Book: Expectations Output And Policy

Question 1

What determines the effect if monetary and fiscal policy

Answer 1

How they affect expectations

Question 2

What happens when you decrease real interest rates or increase net income in a non transitory manner

Answer 2

You increase human wealth and thus increase consumption

Question 3

What happens if you increase dividend payments or decrease the interest rate in a non transitory manner

Answer 3

You increase stock prices which increases non human wealth and in turn increases consumption

Question 4

What happens if you decrease nominal interest rates in a non transitory manner

Answer 4

You increase bond prices which increases non human wealth which increases consumption

Question 5

What happens if you decrease real interest rates or increase net profits for firms

Answer 5

It leads to an increased present value of returns on investment and puts them in a more comfortable position which increases investment

Question 6

What is aggregates private spending and what does it depend on

Answer 6

It is consumption plus investment and depends on output, taxes, real interest rates and the risk premium. It increases with output and decreases with the rest

Question 7

Why foes the IS curve become much steeper in the short tun when you introduce expectations

Answer 7

Because firms and consumers are unlikely to change their spending if they believe the change is transitory so a temporary change in real interest rates have a lesser affect on output leading to a steeper graph

Question 8

How does changing expectations affect the IS relation

Answer 8

Much like fiscal policy it shifts the entire curve ti the right with good news and left with bad news for the participants wealth

Question 9

What are rational expectations

Answer 9

Expectations that are not arbitrary but firmed in a forward looking maner

Question 10

How can a deficit reduction increase output even in the short run

Answer 10

If peoples expectations about the future increase they will increase consumption and thereby output

Question 11

What is the optimal way to save for increased current consumption

Answer 11

To slowly increase the savings rate and commit to futures greater savings called backlogging while ensuring credibility. This maximizes the future expectations in relation to the fiscal contraction

Question 12

What can disrupt the increasing effects of austerity

Answer 12

Low credibility, the programs composition aka what is cut, the current state if finances, the synchronization with monetary policy