Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

ECON2003 Macro Theory > A. Short Run > Flashcards

A. Short Run Flashcards

1
Q

What are the three parts of describing a model?

A

Assumptions
Results
Robustness

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What are the key variables on the demand side?

A 
Consumption
Investment
Government expenditure
Taxation
Net exports
Exchange rate
Money demand
Money supply
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are the key variables on the supply side?

A

Production function
Labour market
Technological change

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are the Keynesian cross and IS-LM models used for?

A

Studying output fluctuations and the effect of policy change

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What do we assume about the AS curve in this topic?

A

We assume it is horizontal and so production adjusts automatically without price changes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What does the clasical economy assume about AS?

A

That the labour market is always in full employment so AS is vertical and there are no business cycles

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What does the new keynesian economy assume about AS?

A

In the SR prices are sticky which means firms are reluctant to change prices when demand shifts. AS is non linear and upward sloping

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

In a classical economy what does a shift in AD cause?

A

It causes only a shift in price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

In a keynesian economy what does a shift in AD cause?

A

It causes only a shift in output

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Equation for production (GDP)

A

Y=C+I+G+X-M
Y=Co+C1(Y-T)+I+G
Y=1/(1-C1)(Co+I+G-C1T)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What simplifications do we need to make to determine z?

A
  • all firms produce the same good
  • firms are willing to supply any amount of the good at a given price and meet demand in the market
  • the economy is closed to international trade
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What does consumption depend on?

A

Disposable income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Consumption function

A

C=Co+C1(YD)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Autonomous spending

A

The demand for goods that doesnt depend on output, it is the intercept in the K cross

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is the effect of an increase in savings on GDP according to the K cross model?

A

The K cross model predicts if people save more at a given level of disposable income the equilibrium level of output and income decreases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is the effect of an increase in investment in the K cross model?

A

GDP increases, the magnitude is dependent on the multiplier

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What leads to a bigger effect on GDP, taxation or government spending?

A

Government spending

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Does the economy respond more to a change in autonomous spending or a case where taxes are independent of income?

A

Economy responds more to case where taxes are independent of income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Limitations of K cross model

A
  • static model
  • prices are assumed fixed
  • no role of interest rate
  • investment is assumed to be exogenous
  • consumption and saving depend only on current disposable income
  • MPC is fixed
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Which markets does the IS-LM model contain?

A

Goods market
Money market
Aggregate demand

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What new assumptions do we need to make about variables

A
  • investment depends on income and interest rate
  • money demand is a choice between money and bonds
  • money supply is exogenous, the growth rate of money supply equals zero in the medium run
22
Q

How can finanical wealth be held?

A

As cash or bonds

23
Q

What does the proportion of money and bonds you wish to hold depend on?

A
  • your level of transactions (PY) - proportional to income

* the interest rate on bonds (i)

24
Q

What affects the money supply?

A

Only the central bank

25
Q

How does interest rate react after an increase in nominal income?

A

It also increases so that the money supply stays constant

26
Q

How do interest rates react to an increase in the money supply?

A

Interest rates fall in order to induce the private sector to hold more money

27
Q

How does the central bank control the money supply?

A

They change the money supply by buying or selling bonds in the bond market i.e Open Market Operations

28
Q

What happens if the government buys bonds?

A

The money supply increases and so interest rate decreases

29
Q

LM equation

A

M/P= YL(i)

30
Q

What does the LM curve look like?

A

Interest rates on Y axis
Income on x axis
LM curve is upwards sloping

31
Q

What shifts the LM curve down?

A

An increase in the money supply

32
Q

What determines investment?

A

They depend on the level of sales and the interest rate

33
Q

Investment function

A

I=I(Y,i)

34
Q

How does investment behave in the short run model?

A

Like consumption, it doesnt add productuve capacity

35
Q

What are the two reasons for why demand is sn increasing function of output?

A
  1. An increase in output lears to an increase in income and also to an increase in disposable income and therefore consumption
  2. An increase in output also leads to an increase in investment
36
Q

Factors that shift the IS curve

A
  • changes in autonomous consumer expenditure
  • changes in gov spending
  • changes in taxes
37
Q

Factors that shift the LM curve

A
  • changes in money supply

- autonomous changes in money demand

38
Q

Describe changes in IS LM diagram after a loss of consumer confidence

A

Less consumption means less Y so IS shifts inwards.

39
Q

Steps to work out new equilibrium in IS LM model

A
  1. Work out what has happened to exogneous variables Ms, G, T
  2. Work out how that effects Y and I
  3. Work out equilibrium and explain changes in other variables
40
Q

What opposing effects does expansionary fiscal policy have?

A

Multiplier effect and crowding out

41
Q

Crowding out

A

Occurs when expansionary fiscal policy causes interest rates to rise, thereby reducing private spending, particularly investment

42
Q

What is the effect of expansionary fiscal policy on investment in the SR?

A

It is ambiguous

43
Q

What determines whether fiscal or moentary policy is more effective?

A

if IS is shallow amd LM is steep then monetary policy is more effective and vice versa

44
Q

When is investment sensitive to a change in interest rates?

A

When IS is shallow

45
Q

When is money demand sensitive to a change in interest rates?

A

When LM is shallow

46
Q

When is moentary policy ineffective?

A
  • if the elasticity of money demand w.r.t the interest rate is infinite- liquidity trap
  • if the elasticity of investment w.r.t the interest rate is zero- IS is vertical
47
Q

How effective is fiscal policy in the presence if a liquidity trap?

A

Very effective

48
Q

What is the view of keynesians on moentary and fiscal policy?

A
  • money demand is unstable and highky elastic
  • investments arent very sensitive to interest rates
  • FP>MP
49
Q

What is the view of monetarists on fiscal and monetary policy?

A
  • money demand is stable and dependent on P and Y
  • investments are sensitive to interest rates
  • MP>FP
50
Q

Limitations of IS- LM model

A
  • effects of policies depend on slopes
  • prices are assumed fixed
  • consumption depends only on current disposable income
  • closed economy model

ECON2003 Macro Theory (7 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions