Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

BSc Economics > EC108 Term 2 > Flashcards

EC108 Term 2 Flashcards

1
Q

What causes business cycles?

A

Keynesian economics: the economy may reach short-run equilibria at levels below or above full employment
-demand side policy used to smooth fluctuations (stabilisation policy)

Mainstream economics: fluctuations have exogenous causes
-minimal govt regulation - focus on long-term growth
-real business cycle theory (RBC)

Alternatives: credit cycle e.g. Fisher debt deflation theory. Minsky’s Financial Instability Hypothesis

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Aggregate demand is equal to…

A

Consumption + Investment + Government Spending + Net Exports

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is generally more stable, consumption or investment?

A

Consumption

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Positive expectations of future demand cycle

A

Firms invest and hire
Higher spending by firms and workers
High demand for the firm’s products
High capacity and utilisation and high profits

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Negative expectations of future demand

A

Low expectations of future demand
Low capacity utilisation and low profits
No incentive to invest or hire
Little spending by firms or workers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

How do we find the output gap?

A

(Actual output - Potential output) / Potential ouptut

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is an output gap?

A

The gap between the economy’s current level of activity and the ‘potential’ level consistent with stable inflation in the long-term

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is a negative output gap associated with?

A

Lower rates of capital and labour utilisation - spare capacity in the economy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is a positive output gap associated with?

A

Higher rates of resource utilisation, potential evidence of an economy ‘overheating’ with upward pressure on wage growth and inflation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

3 main methods to estimate potential output

A

Statistical trend - output gap as the difference between actual output and the trend.

Estimate a production function - use it to generate estimates of potential output

Estimate output gap directly - current data from business surveys of capacity utilisation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

3 negative effects during recessions

A

Unemployment (or fear of losing the job) as a major source of unhappiness and reduction of well-being

Social indicators (mental health, crimes, suicides, etc) worsen during recessions

Political pressure to mitigate recessions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Okun’s law

A

Higher output growth is clearly associated with a decrease in unemployment

Strong and stable relationship in major advanced economies since the WWII

Not one-to-one relationship due to:
-labour hoarding
-tighter regulations on hiring and firing
-longer traditions of lifetime employment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Involuntary unemployment

A

Unemployed people looking for work who would be prepared to take a job at the going wage but cannot get a job offer

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Reservation wage

A

What an employee would get either in alternative employment, or from unemployment benefits (where available) were they not employed in the employee’s current job

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Efficiency wage setting

A

Incentive for employers to pay more than the market-clearing wage in order to increase productivity (efficiency) and/or reduce costs associated with turnover

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Wage setting-curve

A

Real wage necessary at each level of employment to provide workers with incentives to work well

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Price-setting curve equation

A

W/P = (1/(1+μ))MPL

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Labour supply

A

Number of hours people are willing and able to supply at a given wage rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Real wage in terms of nominal wage

A

Nominal wage/Price level

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What shifts the WS curve down?

A

Fall in the level of unemployment benefits
Fall in the disutility of effort (e.g. improving working conditions)
Fall in union mark-up, weaker unions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Price-setting curve

A

Real wage paid when firms choose their profit-maximising price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What is the equilibrium employment rate?

A

Wage setting = price setting curve

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What happens to the price/wage setting curve when unemployment benefits increase?

A

The wage setting curve moves upwards/outwards

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What happens to the price/wage setting curve when there is less competition?

A

Price setting curve shifts downwards

25
What are trade unions?
Organisations that represent the interests of a group of workers in negotiations with employers over issues such as pay, working conditions, working hours.
26
How do you measure output gaps on the wage/price setting diagram?
It's the gap between the wage setting and price setting curve
27
What is the relationship between inflation and unemployment?
Inverse relationship
28
Do changes in aggregate demand affect the equilibrium level in the labour market?
No, only supply side changes will affect the equilibrium level
29
Tobin's q theory of investment
Stock market value is forward looking and indicates how well the firm is able to implement the investment
30
Adaptive expectations characteristics
Backward-looking behaviour Agents make systematic errors Adaptive expectations does not allow agents to learn from their mistakes
31
What are systematic errors
Errors that are not determined by chance but are introduced by an innacuracy (involving either observation or measurement process) inherent to the system.
32
What are the characteristics of rational expectations
Forward-looking behaviour Agents do not make systematic errors Expectation formation behaviour is 'model consistent' (agents inside the model are assumed to "know the model" and on average take the model's predictions as valid)
33
What will happen if the markup increases in the labour market
Price setting curve moves downwards, refer to the Price setting equation
34
Why is inflation bad?
Erodes savings Discourages investment Stimulates capital flight Inhibits growth Difficult to make economic plans Provokes social and political unrest
35
Types of models used for monetary policy framework
Models are theoretically based and data driven (statistical and spreadsheet forecasts, structural, macroeconomic) New Keynesian models - all actors are forward looking and use RE DSGE models (Dynamic Stochastic General Equilibrium) - micro-foundations, include forward looking behaviour
36
How are the Central Bank's preferences shown?
By a Loss function. L = (yt - ye)^2 + β(pit - pi^T)^2
37
When the Phillips curve is on the CB preference curve, what is the most preferable outcome?
The intersection which is closest to the centre
38
Rational Expectations: implications
Economy is at equilibrium output, and inflation is at target (assuming no random shocks) Dynamic behaviour of inflation disappears Inflation not built into the system, so no costly disinflation Simpler job for the CB No policy lags in the AD Also, no role for a stabilising CB to move the economy to equilibrium The CB can influence expectations directly since wage and price setters are forward looking: under adaptive expectations, actual inflation has to fall before it affects pi^E
39
Expectations and the Lucas critique
Models that rely on relationships found in historical data are problematic. Relationships in historical data are conditional on past policy regimes, and will break down if the policy regime changes. Economic agents change their behaviour in response to the new policy regime. Problematic if agents use rational expectations, but policy maker interprets data as though they are not REH agents. Applications in the 3-equation model under REH: Govt spending effects & revoking CB independence.
40
Anchoring expectations
Central bank communication is used to keep inflation expectations anchored at the inflation target. If the inflation target is perfectly credible and expectaed inflation is anchored, then an inflation shock will only last for one period. There is costless disinflation (unemployment does not rise): The PC reverts back to the one indexed by the inflation target in the next period.
41
How to mitigate inflation bias
Commitment - optimal contracts between the CB and the govt Delegation: independent central bank, central bank has different preferences from the govt, long-tenures of MPC members, central bankers are more inflation averse Reputation building (game theory solution) Negative correlation between central bank independence and average inflation
42
What does Tax (T) equal?
Taxation revenue - transfers
43
Permanent income hypothesis (Ricardian equivalence)
Forward looking agents will anticipate will have to pay higher taxes in the future and will not increase consumption They will save, rather than spend the extra disposable income to pay for expected future tax increases that will be used to pay off the debt
44
Ricardian equivalence only works under these conditions
No credit-constrained households, able to borrow at preveailing interest rate (PIH) Interest rates and time horizon faced by households and govt are equivalent Households behave as if they are infinitely-lived (e.g. children's utility incorporated in Consumption decisions)
45
Ricardian equivalence: implications for fiscal policy
Temporary tax cut → implies T ↑ later → T cut is saved C"↓", AD unchanged! Temporary rise in G, debt-financed → ye ↓ but cut in C spread across all periods → Fall in C < Rise in G → AD ↑ in period 0, ceteris paribus. Temporary rise in G, tax-financed (same as above by RE–PIH)
46
The assumptions that do not hold in Ricardian equivalence
Credit constraints - Consumption smoothing absent; Higher disposable income increases consumption Govt has lower interest rate: households prefer debt-fi nancing (cheaper) over tax-fi nancing Households do not always behave as if they are ∞-lived e.g. No bequest to children But financial market development found to strengthen Ricardian effects
47
Zw in the Wage-setting curve is a set of wage-push variables, what might they be?
Institutional, policy, structual and shock variables
48
What is the Gini Coefficient?
It measures how even how evenly distributed a variable is amongst the population, most frequently income.
49
Generally, why do advanced economies have a lower gini coefficient than emerging markets and developing economies?
Because taxes and transfers occur
50
What is a welfare state?
A set of govt policies designed to provide improvements in the welfare of citizens by assiting with income smoothing (for example, unemployment benefits and pensions)
51
Difference between progressive and regressive
Progressive: an expenditure or transfer that increases the incomes of poorer households by more than richer households, in percentage terms. Regressive: an expenditure or transfer that increases the incomes of richer households by more than poorer households, in percentage terms
52
Phillips Curve equation
πt = πt−1 + α(yt − ye)
53
What is stagflation?
Stagnation + inflation
54
What is stagnation?
Stagnation is a prolonged period of slow economic growth, usually accompanied by high unemployment.
55
Taylor rule equation
rt − rs = γ1(πt − πT) + γ2(yt − ye)
56
Monetary Rule equation
(yt - ye) = -αβ(πt - πT)
57
Value of β in the loss function with definitions
β = 1 - CB is equally concerned about inflation and output deviations from its targets β > 1 - CB places less weight on deviations from employment (output) from its tagret than on deviations on inflation β < 1 - CB places less weight on deviations from inflation from its tagret than on deviations on output
58
What does the Loss function truly mean?
The higher the value of the Loss function, the worse-off the CB is
59
Why is deflation bad?
It increases the real burden of debts (lenders benefit but they tend to have a greater propensity to save than borrowers) If anticipated, consumers delay purchases: -Effects on real interest rate -Zero lower bound (nominal interest rate cannot be negative) Deflation increases rigidity in the market

BSc Economics (8 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions