Econ

Question 1

Monetary approach with flexible prices

Answer 1

Is based on the qty theory of money
Price lvl chgs driven by MS chgs

Only holds in LT

Question 2

Dornbusch Overshooting Model

Answer 2

ST: Prices are inflexible; increase in MS, increases real MS, real IR falls, lead to capital outflows, FX depreciates, overshoots, recovers to LT lvl

LT: increase in MS, lead to proportional increase in prices and depreciates FX
(Consistent with PPP)

Question 3

Mundell Flemming Model

Answer 3

(Short term only)
IR, GDP is affected by fiscal & monetary policy, which affects trade & capital flows, affecting FX

HIGH capital mobility
Fiscal/Monetary(+,+) NA
Fiscal/Monetary(+,-) appreciate
Fiscal/Monetary(-,-) NA
Fiscal/Monetary(-,+) depreciate

LOW capital mobility
Fiscal/Monetary(+,+) depreciate
Fiscal/Monetary(+,-) NA
Fiscal/Monetary(-,-) NA
Fiscal/Monetary(-,+) appreciate

Question 4

Taylor Rule

Answer 4

Sensitivity proposed by Taylor are 0.5

Question 5

CDP: Cobb Douglas Production Function (2 Properties)

Answer 5

1) Constant returns to scale

2) Diminishing marginal productivity of factor inputs

Question 6

CDP: Diminishing Marginal Productivity of Factor Inputs

Answer 6

If alpha(capital) is close to zero, diminishing marginal rtns to capital are significant

If alpha(capital) is close to one, diminishing marginal rtns to capital are NOT significant

Question 7

CDP: Profit Maximization

Answer 7

occurs when:
MPk = r, and
MPL = real wage rate

Question 8

CDP: 2 sources of growth in output per worker

Answer 8

1) Capital deepening: increase capital-labor ratio (along curve)
If MPk > real IR, economies will continue to increase investment in capital
2) Technological progress (shifts curve)

Question 9

CDP: Constant rtns to scale

Answer 9

if QTYS of inputs rises by same %, then output also rises by same %

!!DOESN’T mean it’ll be any more productive

Question 10

Factors affecting Labour Supply

Answer 10

1. Population growth
2. Labor force participation
3. Net migration
4. Avg hrs worked

Question 11

Classical growth model

Answer 11

predicts standards of living remains constant over time even with tech progress since there’s no growth in per capital output

Model not valid in real world