Complete intertemporal model including money market + RBC Flashcards
Describe/proof of how demand and temporary government spending changes 1 for one (explaing effects of change in g)
-Assume change in demand = triangle
-Triangle = G2-G1 + MPC(G2-G1) + Triangle(MPC)
-Change in demand = ‘chnage in G spending + effect of change in g spending + effect of change in demand’
-Reararagning for change in dmend = G2 - g1
-Therefore finding the demand multiplier by diiding triangle by g2 - g1 we get 1. Therefore showing demand moves one for one with g.
What shifts the Yd curve (output demand curve)?
-Changes in investment demand (k changes)
-Changes in G, as g rises/falls one for one with G, use proof.
-Changes in demand for consumption,due to credit frictions (lower demand for consumption could be due to increase in frictions lead to shift in Yd.)
What shifts the Ns curve (labour supply curve)?
Changes in the real interest rate, labour supply is a increasing function in interest rate.
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-Example) increase in g, higher PV taxes –> lower life time wealth, intertemporal sub effect, lower consumption on current period of leisure, therefore more hours worked.
What shifts the Nd curve (labour demand curve)?
Changes in TFP, z and K both shift the Nd curve.
-changes in z and k both effect the marginal product of labour as the Nd curve is derived from this a movement will occur.
-Changes in MPL through z and k changes will shift the production function, therefore shifting the output supply schedule (Ys).
What shifts the Ys curve (output supply curve)?
-Changes in the production function, caused by other effects sure as G, Z and MPL.
-Eg) increase in G –> labour supply through intertemporal sub effect –> higher MPL and shift in prod function –> shift in Ys curve.
Comeplete intertemporal model with money market assumptions +credit supply/demand market
-Ms fixed/vertical, fixed by central bank. -Md increasing in Y and decreasing in r (opp cost of using currency).
-Model assumes all goods in economy either ought with cash/currency or credit card, which costs q per unit of consumed goods.
-Credit card supply Xs increasing in q, horizontal D for credit card services
What shifts money demand MD and money supply curves
-Changes in supply and demand for credit card services.
-Eg)Falls in credit supply Xs lead to increase in demand for money, currency more attractive less access to credit, more need for cash etc.
-Changes in Y or r shift demand for money
-Central bank sets the constant MS in model with flexible prices
fisher relation mention with money market
-equation which describes the relationship between real interest rate,r , inflation rate, i, and the nominal interest rate R.
r approx R - i
RBC assumptions
-perfectly competitive markets with the absence of externalities, therefore implying the economy is always behvaing optimally
-changes in TFP/z main drivier of business cycles show on graph
-assuming no role for government stabilisation policy
-assure even in recession all economic agents behave optimally and attempts to alter a recession will reduce welfare.
-Money supply is procyclical in the RBC model, positively correlated with the state of the economy economy.
-All variables procyclical, correlated to business cycle.
Keynasian coordination failure model assumptions
production function has increasing returns to scale, due to the presence of strategic complementarities ( Competition leading to incentive to become more productive and produce more.)
-Labour demand schedule os upward sloping, rather than downward,
-Output supply curve in the coordination failure model is downward sloping.
-Multiple equibrium one efficient, one not.
- the business cycle are caused by self fulfilling beliefs
-Procyclical money supply
government intervention can help move the economy from a bad equilibrium to a good one
what keynasian coordination model shows
how the economy can become stuck in a suboptimal equilibrium due to the lack of coordination among agents. In this model, even if the fundamentals of the economy are sound, individual agents (like consumers and firms) might make decisions that lead to an overall inefficient outcome because they fail to coordinate their actions.
Eg) persisitent increase in TFP RBC
–Higher TFP, shift in prod function higher demand for labour and increase in output supply (higher prod functinon).
-As r has fallen fall in labour supply (intertemporal effect),wage rise
-Whether N changes depends on size of two effects.
-Increase in demand for money due to increase in income.
-Then summarise economic effects, income, N, w, r etc
