Final Flashcards
Equation for nominal GDP
Real GDP*Price level
L index
Percent change of Real GDP in year 1 prices
P index
Percent change of Real GDP in year 2 prices
Fisher index
Year 2 chain weighted=Year 1 chain weighted*(1 + avg of L and P)
Constant growth rule
Yt=Yo(1+g)^t
Rule of 70
Time to double = 70/g
Per capita GDP
y=Abar*k^(1/3)
Cobb Douglas ________ predicts differences in per capita GDP
Under
Why does Abar vary?
Property rights, rule of law, human capital, etc
How do you solve Cobb Douglas?
Profit maximization
Abar is _________ important in Solow (compared to Cobb Douglas) due to the feedback effect from __________.
More, capital accumulation
Does capital accumulation drive LR growth?
No
Solow LR growth
Zero
How do you solve the Solow model?
Steady state sY=dK
What is zbar?
Worker productivity
Does the Romer model exhibit transition dynamics?
No. It has a balanced growth path and constant growth rate instead.
Does Solow-Romer have transition dynamics or a balanced growth path?
Both
In the Solow Romer model, countries grow at the…
Growth rate of knowledge
Why does Solow Romer grow faster than Romer?
Direct: higher output
Indirect: higher savings and investment
What happens if you increase savings in Solow Romer?
You jump to a higher balanced growth path but your growth rate doesn’t change. This is known as a level change.
How do you get the growth accounting measures equation?
Start with Cobb Douglas, divide both sides by L, write in growth rates
How do you solve Romer for the balanced growth path?
Sub into Lyt, use constant growth rate, sub into At
Solve Romer for output per person
Yt/L
Solve Romer for stock of knowledge
Delta At+1/At
Solve Solow Romer for growth rate
Convert production function to growth rates, remember gyt=gkt
Solve Solow Romer for output per person
Start with equation for gkt, flip flop to get gyt, solve for K*, sub back into production function, divide by L
Wage rigidity
Wages don’t change after a shock to labor demand or supply
Equation for PDV
Future value/((1+interest rate)^T)
$100 every year for x years
PDV0+PDV1+…+PDVx
Deflation
Negative interest rates
Disinflation
Positive but declining
Equation for the quantity theory of money
MV=PY
Quantity theory of money written in growth rates
gm=inflation+gy
Fisher equation
Nominal interest rate=real interest rate+inflation
i=R+inflation
3 premises of the SR model
1) economy is hit my shocks
2) monetary and fiscal policies affect the real economy in the SR
3) there is a dynamic trade off between output and inflation in the SR
Okun’s law
u-ubar=-1/2(Yt tilda)
Unemployment during the Great Recession
10%
Leverage
Total liabilities/equity
Equation for return
1/leverage
IS curve: SR output depends on…
The real interest rate
The MP curve: the central bank sets the…
Nominal interest rate, which influences the real interest because of sticky inflation
Phillips curve: inflation rises if the economy is…
Booming
Equation for IS curve
Yt tilda=abar-bbar(Rt-rbar)
What is little abar?
Aggregate demand shock
How do you derive the IS curve?
Start with the national income identity, sub in investments, gather “a” terms, solver for short run output
Equation for Phillips curve
Inflation at t=inflation last period +vbar*Yt tilda + obar
What is vbar?
Sensitivity to demand conditions
What does a tightening or contracting Monetary Policy mean
Raise rates
Why is the money supply curve vertical?
The fed can change the money supply whenever they want
To increase the money supply we _____ bonds
Buy
Bond yield equation
(Coupon payment + face value - price)/price
There is an _____ relationship between interest rates and bond prices
Inverse
Equation for monetary policy rule
Rt-rbar=mbar(inflation at t - inflation target)
Dovish
Low mbar, steeper AD curve
Hawkish
High mbar, flatter AD curve
AS/Ad exhibits transition dynamics because
This period’s inflation is dependent on last period’s inflation
Equation for AD curve
Yt tilda=abar-bbar(inflation at t - inflation target)
Equation for AS curve
Inflation at t=inflation at t-1 + vbar*Yt tilda + obar
Equation for Taylor MP rule
(Rt-r)=mbar(inflation at t-inflation target) + nbar*Yt tilda
The Taylor MP curve makes the AD curve _____ than the regular MP rule.
Steeper
Equation for financial friction
R=Rff+fbar
What is fbar?
Financial friction. Only occurs during a financial crisis
When a financial bubble pops, it acts as a ______ AD shock
Negative
Government budget constraint
G+Tr+iBt=T+delta Bt+1 + delta mt+1
G government purchases Tr transfer purchases iBt interest payments on debt T taxes B borrowing M change in money stock
Why has trade risen?
Transportation cost are declining
Tariffs are declining
What is the law of one price?
EP=Pw
Equation for real exchange rate
RER=EP/Pw
Must equal 1 in the long run
What happens to the exchange rate if you increase interest rates?
Increase exchange rate, decrease exports, increase imports, decrease net
Policy Trilemma
Stable exchange rates, MP autonomy, free financial flows
