Chapter 2. Short-run. Goods market & Financial market

Question 1

Components of the GDP

Answer 1

Z=Y= CIG+NX

Question 2

Consumption theory by Keynes

Answer 2

• Consumption is based solely on on today´s income
• The propensity to save or consume is defined based on aggregated data (not founded in microeconomis). it is criticised bc it does not take into account income changes, future income, wealth etc.

Consumption function
C= c0+c1Yd= c0+c1(Y-T)
-C increases with Yd but less than one for one.

is the c0 that will shift the entire line down
*check gdp y esto lo d q una parte es autonomous y otra no se q (esta en el macro book summary)

Question 3

Permanent income hypothesis

Answer 3

The permanent income model describes how households should determine their consumption path over time, taking into account their budget constraints, in order to maximize their utility.
Elements of the model:
Life income: all current and future incomes
* Utility function: Consumption and leisure create utility.
* Intertemporal budget constraint: households cannot spend more than they earn (income).
* Optimization within these restrictions
Intertemporal budget constraint:
C, + C/ (1+r) = Y, + Y2/ (1+r)
Permanent income model: impact
* Consumption does not fluctuate as much as income.
* Savings are more volatile than income.

Question 4

Role of interest in Consumption ( in which theroy??or in general)

Answer 4

Thought experiment: interest rate rises
Income effect:
* Saver expects higher future income
- Current and future consumption are rising.
Borrower pays more for loans, lower income
- Current and future consumption decline.
Substitution effect:
* The relative “prices” of consumption in the two periods change with the interest rate.
* Today’s consumption becomes more expensive relative to future consumption for savers and borrowers
- Current consumption is falling, future consumption is rising
summary in pg. 37

Question 5

Investments

Answer 5

Two factors determine the level of investment
1) Interest rate
2) Production level
Deep-dive: Interest rate
* Companies have many potential investment projects with different returns (returns on investment, Rol)
* Each project has a net present value
- A lower interest rate makes more projects profitable (opportunity costs)
Deep-dive: Production level
* Additional machines are required to be able to produce more.
Mathematically, this means:
1 =1(Y.i)

Question 6

un poco lost cn la IS curve tbh repasa

Answer 6

c

Question 7

Types of money in the modern economy

Answer 7

MO: “Currency in circulation”
The narrowest definition of money. limited to banknotes and coins In public circulation

MB: “Monetary Base” or “Total Currency”
All physical banknotes and coins held by both the publie and by the banks as cash reserves (also known as
“Vault Cashi)

MI “Money”
Defined as MO + Demand Deposits (also known as
‘Sight Deposits” or Chequing Accounts”)

M2 “Money and Close Substitutes”
Defined as M1 + Small Savings and Time Deposits (also known as “Term Deposits)

MZM “Money Zero Maturity”
A recent monetary aggregate meant to measure all liquid forms of money within an economy. MZM represents all money in M2 less Time Deposits. plus all Money Market Funds

M3”Broad Money”
Defined as M2 + Large Time Deposits, Institutional Money Market Funds, Short-Term Repurchase Agreements, along with other large liguld assets

Question 8

Money demand

Answer 8

Md= PY*i
Money demand depends positively on nominal income (PY) and negatively in interest rate (i)

Question 9

Money supply

Answer 9

The Money Supply
Money is provided by central banks (cash and reserves: for commercial banks) and by commercial banks (demand deposits).
- Money creation of central banks and commercial banks
Instruments of monetary policy by central banks:
* Open market operations: buying and selling assets (foreign exchange, government bonds, corporate bonds) in the open market (referred to as ‘Quantitative Easing (QE) for long-term bonds)
- Choosing the money supply (late 1970s to early 1990s, revival through QE) vs.
choosing the Mierest rate (since the early 1990s)
* Expectation management with regard to future policy: forward guidance
* Reserve rate
* Helicopter money

Question 10

Open market operations

Answer 10

Deep dive: open market operations
In modern economies all central banks conduct monetary policy through open market operations, usually through the purchase and sale of government bonds.
With an expansive open market policy, the balance sheet of the central bank expands:
* Assets: additional bonds
* Liabilities: additional money supply
The opposite of expansionary monetary policy is restrictive monetary policy.
Remark:
There is an inverse relationship between bonds price and interest rate.
It follows that the higher i, the lower the price.

with exapnsionary, you buy bonds

Question 11

Money creation by commercial banks

Answer 11

Not interested in this, I have never seen it, but it is like full 2 pages of this in glemser lol