Book: IS-LM-PC Model

Question 1

How foes one calculate deviation from natural output

Answer 1

Y-Yn=L(1-u)-L(1-un)=-L(u-un)

As output is the same as the output of employment in this simplified world the deviation from natural output is a function of deviation from natural employment

Question 2

What is the deviation from natural employment called

Answer 2

The output gap

Question 3

What is labor hoarding

Answer 3

The common practice of keeping unneeded labor that might come in handy

Question 4

How is inflation related to labor and production

Answer 4

Inf - inf(e) = (a/L)*(Y-Y(n))

n is for natural output
e is for expectation

Question 5

What happens to inflation when production is higher then natural production

Answer 5

Inflation is higher than expected

Question 6

Why will the central bank raise the interest rate when an economy is overperforming

Answer 6

Because it might de anchor inflation casing it to rise to unseemly levels

Question 7

What is the expected inflation level in the civilized world

Answer 7

The target inflation

Question 8

What is the natural rate if interest

Answer 8

The interest rate creating a demand fir goods equal to the potential for output aka the natural level of output decided by the natural level of enployment

Question 9

What are some different words for the natural rate of interest

Answer 9

neutral rat of interest or wicksellian rate of interest

Question 10

What is the equation for the real rate of borrowing

Answer 10

Natural rate of interest plus risk premium

Question 11

Can monetary policy affect real rates in the medium run

Answer 11

No, it can only control inflation and thus nominal rates, thus is called the neutrality of money

Question 12

What is a deflation spiral or deflation trap

Answer 12

If the zero lower bound prevents monetary policy from increasing output back to the potential natural rate leading to people anticipating deflation which makes deflation spiral even higher as workers are payed less and investments are put of all while monetary policy is handy caped and the Phillips curve de anchored

Question 13

What challenges did japan face during the lost decade

Answer 13

Persistent high real interest rates and low inflation expectations as well as a declining natural rate if interest, growth potential and capital accumulation

Question 14

How did japan overcome the lost decade

Answer 14

Quantitative easing, negative interest rate, strong statements and purchases of special bonds. Japanese banks had strong reserves and Japanese saved quite a lot so they could survive the negative rates

Question 15

What is the PC curve

Answer 15

Philips curve

Question 16

How does public and private saving affect investment in the short and medium run

Answer 16

In the short run it decreases investment and spending but in the medium run it increases investment even if spending is low

Question 17

What might stop government and the central bank from coordinating a fiscal consolidation

Answer 17

The government be prevented from reducing its debt without triggering a recession if the fed is to close to the zero lower bound

Question 18

Does the natural output only depend on the availability of labor

Answer 18

No it also depends in other resources such as energy

Question 19

What can lower production caused by lack of resources lead to

Answer 19

Stagflation, lower output with higher inflation than target

Question 20

How does a higher resource price affect IS

Answer 20

As this shifts wealth to the producers that spend less and in some times spend on other economies it lessens demand and thus shifts the IS curve to the left

Question 21

What are business cycles

Answer 21

Output fluctuation patterns

Question 22

What is a propagation mechanism of a shock

Answer 22

The way that a shock like the introduction of a new law or some other event effects output through various means

Question 23

What chain of events typically follows a positive output gap

Answer 23

It leads to higher inflation which leads the central bank to increase the real interest rate which decreases the output, the reverse happens if the output gap is negative

Question 24

How does increased government saving affect output in the medium run

Answer 24

Lower consumption higher investment

Question 25

What is the main cause of differences in policy recomendation

Answer 25

Economists disagree at the speed that economies adjust to their medium run equilibrium, if they believe it is slow they are more likely to recommend short term measures and if they believe it is fast short term does not matter as much