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Year 2 Exam Prep > ECO2102 Intro to Business Cycle Analysis (2) > Flashcards

ECO2102 Intro to Business Cycle Analysis (2) Flashcards

1
Q

What is the difference between endogenous and exogenous variables?

A

Endogenous variables are determined by the exogenous whereas Exogenous are determined outside the model.

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2
Q

How are shocks different for Endogenous and Exogenous variables?

A

Exogenous variables are a source of shocks whereas Endogenous variables cant generate shocks; they change as a result of shocks.

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3
Q

What is the difference between long term economic growth and business cycles?

A

Long-run growth models explain the continuous drive upwards in GDP. Business cycle models explain the peaks ( booms ) and troughs (economic recessions).

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4
Q

What is the economic growth identity?

A

y=C+G+I

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5
Q

What is the equation for aggregate demand?

A

y^D = C+I+G

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6
Q

What is the equation showing equilibrium between aggregate supply and aggregate demand?

A

y = y^D

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7
Q

What is the consumption demand function and list what all the variables are?

A

C = c0 + c1(1-t)y
c0 = autonomous consumption
c1 = marginal propensity to consume ( MPC)
y = aggregate income
t = tax rate

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8
Q

What is another name for aggregate demand?

A

Planned expenditure

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9
Q

Describe the Keynesian cross diagram?

A

Y^D on the y axis and y on the x axis. A line runs at 45degress from the origin. The other line is created with the equation y=c0+I+G+c1(1-t)y

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10
Q

What change does the government spending multiplier quantify?

A

It quantifies the change in output (y) divided by change in government spending (G).

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11
Q

How do you work out the government spending multiplier?

A

Reorganise ( y=c0+I+G+c1(1-t)y )so that y is on the left. Then you should be able to see that the multiplier is 1/(1-c1(1-t))

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12
Q

What does the multiplier apply to changes too?

A

To all exogenous components: G,I and c0

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13
Q

What is the spending multiplier?

A

It measures the effect of a change in an exogenous variable (G,I,c0) on output (y).

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14
Q

What does the IS curve represent?

A

The IS curve represents equilibrium on the goods markets, its shown by y=c0+I+G+c1(1-t)y

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15
Q

What are the axis on an IS curve diagram?

A

y axis - Real interest rate
x axis - y (aggregate supply)

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16
Q

What is the equation for investment and its variables?

A

I = a0-a1r
a0 = autonomous investment
a1 = sensitivity of investment with respect to interest rates
r = real interest rates

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17
Q

What does a0 represent in the Investment equation?

A

a0 = sensitivity of investment with respect to interest rates

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18
Q

What is the IS equation with C and I expanded?

A

y = c0+c1(1-t)y + a0 -a1r + G

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19
Q

How would you rearrange the IS equation with I and C expanded?

A

y=k(c0+a0+G)-ka1r

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20
Q

How can you further simplify the IS equation?

A

y = A-ar
A=k(c0+a0+G)
a = ka1

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21
Q

What do each part of the IS-PC-MR represent.

A

IS- Keynesian cross
PC - Phillips curve
MR - Monetary Rule

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22
Q

How is the supply-side of the economy shown?

A

with a production function
y = F(K,N)
y = aggregate output ( not output per worker as in Solow)

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23
Q

What are some of the long-run Solow assumptions?

A

Capital grows over time depending on capital depreciation and investment
Labour grows over time
Capital and Labour behave differently.

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24
Q

What are the different time frames for business cycle analysis?

A

Long run, Medium run, Short run

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25
What are the assumptions for Long-run?
Both labour and capital are allowed to grow
26
What are the assumptions for medium-run?
Capital is assumed to be fixed, labour doesn't grow at a constant rate and can change with supply shocks.
27
What are the assumptions for the short-run?
Capital is fixed, employment decisions are driven by demand for goods and services.
28
What drives the economy in the short run and medium run?
Short run demand drives the economy Medium run - labour market drives the economy as a whole
28
How is y (output/GDP) determined in the short and medium run?
y (output/GDP) is determined by labour market equilibrium in the medium run and is driven by the demand for goods and services in the short run.
29
How is N (labour/employment) determined in the Short/Medium run?
Employment is determined by labour market equilibrium in the medium run and is driven by demand for goods and services in the short run.
30
How do you work out where profit maximisation occurs?
Take the derivative of the profit equation with respect to N then equate too zero. F'(N) -W/P=0 F'(N) = W/P
30
What is the equation for Profit?
Profit = F(N) - (W/P)N W = money wages P = price of output W/P = Real wage
31
What does F'(N) represent?
it represents the marginal product of labour
32
What decides demand for labour in perfect competition?
MPL=W/P represents the demand for labour in perfect competitions. Firms take money wages and prices as given and they employ workers until MPL becomes equal to W/P.
33
What are the axis on a labour demand/supply diagram?
x axis - W/P = real wage y axis N - population employed
34
List some features that make labour markets imperfect.
Imperfect Information, Trade unions, minimum wages and labour market regulation.
35
What are some factors that influence wage setting?
Unemployment benefit, Net utility of unemployment, Economy-wide unemployment
36
Draw the Wage Setting curve (WS)
Check Word for Image
37
What is Trade Union Density?
the % of employees that are members of a trade union in a country.
38
What does a point on the WS curve show?
It shows the wage that has to be paid to secure adequate worker effort( at given level of unemployment)/ effective labour input
39
What determines workers willingness to exert effort?
Real Wage ( w=W/P)
40
Who are the wage setters in imperfect competition?
Employers, trade unions or both
41
What is the Wage setting equation?
W=P^E(B(N,z^w)) P^E = expected price level B = function of the level of employment z^W = a set of wage push variables
42
Why is P^E used?
What matters to workers is what the nominal wage will buy, at the time of wage-setting the price level for the coming period is uncertain so the money wage is evaluated in terms of expected consumer price level.
43
Why is N in the wage setting equation?
High employment (N) means low unemployment and firms have to pay higher wages to motivate workers. money wages W and employment N are positively related.
44
What is zW?
Institutional, policy, structural and shock variables such as unemployment benefits, net utility of unemployment and trade unions.
45
List examples of changes in zW that would shift WS down
Unemployment benefits decrease, working conditions improve, trade unions are weakened.
46
How do you create the price setting equation?
Rearrange W/P=MPL too P=W/MPL then add (1+u) where u represents the markup P=(1+u)(W/MPL) u is actually mew
47
What does the value of u (mew) depend on?
It depends on the degree of competition: more competition means lower mark-up
48
What represents the supply and demand sides of the labour market?
PS (Price setting) - demand WS(Wage setting) - supply
49
What are the axis on a PS diagram?
y axis - real wage W/P x axis - employment N
50
How do you rearrange the PS equation so its suitable to be plotted on a diagram?
P=(1+u)(W/MPL) rearrange to find real wage W/P=MPL/1+u an approximation of this is W/P = (1-u)(MPL) this approximation holds for small values of the mark up
51
What do we assume when modelling WS and PS together?
Non diminishing MPL meaning MPL and PS are horizontal. This means that MPL=APL(Average product of labour)
52
Draw the PS curve
Check Word
53
When WS and PS are modelled together why the equilibrium in the medium run?
Because medium run allows for wages and prices to have time to adjust, but long-run structural changes ( capital accumulation or tech change) haven't occurred yet
54
Draw the WS PS diagram
Check Word
55
How does equilibrium employment define medium run equilibrium output?
because y is a function of N
56
How do we notate MRE ( medium run equilibrium) of output (y) and employment (N)?
equilibrium output = ye Equilibrium employment = Ne e is meant to be small
57
What are short run fluctuations?
They are deviations of output from the MRE level so that y dosnt equal ye
58
How are business cycles generated?
By demand and supply side shocks which push the economy away from MRE
59
What shocks cause WS too shift down?
Changes in zW such as decreases in unemployment benefits or a decline in trade union strength
60
What are positive supple shocks?
Shocks that increase equilibrium level of employment
61
What are some shocks that would shift the PS curve up?
MPL increases from possibly more capital per worker or more skilled workers through investing in labour, increased competition meaning markups (u) decrease
62
What effect would a shift up of the PS curve have?
This is a positive supply shock

Year 2 Exam Prep (3 decks)

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