Diagrams Flashcards
What is the equation of the production function?
Y=AF(K,N)
Y=AK^aN^(1-a)
What shifts the production function?
Supply shocks
How is the demand function for labour derived?
pi = p x Y(.) - W x N
Differentiate wrt N
MRPN=W
MPN=w
What shifts the demand for labour?
Supply shocks
Changes in capital stock
How is the supply of labour derived?
U=U(c,L)
SE: opportunity costs can affect work supply
IE: change in income in the same amount of work time can affect labour supply
Pure SE: one day increase in wages
Pure IE: change in wealth or expected future wage
IE stronger in LR
What shifts the individual labour supply curve?
Wealth
Expected future real wage
What shifts the aggregate labour supply?
Wealth
Expected future real wage
Participation rate
Working age population
What are the budget constraints for current period consumption and future period consumption?
a^f = y - c + a
C^f = y^f + (1+r)a^f
What is the equation of the intertemporal budget constraint?
c^f = y^f + (y+a)(1+r) - (1+r)c
What is the no borrowing no lending point?
When y^f=y+a
What shifts the intertemporal budget constraint?
y^f
y
a
What is the effect of a change in r on the intertemporal budget constraint?
Assume increase in interest rates:
SE= future consumption becomes cheaper relative to current consumption
- Shift angle of budget more steep, make sure tangent to utility function
IE:
Lender: increase in income/wealth, increase in consumption and future consumption, less saving
- Shift curve outwards, make sure it goes through no borrowing no lending point
Borrower: decrease in income/wealth, decrease current consumption and future consumption. Increase saving
- Shift curve inwards
What is the function of the user cost curve?
uc = rp +dp - change in value of p
What is the equilibrium of the investment diagram?
MPK^f=uc
What shifts the uc curve?
Interest on capital
Depreciation rate
Change in the value of p
P
Tax
What shifts the MPK^f curve?
Technological changes
What is the goods market equilbrium?
Where Y=Yad
Y=C^d+I^d+G
Y-C^d-g = I^d
S^d=I^d
What shifts the savings curve?
Wealth
Expected future income
G
Income
Effective tax rate
Expected future output
Explain the effect of increased G on the goods market?
Increased G
Decrease in national saving
Increased interest rates
Lower investment
===Crowding out
What shifts the investment curve?
Technology changes
uc
Effective tax rate
Derive the demand function in the bond market
i =F/Pb -1
What shifts the demand for bonds?
Wealth
Risk
Relative interest rates of other assets
Expected inflation rate
Liquidity
What shifts the supply of bonds?
Budget deficit
Expected profitability of investment opportunity
Expected inflation
Explain the Fisher effect
Increase in inflation
Increased supply of bonds
Decrease demand for bonds
Causes increase in interest rates
Business cycle expansion on bond market
Increased wealth
Increased demand for bonds
Increased supply of bonds as more profitable opportunities
Increase in Q
r change ambiguous
What are the variables that affect money demand?
Price level
Real income
Interest rates on non-monetary assets
Inflation
Wealth
Risk
Liquidity of alternative assets
Payment technologies
What is the money demand function?
M^d = p x L(Y,i)
M^d/p = real money demand
What is the function of the FE line?
Ybar=AF(K,Nbar)
What shifts the FE line?
Supply shock
Change in capital
What shifts the IS curve?
Y
G
C
Wealth
MPK^f
Taxes
What shifts the LM curve?
Changes in the price level
Anything that affects Ms of Md
Effect of temporary adverse supply shock on IS-LM
FE shifts inwards
Prices increased
LM curves inwards
Effects of monetary expansion
Shift LM to right
Prices adjust
LM curve shifts inwards
What shifts AD
Any change in IS or LM
What shifts SRAS
Change in cost of production
Whats shifts LRAS
Change in FE
Increase in G in classical model
Decreased saving, shift rightwards of IS.
Expected future taxes higher, income effect, increase labour supply.
Prices increase so LM shifts to the left to restore equilibrium.
Higher output, higher interest rates.
What is the weakness of the classical model?
Explain how these are accounted for.
Doesn’t explain why unemployment rises in a recession.
- Changes in the natural rate of unemployment
Money neutrality
- Misperceptions theory
Explain misperceptions theory
Producers have imperfect info on the general price level.
Misinterpreted changes in price level seen as relative price change.
SRAS upwards sloping
Unanticipated change in money supply in Classical model
Shift AD to right
SR equilibrium at SRAS1,AD2 as actual prices exceed expected.
Output increased. (Money non neutral)
People get info on true price level, expectations change, SRAS shifts up.
Prices increase
General equilibrium met
Anticipated change in the money supply Classical
Increase in AD.
People has more knowledge on prices.
SRAS shifts straight away restoring equilibrium.
Money neutral in SR and LR.
What else does MPN depend on in the Keynesian model?
Effort per worker
Increase in nominal money supply Keynesian
Shift AD up.
SRAS1 and AD SR equilibrium.
In LR prices increase, SRAS shifts up.
Higher price level and same output.
Increased government purchases
Shift IS to the right.
SR equilibrium at LM=IS.
Prices increase in LR, LM shifts to the left.
Increased interest rates and same output in LR.
Lump sum taxes cut Keynesian
Shift IS to the right due to greater cosnumption.
SR equilibrium at IS=LM.
Prices increase in LR, LM shifts to the left.
Negative shock to IS Keynesian and no stabilisation policy.
Leftwards shift or IS.
SR equilibrium at IS=LM, lower output and employment in LR.
In LR, prices fall. LM shifts to the right.
LR equilibrium met.
Negative shock to IS keyenesian with monetary policy.
Leftward shift of IS.
No SR equilibrium where IS=LM.
LM shifts to the right due to increase in money supply.
LR equilibrium with higher price.
3Negative shock to IS Keynesian with government intervention
Leftward shift of IS.
No SR equilibrium at IS=LM.
IS2 shifts back to IS1.
Increased prices same output.
