Chapter 13 Flashcards
Explain the impact of an increase in z and z’, in terms of w/N, r/Y and P/Md/Ms in the RBC model.
-For w/N: Causes an outwards shift in the MPL, therefore, shifting Nd out. Ns shifts inwards because of the decrease in the interest rate.
-For r/Y: Yd shifts out because of the increases in demand for I as firms anticipate future increases in MPK, consumers anticipate future increases in income and lifetime wealth increasing means consumption goods demanded increases. Ys shifts out because of the increase in Nd.
-For P/Md/Ms: Md shifts outwards because PL(y’r) has increased as Y has increased and r has decreased, therefore, P has decreased.
What happens to Average Product of Labour (APL) following a positive total TFP shock?
Friedman showed that money supply is procyclical and an increase in money supply causes and increase in real GDP. In the P/Ms,Md diagram, an increase in total z means that PL(y,r) shifts out, however, in order to combat the fall in price level, the Central Bank increases money supply, causing an overall zero change in price and an increase in money supply.
Explain how multiple equilibria arises in the Keynesian coordination failure model.
There exists strategic complementarities as a person is more willing to engage as the number of people who are engaged increases. There leads a multiple equilibria in the economy which can be high or low… lots or few people are involved.
Why is the MPL of the labour schedule upward-sloping?
-Assume there is aggregate increasing returns to scale due to strategic complementarity.
-For each firm, there is constant returns to scale in production.
-Due to the production function slope increasing with labour, the MPL for the economy is increasing.
What is one of the main conditions for the Keynesian coordination model to work?
The slope of labour demand has to be greater than the slope of labour supply, due to the sufficient increasing returns to labour.
What is a fiscal policy that can get rid of multiple equilibria in the r/Y model?
Fiscal policy is used to shift Yd inwards due to the decrease in G, causing a decrease in the PV of taxes, meaning labour supply shifts out.
