Book: IS-LM-PC Model Flashcards
How foes one calculate deviation from natural output
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
What is the deviation from natural employment called
The output gap
What is labor hoarding
The common practice of keeping unneeded labor that might come in handy
How is inflation related to labor and production
Inf - inf(e) = (a/L)*(Y-Y(n))
n is for natural output
e is for expectation
What happens to inflation when production is higher then natural production
Inflation is higher than expected
Why will the central bank raise the interest rate when an economy is overperforming
Because it might de anchor inflation casing it to rise to unseemly levels
What is the expected inflation level in the civilized world
The target inflation
What is the natural rate if interest
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
What are some different words for the natural rate of interest
neutral rat of interest or wicksellian rate of interest
What is the equation for the real rate of borrowing
Natural rate of interest plus risk premium
Can monetary policy affect real rates in the medium run
No, it can only control inflation and thus nominal rates, thus is called the neutrality of money
What is a deflation spiral or deflation trap
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
What challenges did japan face during the lost decade
Persistent high real interest rates and low inflation expectations as well as a declining natural rate if interest, growth potential and capital accumulation
How did japan overcome the lost decade
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
What is the PC curve
Philips curve
How does public and private saving affect investment in the short and medium run
In the short run it decreases investment and spending but in the medium run it increases investment even if spending is low
What might stop government and the central bank from coordinating a fiscal consolidation
The government be prevented from reducing its debt without triggering a recession if the fed is to close to the zero lower bound
Does the natural output only depend on the availability of labor
No it also depends in other resources such as energy
What can lower production caused by lack of resources lead to
Stagflation, lower output with higher inflation than target
How does a higher resource price affect IS
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
What are business cycles
Output fluctuation patterns
What is a propagation mechanism of a shock
The way that a shock like the introduction of a new law or some other event effects output through various means
What chain of events typically follows a positive output gap
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
How does increased government saving affect output in the medium run
Lower consumption higher investment
What is the main cause of differences in policy recomendation
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
