291 midterm 2

Question 1

in a small open economy how much is the foreign lending to a small open economy?

Answer 1

Difference horizontally between the saving curve and investment curve below the national equilibrium.

Question 2

how much is lending from the small economy to foriegn market?

Answer 2

difference between s and i curves above equilibrium

Question 3

What is absorption?

Answer 3

Cd+Id+G

Question 4

What does net exports of 4 billion imply?

Answer 4

the country is lending 4 billion to foriegners

Question 5

What are reasons for slowed productivity growth in 1973 onwards?

Answer 5

1. statistics error - not counted in GDP is increase in qulaity of products ie computers which does not properly measure increase in living.
2. Increase in oil prices - inputs to business more expensive therefore less output
3. emphasis on health, safety and environment has lead to less output due to more red tape, increase costs etc
   4 IT - learning time to warm up to new technology temporarily decreased output

Question 6

What is steady state?

Answer 6

when yt, ct and kt do not change over time. Ie the economies output, consumption and capital stock per worker are constant. They do not change over time.

Question 7

What is the equation for investment in a steady state?

Answer 7

It = (n+d)K where d is depreciation and n is net investment or pop growth

Question 8

What is the equation for net investment?

Answer 8

(1+n)Kt - Kt = nK where n is equal to investment for the year

Question 9

What is steady state consumption?

Answer 9

Consumption is found by Ct=yt-It. Afterwards we put the steady state investment equation into I to get Ct=Yt-(n+d)Kt

Question 10

How do you find the per worker C/Y/I?

Answer 10

divide by N where N is number of workers

Question 11

What is steady state consumption per worker?

Answer 11

c = Af(k) - (n+d)k where c is consumption per worker, A is productivity, kis capital per worker n is net investment and d is depreciation. Af(k) could also be y.

Question 12

What is the per worker production function?

Answer 12

yt=Atf(k)

Question 13

What is the Golden rule steady state?

Answer 13

That is the capital labour ratio that leaves the largest amount of per worker consumption

Question 14

What is investment in steady state?

Answer 14

(n+d)Kt where n is net investment, d is depreciation and K is capital and t is the time (year). Note saving in a steady state is equal to Investment

Question 15

On a graph, which point is the steady state point if there is a production function line, a savings rate*production line and an investment line?

Answer 15

It will be at the point where Investment and savings*production lines meet. If the capital labour ratio is at a different point than the where savings and investment meet it will move towards that poin until it reaches it.

Question 16

In the steady state on a graph, what is the consumption?

Answer 16

At the capital labour ratio output where investment meets savings the consumption is the distance between that point and the production function.

Question 17

Why is efforts to move the saving rate to the golden rule level of output often resisted?

Answer 17

The living standards drop for a short time while the spending on investment takes effect. Short term elections for politicians make it difficult to to seeem like the right thing is happening when living standards drop

Question 18

state if it will make output fall, rise or stay the same all else equal after an increase in:
savings rate, population growth and productivity

Answer 18

savings rate: rise because the higher savings allows for more investment/capital
pop growth: fall, more output must be used to equip new workers with capital
productivity:rise, derp

Question 19

What 2 ways does endogenous model describe growth?

Answer 19

Through growth of human capital and that human capital will increase as capital increases therefore mpk does not decrease. It also describes growth through technological breakthroughs via R&D

Question 20

What are 3 functions of money?

Answer 20

Unit of account, medium of exchange, store of value

Question 21

What is M1?

Answer 21

currency + chequeable deposits

Question 22

What is M2?

Answer 22

M1 + personal savings, + non personal demand and notice deposits

Question 23

What is M3?

Answer 23

M2 +non personal term deposits and foreign currency deposits of residents

Question 24

What is the money demand function?

Answer 24

Md = P*L(Y, i) where Md is nominal money demanded, P is the price level, Y is real income/output, i is real interest.

Question 25

What is Md/P?

Answer 25

Real money demand, aka the amount of money demanded in terms of the goods in can purchase.

Question 26

Why does an increase in expected inflation cause an decrease in demand for money?

Answer 26

higher expected inflation means a higher return on alternate assets compared to money therefore people want to rid themselves of cashola and buy stocks or sumthin similar

Question 27

How do you measure velocity?

Answer 27

GDP/Nominal money stock aka PY/M

Question 28

Md - M is what?

Answer 28

Excess demand for money

Question 29

NMd - NM is what?

Answer 29

excess demand for non monetary assets

Question 30

(md-m)+(NMd-NM) =?

Answer 30

0 when md-m = 0. this is equilibrium in the asset market

Question 31

excess demand for money plus excess demand for non monetary assets is equal to what?

Answer 31

0 if md-m = 0

Question 32

How do you calculate the price level?

Answer 32

P = M/L(Y, e+pie)

Question 33

What is the quantity theory of money?

Answer 33

The theory of money that assumes velocity is constant which implies that money demand is proportional to real income and unaffected by interest rate

Question 34

vat is money demand function?

Answer 34

Md = P * L(Y,i)

Question 35

What is the bank rate?

Answer 35

interest charged by central bank

Question 36

What is the overnight rate

Answer 36

The rate charged on very short term loans to banks

Question 37

how to calculate inflation rate if money is growing by 10% output is growing by 3% and elasticity of money demand 2/3?

Answer 37

10% - 2/3(3%) = 8% which is the inflation

Question 38

How do you calculate inflation given elasticity of miney demand?

Answer 38

growth rate of money% - elasticity of demand times the growth rate of output