final

Question 1

Growth

Answer 1

is the steady increase in aggregate output over time.

Question 2

measuring the standard of living

Answer 2

• We care about growth because we care about the standard of living.
• Output per person, rather than output itself, is the variable we compare over time or across countries.
• We need to correct for variations in exchange rates and systematic differences in prices across countries.
• When comparing the standard of living across countries, we use purchasing power parity (PPP) numbers which adjust the numbers for the purchasing power of different countries.

Question 3

Growth in Rich Countries since 1950

Answer 3

Countries with lower levels of output per person in 1950 have typically grown faster.

Question 4

Change in Growth in Rich Countries since 1950 VS 1960

Answer 4

When we look at 85 countries for which we have data, we see that there is no clear relation between the growth rate of output since 1960 and the level of output per person in 1960.

Question 5

For the OECD countries, evidence of convergence.

Answer 5

For the OECD countries, there is clear evidence of convergence.

• Convergence is also visible for many Asian countries, especially for those with high growth rates, called the four tigers—Singapore, Taiwan, Hong Kong, and South Korea.
• Most African countries were very poor in 1960, and some of them had negative growth of output per person between 1960 and 2011 due in part to internal or external conflicts.

Question 6

aggregate production function

Answer 6

Y = F ( K, N)

where Y is output,

K is capital, and N is labour.

The function F depends on the state of technology.

susieja visą ekonomikos produkciją su visu ekonomikoje įdarbinto darbo kiekiu

Question 7

Y = F ( K, N)

Answer 7

aggregate production function

where Y is output,

K is capital, and N is labour.

The function F depends on the state of technology.

Question 8

constant returns to scale:

Answer 8

xY =F ( xK, xN)

tai, kas atsitinka su ilgalaike grąža, kai didėja gamybos mastas, kai visi sąnaudų lygiai, įskaitant fizinio kapitalo naudojimą, yra kintami.

Question 9

production function and constant returns to scale imply

Answer 9

a simple relation between output per worker (Y/N) and capital per worker (K/N):

Y/N = F * ( K / N, 1)

Question 10

Decreasing returns to capital:

Answer 10

Increases in capital, given labour, lead to smaller and smaller increases in output per worker.

Kapitalo padidėjimas, atsižvelgiant į darbo jėgą, lemia vis mažesnį produkcijos vienam darbuotojui padidėjimą.

Question 11

Decreasing returns to labour:

Answer 11

Increases in labour, given capital, lead to smaller and smaller increases in output.

Darbo jėgos padidėjimas, atsižvelgiant į kapitalą, lemia vis mažesnį gamybos padidėjimą.

Question 12

Increases in capital per worker:

Answer 12

Movements along the production function.

Question 13

Improvements in the state of technology:

Answer 13

Shifts (up) of the production function, lead to an increase in output per worker for a given level of capital per worker.

Question 14

Growth comes from

Answer 14

capital accumulation (a higher saving rate) and technological progress (the improvement in the state of technology)

Question 15

Interactions between Output and Capital since 1970

Answer 15

Since 1970, the US saving ratio—the ratio of saving to gross domestic product—has averaged only 17%, compared to 22% in Germany and 30% in Japan.

Even if a lower saving rate does not permanently affect the growth rate, it does affect the level of output and the standard of living

Question 16

Output, in the long run, depends on two relations

Answer 16

• The amount of capital determines the amount of output
• The amount of output being produced determines the amount of saving, which in turn determines the amount of capital being accumulated over time.

Question 17

Higher capital per worker leads to …

Answer 17

to higher output per worker.

Question 18

Assume: the economy is closed, public saving is 0, and private saving is proportional –> So the relation between output and investment:

Answer 18

The economy is closed: I = S + (T − G)
Public saving (T − G) is 0: I = S
Private saving is proportional to income: S= sY

where s is a saving rate, which has a value between 0 and 1.

So the relation between output and investment:
It = sYt

Question 19

It = sYt

Answer 19

Investment is proportional to output.

The higher (lower) output is, the higher (lower) is saving and so the higher (lower) is investment

Question 20

It = sYt

the economy, public savings, and private savings are:

Answer 20

The economy is closed: I = S + (T − G)

Public saving (T − G) is 0: I = S

Private saving is proportional to income:S = sY

where s is a saving rate, which has a value between 0 and 1.

Question 21

The change in the capital stock per worker

Answer 21

is equal to saving per worker minus depreciation:

s* Yt/N - δ* Kt / N

Capital per worker refers to the measure of how much capital exists in the economy and how good that capital is. Moreover, improvement in the quality of capital per worker leads to economic growth since employees will make more services and goods with better capital.

Question 22

δ meaning

Answer 22

where (delta) is capital depreciation.

Question 23

If investment per worker exceeds (is less than) depreciation per worker

Answer 23

If investment per worker exceeds (is less than) depreciation per worker –> the change in capital per worker is positive (negative).

Question 24

When capital and output are low –> …

When capital and output are high –> …

Answer 24

When capital and output are low, investment exceeds depreciation and capital increases.

When capital and output are high, investment is less than depreciation and capital decreases.

Question 25

Steady state of the economy.

Answer 25

The state in which output per worker and capital per worker are no longer changing is called the steady state of the economy.

Question 26

The steady-state value of capital per worker

Answer 26

The steady-state value of capital per worker is such that the amount of saving per worker is sufficient to cover depreciation of the capital stock per worker.

Question 27

The saving rate

Answer 27

has no effect on the long-run growth rate of output per worker, which is equal to zero.

The saving rate determines the level of output per worker in the long run.

An increase in the saving rate will lead to higher growth of output per worker for some time, but not forever.

Question 28

A country with a higher saving rate achieves

Answer 28

a higher steady-state level of output per worker.

Question 29

An increase in the saving rate leads to a

Answer 29

period of higher growth until output reaches its new higher steady-state level

Question 30

Golden-rule level of capital:

Answer 30

The level of capital associated with the saving rate that yields the highest level of consumption in a steady state.

Question 31

Implications of Alternative saving Rates

Answer 31

What matters to people is not how many is produced, but how much they consume.

Question 32

For a saving rate between zero and the golden-rule level

Answer 32

a higher saving rate leads to higher capital per worker, higher output per worker and higher consumption per worker in the long-term.

Question 33

For a saving rate greater than the golden-rule level leads

Answer 33

a higher saving rate still leads to higher capital per worker and output per worker, but lower consumption per worker.

Question 34

In the long run, output per worker doubles when

Answer 34

the saving rate doubles.

Question 35

It takes a long time for output to adjust to its new higher level after

Answer 35

an increase in the saving rate. Put another way, an increase in the saving rate leads to a long period of higher growth.

Question 36

Human capital (H):

Answer 36

the set of skills of the workers in the economy is built through education and on-the-job training.

Question 37

As for physical capital (K)

Answer 37

accumulation, countries that save more or spend more on education can achieve higher steady-state levels of output per worker.

Question 38

Models of endogenous growth

Answer 38

: Steady-state growth in output per worker depends on variables such as the saving rate and the rate of spending on education, even without technological progress

the current consensus is that given the rate of technological progress, higher rates of saving or spending on education do not lead to a permanently higher growth rate.

Question 39

to compare the standard of living across countries we use:

Answer 39

purchasing power parity (PPP)

numbers which adjust the numbers for the purchasing power of different countries.

Question 40

Technological progress can lead to:

Answer 40

*larger quantities of output for given quantities of capital and labour

*better products

*new products

*a large variety of products.

Question 41

The state of technology (A)

Answer 41

is a variable that tells us how much output can be produced from given amounts of capital and labour at any time:

Y = F ( K, AN )

Question 42

AN

Answer 42

so AN is the amount of effective labour.

Question 43

effective labour

Answer 43

AN

Question 44

With constant returns to scale and a given state of technology (A), if the amounts of capital and labour changes by x times,

Answer 44

output changes by x times: xY = F (xK, xAN)

Question 45

If x = 1/AN, output per effective worker is a function of capital per effective worker:

Answer 45

Y / AN = f ( K / AN)

Question 46

Because of decreasing returns to capital, increases in capital per effective worker lead to

Answer 46

smaller and smaller increases in output per effective worker.

Question 47

When the economy is in a steady state, capital per worker and output

Answer 47

per worker grow at the rate of technological progress (gA).

Question 48

The steady state of the economy is such that capital per effective worker and output per effective worker are

Answer 48

constant and equal to (K/AN)* and (Y/AN)*, respectively

Question 49

On the balanced growth path (steady state or long run):

Answer 49

• Capital per effective worker and output per worker are constant.
• Capital per worker and output per worker are growing at the rate of technological progress.
• Capital and output are growing at a rate equal to the sum of population growth and the rate of technological progress.

Question 50

An increase in the saving rate leads to an

Answer 50

increase in the steady-state levels of output per effective worker and capital per effective worker.

Question 51

The increase in the saving rate leads to higher growth until

Answer 51

the economy reaches its new, higher, balanced growth path.

Question 52

Most technological progress is

Answer 52

the outcome of firms’ research and development (R&D) activities.

Question 53

The level of R&D spending depends

Answer 53

not only on the fertility of research (how spending on R&D translates into new ideas and new products)

but also on the appropriability of research results (the extent to which firms can benefit from the results of their own R&D).

Question 54

Patents give a firm

Answer 54

that has discovered a new product the right to exclude anyone else from the production or use of that new product for some time.

Question 55

Some researchers believe that management practices

Answer 55

might be stronger than many of the other factors that determine a firm’s performance, including technological innovations.

Question 56

After the Korean War, South Korea has provided private ownership and legal protection of

Answer 56

private producers, while North Korea relied on central planning with no property rights for individuals

Fifty years later, GDP per person was 10 times higher in South Korea.

Question 57

To sustain growth must:

Answer 57

To sustain growth, advanced countries that are at the technology frontier must innovate.

Question 58

Poorer countries that are further from the technological frontier, can instead grow largely by …

Answer 58

by imitating rather than innovating, by importing and adapting existing technologies instead of developing new ones.

Question 59

The difference between innovation and imitation explains

Answer 59

why countries that are less technologically advanced often have poor patent protection (e.g. China).

Question 60

technological progress is the key to

Answer 60

increases in the standard of living.

Question 61

technological progress is often blamed

Answer 61

for higher unemployment and for higher income inequality (bet statistika rodo kad didesnis darbingumas su technologijom)

Question 62

For simplicity, we ignore capital so that the production function becomes:

Answer 62

Y = A N
so output is produced using only labour.

Question 63

N = Y / A

Answer 63

employment equals output divided by productivity.

Question 64

increase in productivity may increase or decrease the demand for goods. Thus, it may shift the

Answer 64

IS curve to the left or to the right. What happens depends on what triggered the increase in productivity in the first place.

Question 65

there is a strong positive relation between output growth and productivity growth. But the causality runs from

Answer 65

output growth to productivity, not the other way around.

Question 66

In the medium run, the economy tends to return

Answer 66

to the natural level of unemployment.

Question 67

technological unemployment typically resurfaces

Answer 67

whenever unemployment is high, e.g., the Great Depression

Because the natural rate of unemployment is determined by the price-setting relation and the wage-setting relation (Chapter 7), we can consider how changes in technology affect each of the two relations.

Question 68

increase in productivity

Answer 68

shifts both the wage- and the price-setting curves by the same proportion and thus has no effect on the natural rate.

Question 69

There is little relation between the 10-year averages of productivity growth and the 10-year averages of the unemployment rate.

Answer 69

If anything, higher productivity growth is associated with lower unemployment.

Question 70

Productivity and the Natural Rate of Unemployment In the short run

Answer 70

there is no reason to expect a systematic relation between movements in productivity growth and movements in unemploymen

Question 71

Productivity and the Natural Rate of Unemployment In the medium run

Answer 71

if there is a relation between productivity growth and unemployment, it appears to be an inverse relation.

An inverse relationship is a situation where if one variable increases, the other tends to decrease

Question 72

Fears of technological unemployment probably come from structural change

Answer 72

– the change in the structure of the economy induced by technological progress.

Question 73

Openness in goods markets

Answer 73

The ability of consumers and firms to choose between domestic goods and foreign goods.

Even countries most committed to free trade have tariffs (taxes on imported goods) and quotas (restrictions on the quantity of goods that can be imported).

Question 74

Openness in financial markets

Answer 74

The ability of financial investors to choose between domestic assets and foreign assets — until recently, even some rich countries had capital controls — restrictions on the foreign assets their domestic residents could hold and the domestic assets foreign could hold.

Question 75

Openness in factor markets

Answer 75

The ability of firms to choose where to locate production, and of workers to choose where to work,

e.g., the North American Free Trade Agreement (NAFTA) signed in 1993 by the United States, Canada, and Mexico centered on how it would affect the relocation of US firms to Mexico.

Question 76

Openness in Goods Markets

Answer 76

Since 1960, exports and imports have more than doubled in relation to GDP. The EU has become an increasingly open economy.

Question 77

Real exchange rate

Answer 77

The price of domestic goods relative to foreign goods.

Question 78

Nominal exchange rate

Answer 78

The price of the domestic currency in terms of foreign currency.

Question 79

(Nominal) Appreciation

Answer 79

An increase in the price of the domestic currency in terms of a foreign currency, i.e., an increase in the exchange rate.

Question 80

(Nominal) Depreciation:

Answer 80

A decrease in the price of the domestic cucurrency in terms of a foreign currency, i.e., a decrease in the exchange rate.

Question 81

Although the euro has appreciated relative to the pound,

Answer 81

this appreciation has come with large swings in the nominal exchange rate between the two currencies (2022-11-21: 1Eur = 0.87GBP)

Question 82

The real exchange rate

Answer 82

the price of euro area goods in terms of UK goods, is —-> ε = EP/P*

ε - real exchange rate
E – exchange rate
P – domestic price level
P* – foreign price level

Question 83

The real exchange rate formula

Answer 83

ε = EP/P*

ε - real exchange rate
E – exchange rate
P – domestic price level
P* – foreign price level

Question 84

ε

Answer 84

real exchange rate

Question 85

real exchange rate example

Answer 85

Ferrari is Italian product, while Jaguar is British luxury car.

Assume that the price of Jaguar is £40,000 and the price of Ferrari is €200,000. 1 EUR = 0.87 GBP. The price of Ferrari in pounds is €200,000 x £0.87 = £174,000.

The price of Ferrari in terms of Jaguars – real exchange rate between the euro area and the UK – £174,000/£40,000 = £4.35.

Ferrari is more than 4 times more expensive than a Jaguar.

Question 86

Real appreciation:

Answer 86

An increase in the real exchange rate, i.e., an increase in the relative price of domestic goods in terms of foreign goods.

Question 87

Real depreciation:

Answer 87

A decrease in the real exchange rate, i.e., a decrease in the relative price of domestic goods in terms of foreign goods.

Question 88

Reasons of recent euro depreciation against US dollar:

Answer 88

monetary policy divergence, US dollar as safe-haven currency, (energy prices)

Question 89

Multilateral exchange rate

Answer 89

is a weighted average of bilateral exchange rates, with the weight for each foreign country equal to its share in trade

yra dvišalių valiutų kursų svertinis vidurkis, kai kiekvienos užsienio šalies svoris yra lygus jos daliai prekyboje

Question 90

The nominal effective exchange rate (NEER)

Answer 90

of the euro is a weighted average of nominal bilateral rates between the euro and a basket of foreign currencies. It is an indicator of the external values of the euro vis-à-vis the currencies of selected euro area’s trading partners

eurų yra nominaliųjų dvišalių euro ir užsienio valiutų krepšelio kursų svertinis vidurkis. Tai euro išorinės vertės, palyginimas su pasirinktų euro zonos prekybos partnerių valiutomis, rodiklis.

Question 91

Foreign exchange:

Answer 91

Buying and selling foreign currency.

Question 92

Balance of payments (BOP):

Answer 92

A set of accounts that summarize a country’s transactions with the rest of the world. The BOP divides transactions into two accounts: the current account and the capital account.

Question 92

Balance of payments (BOP):

Answer 92

A set of accounts that summarize a country’s transactions with the rest of the world. The BOP divides transactions into two accounts: the current account and the capital account.

Question 93

Current account, the sum of:

Answer 93

Exports and imports of goods and services (trade balance)

Net income balance between income received from the rest of the world and income paid to foreigners

Net transfers - the difference in foreign aid given and received

Question 94

Capital account

Answer 94

measures the changes in national ownership of assets.

Question 95

Capital account balance

Answer 95

is equal to capital inflows from the rest of the world minus capital outflows to the rest of the world

Question 96

Capital account surplus:

Answer 96

Positive net capital inflows.

Question 97

Capital account deficit:

Answer 97

Negative net capital outflows

Question 98

Current account + capital account =

Answer 98

0

Question 99

Statistical discrepancy:

Answer 99

Difference between current and capital account transactions.

Question 100

GDP measures

Answer 100

value added domestically

Question 101

Gross national product (GNP) measures

Answer 101

the value added by domestic factors of production

Question 102

GNP formula

Answer 102

GNP= GDP + NI

NI denotes net income—payments received from the rest of the world minus income paid to the rest of the world.

Question 103

NI

Answer 103

NI denotes net income—payments received from the rest of the world minus income paid to the rest of the world.

Question 104

Uncovered interest parity

Answer 104

is an arbitrage condition stating that the expected rates of return in terms of domestic currency on domestic bonds and foreign bonds must be equal.

Question 105

Interest parity

Answer 105

implies that the domestic interest rate must be equal to the foreign interest rate minus the expected appreciation rate of the domestic currency.

Question 106

Interest parity

Answer 106

implies that the domestic interest rate must be equal to the foreign interest rate minus the expected appreciation rate of the domestic currency.

atspindinti pusiausvyros būseną, pagal kurią investuotojai gali taikyti palūkanų normas už bankų indėlius dviejose šalyse.

Question 107

Openness in goods markets allows

Answer 107

people and firms to choose between domestic goods and foreign goods. This choice depends primarily on the real exchange rate.

Question 108

Openness in financial markets allows

Answer 108

investors to choose between domestic assets and foreign assets. This choice depends primarily on their relative rates of return, and on the expected rate of appreciation of the domestic currency.

Question 109

In an open economy, the demand for domestic goods formula

Answer 109

Z + C + I + G - IM / ε + X

Question 110

IM / ε

Answer 110

the value of imports in terms of domestic goods

Question 111

C, I, and G constitute the

Answer 111

total domestic demand for goods, domestic or foreign.

Question 112

domestic demand formula

Answer 112

C + I + G = C ( Y - T ) + I ( Y , r ) + G

Question 113

Imports are positively related

Answer 113

to domestic income (Y) and the real exchange rate (ε): IM = IM ( Y, ε)

Question 114

Exports are positively related

Answer 114

to foreign income (Y) and negatively related ε:
X = X ( Y ,ε)

Question 115

The demand for domestic goods and net exports:

Answer 115

The demand for domestic goods and net exports:

a) The domestic demand for goods is an increasing function of income (output).

(b and c) The demand for domestic goods is obtained by subtracting the value of imports from domestic demand and then adding exports.

(d) The trade balance is a decreasing function of output

Question 116

what shows AA, DD, ZZ

Answer 116

The line AA represents the domestic demand for domestic goods, and the line DD represents domestic demand.
AA is flatter than DD.

The line ZZ represents the demand for domestic goods (including exports).

The distance between ZZ and AA is constant because exports do not depend on domestic income but they depend on foreign income.

Question 117

The goods market is in equilibrium when

Answer 117

domestic output is equal to the demand for domestic goods.

At the equilibrium level of output, the trade balance may show a deficit or a surplus.

Question 118

Differences from a closed economy:

Answer 118

Effect on trade balance: An increase in output leads to a trade deficit.

Smaller effect of government spending on output: Because ZZ is flatter than DD, the multiplier is smaller in the open economy.

An increase in government spending leads to an increase in output and to a trade deficit.

Question 119

An increase in foreign demand leads to

Answer 119

an increase in output and to a trade surplus.

Question 120

Summary of Demand− Domestic or Foreign

Answer 120

An increase in domestic demand leads to an increase in domestic output but leads also to a deterioration of the trade balance.

An increase in foreign demand leads to an increase in domestic output and an improvement in the trade balance.

Question 121

Implications of Demand− Domestic or Foreign

Answer 121

Shocks to demand in one country affect all other countries.
.
.
Economic interactions complicate the task of policy makers. Policy coordination is not so easy to achieve.

Question 122

Real deprecation affects the trade balance through three separate channels:

Answer 122

Exports, X, increase.

Imports, IM, decrease.

The relative price of foreign goods in terms of domestic goods, 1/ε , increases.

Question 123

Marshall–Lerner condition

Answer 123

A real depreciation leads to an increase in net exports.

Depreciation leads to a shift in demand, both foreign and domestic, toward domestic goods. The shift in demand leads, in turn, to both an increase in domestic output and an improvement in their trade balance.

Question 124

If the government wants to eliminate the trade deficit without changing output, it must do two things:

Answer 124

achieve a depreciation sufficient to eliminate the trade deficit

reduce government spending so as to shift ZZ back.

Question 125

J-curve

Answer 125

: The adjustment process in the trade balance in response to a real depreciation.

A depreciation initially increases the trade deficit and, over time, exports increase and import decrease, reducing the trade deficit.

Question 126

Uncovered interest parity relation

Answer 126

(or in short interest parity relation) –domestic and foreign bonds must have the same expected rate of return in terms of domestic currency.

Question 127

Interest parity implies that the domestic interest rate must

Answer 127

be equal to the foreign interest rate minus the expected appreciation rate of the domestic currency.

Question 128

expected future exchange

Answer 128

An increase in the domestic interest rate leads to an increase in the exchange rate (appreciation).

An increase in the foreign interest rate leads to a decrease in the exchange rate (depreciation).

An increase in the expected future exchange rate leads to an increase in the current exchange rate (appreciation).

Question 129

A higher domestic interest rate leads

Answer 129

to a higher exchange rate — an appreciation

Question 130

An increase in the interest rate now has two effects:

Answer 130

The direct effect on investment

The secondary effect through the exchange rate

Question 131

An increase in the interest rate decreases demand

Answer 131

directly and indirectly – through the adverse effect of the appreciation on demand.

Question 132

An increase in the interest rate leads to

Answer 132

a decrease in output and an appreciation.

Question 133

An increase in government spending leads to

Answer 133

an increase in output. If the central bank keeps the interest rate unchanged, the exchange rate also remains unchanged.

NX decrease, as higher output increases imports

Question 134

If the country pegs the exchange rate so the interest rate relation becomes

Answer 134

Under a fixed exchange rate and perfect capital mobility, the domestic interest rate must be equal to the foreign interest rate.

Under fixed exchange rates, the central bank gives up monetary policy as a policy instrument.

Question 135

The real exchange rate is:

Answer 135

through a change in the nominal exchange rate, E: If the domestic price level and foreign price level do not change in the short run, this is the only way to adjust the real exchange rate in the short run.

through a change in the domestic price level relative to the foreign price level: In the medium run, as prices adjust, this option is open even to a country with a fixed nominal exchange rate.

Question 136

Demand and output depend:

Answer 136

negatively on the real exchange rate, as higher Ꜫ implies a lower demand for domestic goods, and in turn lower output

positively on government spending and negatively on taxes

negatively on the domestic real interest rate

positively on foreign output through the effect on exports

Question 137

if two economies are operating at potential, inflation rates

Answer 137

would be the same, relative prices would remain constant, and so would the real exchange rate.

Question 138

In the short run, a fixed nominal exchange rate implies

In the medium run, the real exchange rate can

Answer 138

a fixed real exchange rate.

In the medium run, the real exchange rate can adjust even if the nominal exchange rate is fixed. This adjustment is achieved through movements in the relative price levels over time

Question 139

gold standard

Answer 139

was a system in which each country fixed the price of its currency in terms of gold and stood ready to exchange gold for currency at the stated parity.

Question 140

To let a currency float is to

Answer 140

allow a move from a fixed to a flexible exchange rate regime.

Question 141

Faced with the expectations of devaluation, the government has two options:

Answer 141

give in and devalue, or

fight and maintain the parity, at the cost of high interest rates and a potential recession.

Question 142

optimal currency area needs to satisfy one of the two conditions:

Answer 142

The countries have to experience similar shocks.

If the countries experience different shocks, they must have high factor mobility.

The common currency area composed of the 50 states of the United States is close to an optimal currency area, which has high factor mobility, although different states are affected by different shocks.

Question 143

Ways to fix the exchange rate and convince financial investors that the exchange rate is fixed today and also in the future:

Answer 143

Make the fixed exchange rate be part of a more general macroeconomic package.

Make a hard peg so that it is symbolically or technically harder to change the parity

Question 144

Examples of a hard peg:

Answer 144

Dollarization: Replace the domestic currency with the dollar (e.g. British Virgin Islands)

Currency board: A central bank stands ready to exchange foreign currency for domestic currency at the official exchange rate set by the government (e.g. Bulgaria)

Question 145

The European Central Bank (ECB)

Answer 145

institution that governs the euro area’s central banking system and is responsible for shaping and implementing monetary policy in the euro area. The main objective of the ECB is to maintain price stability.

Question 146

The Eurosystem

Answer 146

the ECB and the national central banks (NCBs) of those countries that have adopted the euro.

Question 147

The European System of Central Banks (ESCB)

Answer 147

the ECB and the NCBs of all EU Member States.

Question 148

Governing Council formulates

Answer 148

monetary policy for the euro area

It consists of the 6 members of the Executive Board, plus the governors of the 19 euro area NCBs

Question 149

the decision making bodies of the ECB

Answer 149

governing council, executive board, general council

Question 150

Executive Board prepares

Answer 150

Governing Council meetings and implements monetary policy for the euro area

Question 151

General Council coordinates

Answer 151

monetary policies of the EU Member States whose currency is not the euro

Question 152

Price Stability Definition

Answer 152

Price stability is defined as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of 2% over the medium term.

Question 153

Interest rates were increased

Answer 153

3 times this year: in July (50 bps), September (75 bps) and October (75 bps) meetings. 200 bps in total.

Next Governing Council meeting: 15 December. Markets fully price-in 50 bps increase of interest rates. Terminal rate around 3% by mid-2023. Adjusted for term-premia: ~2.6%

Question 154

,

Answer 154

.

Question 155

Taylor rule

Answer 155

In the 1990s, John Taylor suggested a rule of the policy rate it, now known as the Taylor rule:

it -> nominal interest rate controlled by the central bank (policy rate)

i* -> nominal neutral interest rate, associated with the real neutral rate of interest rn and the target rate of inflation π, so i = rn + π*

πt -> rate of inflation

π* -> target rate of inflation

ut -> unemployment rate

un -> natural rate of unemployment

a and b -> positive coefficients chosen by the central bank

it = i* + alfa ( πt - π*) - b (ut - un)

Question 156

If πt = π* and ut = un,

Answer 156

the central bank should set it = i*.

Question 157

If πt > π*, the central bank should

Answer 157

increase it above i*.

Question 158

If ut > un,

Answer 158

the central bank should decrease it.

The coefficient a reflects how much the CB cares about inflation, while coefficient b reflects how much it cares about unemployment.

Question 159

The budget deficit

Answer 159

equals spending, including real interest payments on the debt (rBt-1), minus taxes net of transfers:

Question 160

primary deficit

Answer 160

(Gt - Tt)

Question 161

primary surplus

Answer 161

(Tt - Gt)

Question 162

September 2022 ECB projections:

Answer 162

euro area government budget balance is expected to improve, driven by the economic cycle and lower cyclically adjusted primary deficit.

Question 163

Government debt in the euro area

Answer 163

is expected to decline over time, reaching about 90% of GDP in 2024.

Question 164

The change in the debt ratio over time (the left side of the equation) is equal to the sum of two terms:

Answer 164

The difference between the real interest rate and the growth rate times the initial debt ratio

The ratio of the primary deficit to GDP

Question 165

The increase in the ratio of debt to GDP is larger:

Answer 165

the higher the real interest rate

the lower the growth rate of output

the higher the initial debt ratio

the higher the ratio of the primary debt to GDP

Question 166

key variable for debt dynamics and sovereign sustainability analysis.

Answer 166

The difference between the average interest rate that governments pay on their debt (i) and the nominal growth rate of the economy (g) is a key variable for debt dynamics and sovereign sustainability analysis.

If i-g > 0, a primary fiscal surplus is needed to stabilise or reduce the debt-to-GDP ratio.

If i-g < 0, debt ratios could be reduced even in the presence of primary budget deficits.

Question 167

The negative interest rate-growth differential before the pandemic helped to contain, or even reduce, debt-to-GDP ratios.

Answer 167

The differential still stands near historic lows but is about to become less favourable as interest rates are increasing.

Question 168

Procyclical fiscal policy -

Answer 168

governments choose to increase government spending and reduce taxes during an economic expansion; reduce spending and increase taxes during a recession.

Question 169

Countercyclical fiscal policy

Answer 169

• counteract the effects of the economic cycle. For example, in recession, governments would increase spending or reduce taxes.

Question 170

To stabilize the economy, governments should

Answer 170

run deficits during recessions and surpluses during booms (countercyclical fiscal policy).

Question 171

.

Answer 171

.

Question 172

Increasingly procyclical during “good years” of 2016-2018,

Answer 172

although institutions recommended differentiated national fiscal policies: countries with fiscal space should have used it, while gradual consolidation should have been pursued by countries with high debt-to-GDP ratios.

Question 173

The aggregate production function

Answer 173

is a relation between output on one hand and labour and capital on the other.

Question 174

The economy will eventually reach a steady state

Answer 174

where output per worker does not increase.

Question 175

Output per person is converging across countries but

Answer 175

most still lag far behind the United States.

Question 176

Consider the following statement: “The Solow model shows that the saving rate does not affect the growth rate in the long run, so we should stop worrying about the low U.S. saving rate. Increasing the saving rate wouldn’t have any important effects on the economy.” Explain why you agree or disagree with this statement?

Answer 176

Disagree. An increase in the saving rate does not affect growth in the long run but does increase growth in the short run. In addition, an increase in the saving rate leads to an increase in the long-run level of output per worker. Finally, since the evidence suggests that the U.S. saving rate is below the golden-rule rate, an increase in the saving rate would increase steady-state consumption per worker.

Question 177

If the rate of technological progress increases, the investment rate

Answer 177

(the ratio of investment to output) must increase to keep capital per effective worker constant.

Question 178

The steady-state rate of growth of output per effective worker is

Answer 178

zero.

Question 179

In steady state, output per worker grows

Answer 179

at the rate of technological progress.

Question 180

Even if the potential returns from research and development (R&D) spending are identical to the potential returns from investing in a new machine,

Answer 180

R&D spending is much riskier for firms than investing in new machines

Question 181

Technological progress leads to a decrease in employment if,

Answer 181

and only if, the increase in output is smaller than the increase in productivity.

Question 182

creative destruction make

Answer 182

some skill sets outdated.

Question 183

For each of the economic changes listed in assess the likely impact on the growth rate and the level of output per worker over the next 5 years and over the next 5 decades.

A permanent reduction in the rate of technological progress

Answer 183

The growth rate of output per worker falls in the short run and continues to fall over time. In the long run, the growth rate approaches a new steady state with a permanently lower (but still positive) growth rate. Level of output per worker continues to rise over time, just at a slower rate.

Question 184

For each of the economic changes listed in assess the likely impact on the growth rate and the level of output per worker over the next 5 years and over the next 5 decades.

A permanent reduction in the saving rate.

Answer 184

A permanent reduction in the saving rate has no affect on the steady-state growth rate of output per worker. The growth rate of output per worker falls (but remains positive) in the short run but in the long run it approaches its original steady-state rate.

Question 185

How do each of the policy proposals affect the appropriability and fertility of research, R&D spending in the long run, and output in the long run?

An international treaty ensuring that each country’s patents are legally protected all over the world.

Answer 185

This proposal would probably lead to lower growth in poorer countries, at least for a while, but higher growth in rich countries.

Question 186

How do each of the policy proposals affect the appropriability and fertility of research, R&D spending in the long run, and output in the long run?

Tax credits for each dollar of R&D spending.

Answer 186

This proposal would lead to an increase in R&D spending. If fertility did not fall, there would be an increase in the rates of technological progress and output growth.

Question 187

How do each of the policy proposals affect the appropriability and fertility of research, R&D spending in the long run, and output in the long run?

A decrease in funding of government-sponsored conferences between universities and corporations.

Answer 187

Presumably, this proposal would lead to a (small) decrease in the fertility of applied research and therefore to a (small) decrease in growth.

Question 188

How do each of the policy proposals affect the appropriability and fertility of research, R&D spending in the long run, and output in the long run?

The elimination of patents on breakthrough drugs, so the drugs can be sold at a low cost as soon as they become available.

Answer 188

This proposal would reduce the appropriability of drug research. Presumably, there would be a reduction in the development of new drugs, a reduction in the rate of technological progress, and a reduction in a growth rate.

Question 189

Sources of technological progress: leaders versus followers

Where does technological progress come from for the economic leaders of the world?

Answer 189

the economic leaders typically achieve technological progress by generating new ideas through R&D.

Question 190

Do developing countries have other alternatives to the sources of technological progress

Answer 190

Developing countries can import technology from the economic leaders by copying this technology or by receiving a transfer of technology as a result of joint ventures with firms headquartered in the economic leaders. Even in the absence of technology transfer, foreign direct investment (FDI) can increase technological progress in the host country by substituting more productive foreign production techniques for less efficient domestic ones.

Question 191

Do you see any reasons developing countries may choose to have poor patent protection? Are there any dangers in such a policy (for developing countries)?

Answer 191

Poor patent protection may facilitate a more rapid adoption of new technologies in developing countries. The costs of such a policy are relatively small, since developing countries generate relatively few new technologies.

Question 192

Interest rate parity means

Answer 192

exchange rates will adjust to equate returns in countries.

Question 193

The central bank influences the value of the exchange rate by

Answer 193

changing the domestic interest rate relative to the foreign interest rate

Question 194

Higher interest rates lead to the

Answer 194

appreciation of domestic currency, which negatively affects exports.

Question 195

Fiscal expansion increases domestic output and leads

Answer 195

to deterioration of the trade balance via higher imports.

Question 196

Real exchanges rates

Answer 196

adjust as the relative price levels change.

Question 197

A devaluation is a decrease

Answer 197

in the nominal exchange rate.

Question 198

Consider an open economy with flexible exchange rates. Suppose output is at the natural level, but there is a trade deficit. The goal of policy is to reduce the trade deficit and leave the level of output at its natural level.

What is the appropriate fiscal and monetary policy mix?

Answer 198

The appropriate mix is a cut in interest rates (shift the LM curve down) to decrease the value of the currency (and thereby to improve the trade balance) and a fiscal contraction (shift the IS curve to the left). If this is done correctly, the level of output will be unchanged and the trade balance will be less negative as net exports increase due to the depreciation of the currency. There would be more exports and less imports (at the same level of income) due to the depreciation.

Question 199

Consider an open economy with flexible exchange rates. Let UIP stand for the uncovered interest parity condition.

In an IS-LM–UIP diagram, show the effect of an increase in foreign output, Y*, on domestic output (Y) and the exchange rate (E), when the domestic central bank leaves the policy interest rate unchanged. Explain in words.

Answer 199

The IS curve shifts right, because net exports tend to increase as foreign output rises. Domestic output increases if the central bank leaves the interest rate unchanged (the LM curve does not shift). The exchange rate will be unchanged.

Question 200

In an IS-LM–UIP diagram, show the effect of an increase in the foreign interest rate, i*, on domestic output (Y) and the exchange rate (E), when the domestic central bank leaves the policy interest rate unchanged. Explain in words.

Answer 200

When the foreign interest rate rises, the domestic interest rate is relatively lower. The UIP curve will shift to the left and the domestic currency depreciates. Note that the IS curve is also affected by the change in the foreign interest rate. A higher foreign interest rate, given the same domestic interest rate, will depreciate the domestic currency and increase net exports. The IS curve will shift to the right. Domestic output rises when the foreign country tightens its monetary policy. The exchange rate depreciates.

Question 201

Eurosystem‘s objective is inflation measured with

Answer 201

HICP measure.

Question 202

Public Sector Purchase Programme (PSPP)

Answer 202

constitute the largest part of Eurosystem‘s APP.

Question 203

Taylor rule describes

Answer 203

it describes monetary policy reaction function.

Question 204

According to Taylor rule, if unemployment gap is positive,

Answer 204

central bank should decrease policy interest rate.

Question 205

To stabilise the economy, governments should

Answer 205

run countercyclical fiscal policy.

Question 206

imply that governments can reduce debt ratios even in the presence of primary budget deficits.

Answer 206

i-g differential should be negative