

This formula suggests that the interest rate in the domestic country must equal the interest rate in
the foreign country minus the expected appreciation of the domestic currency.

Let’s apply this equation to German bonds versus UK bonds. Suppose the one-year nominal interest
rate is 2% in the EU and 5% in the United Kingdom. Should you hold UK bonds or German bonds?
- It depends on the depreciation of the pond, if the pond depreciates with more than 3% than
you should not invest, if with less than 3 then invest.
Principles of macro economics

Demand for all the goods if it was a closed economy.

Demand for all goods if it was a open economy,

some of the income goes to import, therefore, the
slope is less steep.

ZZ is the demand for goods with export and import

included. Export depends on the income of another
country, not on ours. When our income increases,
our import increases, but our export does not.

This also means that:

When the income increases, net exports becomes

negative since the import increases but export stays
the same, this creates a trade deficit.

When output from foreign country increases, the domestic export increases. This does not mean a
change in the DD line. Demand for domestic goods increases but the domestic demand does not
increase that’s why the trade balance must improve.

When all countries are in recession, all would benefit from each other’s increase in G. If not, the ones
that are in recession would only benefit from other countries which are not in recession to increase
their G. So, in the end, no country would increase their G. They would do it only if everyone is in
crisis.
Principles of macro economics

The condition under which a real depreciation leads to an increase in net exports is known as the
Marshall-Lerner condition.

A depreciation of our domestic currency leads to a shift in demand, both foreign and domestic,
toward domestic goods. This shift in demand leads, in turn, to both an increase in domestic output
and an improvement in the trade balance.

Understand this table, otherwise go to page 439.

Currency account is export – import.

- An increase in investment must be reflected in either an increase in private or public saving

or a deterioration of the current account balance – a smaller current account surplus, or a
larger current account deficit, depending on whether the current account is initially in surplus
or in deficit.
- A deterioration in the government budget balance – either a smaller budget surplus or a
larger budget deficit – must be reflected either in an increase in private saving or a decrease
in investment, or in a deterioration of the current account balance.
- A country with a high saving rate (private plus public) must have either a high investment rate
or a large current account surplus.
Principles of macro economics

Open economy:
Arbitrage makes sure that when exchanging currency’s and investing in another country, returns are
the same as

You risk that the euro would appreciate and the lira would depreciate, this is the risk that you take
when investing your money in another country.

Savings does not equal investment, because it flows out to bonds and capital outflow to other
countries.

Disadvantage of capital inflow and their account deficit is that you lose wealth because foreigners
have your stocks and they are settled in other countries.

Negative correlation between net export and domestic Y because if Y increases, C I and M will
increase, export will stay the same. Resulting in a negative net export.

The effect of the multiplier is smaller when incorporating import, this is a dead outflow

On the short run, when depreciating out own currency, we have to pay more for import.

Difference between devaluation risk and default risk

Default: bank could go bankrupt and not repay you.

Lerner condition

Capital flow: if Americans buy more with euro’s than we buy from America, there is a capital outflow
because Americans need more euro’s than we need dollars. So NX is positive so there is a capital
outflow. S = I + (G – T) + NX
Principles of macro economics

Exam has open questions about:

- Labour market
- The IS-LM-PC model
- Growth
- Expectations
- Open economy
- Economic news