Final exam Flashcards
1
Q
Growth is
A
the steady increase in aggregate output over time
2
Q
When comparing the standard of living across countries, we use
A
purchasing power parity (PPP)
3
Q
purchasing power parity (PPP)
A
4
Q
Aggregate production function:
A
5
Q
Y is
A
output
6
Q
K is
A
capital
7
Q
N is
A
labour
8
Q
The function F depends on the
A
state of technology
9
Q
Constant returns to scale:
A
10
Q
Decreasing returns to capital:
A
Increases in capital, given labour, lead to smaller and smaller increases in output.
11
Q
Decreasing returns to labor:
A
Increases in labor, given capital, lead to smaller and smaller increases in output.
12
Q
Increases in capital per worker:
A
Movements along the production function.
13
Q
Improvements in the state of technology:
A
Shifts (up) of the production function.
14
Q
Growth comes from
A
capital accumulation and technological progress
15
Q
capital accumulation
A
a higher saving rate
16
Q
technological progress
A
the improvement in the state of technology
17
Q
Decreasing returns to capital: Increases in capital per worker lead to smaller and smaller increases in output per worker.
A
18
Q
An improvement in technology shifts the production function up, leading to an increase in output per worker for a given level of capital per worker.
A
19
Q
Even if a lower saving rate does not permanently affect the growth rate, it does affect the level of
A
output and the standard of living
20
Q
Output, in the long run, depends on two relations:
A
*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.
21
Q
Interactions between Output and Capital
A
22
Q
Higher capital per worker leads to
A
higher output per worker
23
Q
The economy is closed:
A
I = S + (T − G)
24
Q
Public saving (T − G) is 0:
A
I = S
25
Private saving is proportional to income:
S = sY where s is a saving rate, which has a value between 0 and 1
26
the relation between output and investment:
27
Investment is proportional to
output
28
The higher (lower) output is, the higher (lower) is saving and so
the higher (lower) is investment.
29
The change in the capital stock per worker is equal to
saving per worker minus depreciation:
30
31
If investment per worker exceeds (is less than) depreciation per worker, the change in capital per worker is
positive (negative)
32
When capital and output are low,
investment exceeds depreciation and capital increases.
33
When capital and output are high,
investment is less than depreciation and capital decreases.
34
The state in which output per worker and capital per worker are no longer changing is called the
steady state of the economy
35
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.
36
The saving rate has no effect on the long-run growth rate of output per worker, which is equal to
zero
37
The saving rate determines the level of output per worker in the
long run
38
A country with a higher saving rate
achieves a higher steady-state level of output per worker.
39
An increase in the saving rate will lead to
higher growth of output per worker for some time, but not forever.
40
A country with a higher saving rate achieves a higher steady-state level of output per worker.
41
An increase in the saving rate leads to a period of higher growth until
output reaches its new higher steady-state level.
42
An increase in the saving rate leads to a period of higher growth until output reaches its new higher steady-state level.
43
Golden-rule level of capital:
The level of capital associated with the saving rate that yields the highest level of consumption in steady state.
44
For a saving rate between zero and the golden-rule level, a higher saving rate leads to higher capital per worker, higher output per worker and higher consumption per worker in the long-term.
For a saving rate greater than the golden-rule level, a higher saving rate still leads to higher capital per worker and output per worker, but lower consumption per worker.
45
Human capital (H):
The set of skills of the workers in the economy built through education and on-the-job training.
46
As for physical capital (K) accumulation, countries that save more or spend more on education can achieve
higher steady-state levels of output per worker.
47
Models of endogenous growth:
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.
48
The price of food is higher in poor countries than it is in rich countries TF
False. Prices of goods, including food, are typically lower in poor countries.
49
In virtually all the countries of the world, output per person is converging to the level of output per person in the United States TF
False. Output per person is converging across countries but most still lag far behind the United States.
50
Capital accumulation does not affect the level of output in the long run, only technological progress does TF
False. Capital formation cannot sustain growth alone, but it does contribute to long-term growth.
51
The aggregate production function is a relation between output on one hand and labour and capital on the other. TF
True.
52
A higher investment rate can sustain higher growth of output forever. TF
False. The economy will eventually reach a steady state where output per worker does not increase.
53
The higher the saving rate, the higher consumption in steady state. TF
Uncertain, depends on the saving rate.
54
55
56
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?
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.
57
Technological progress can lead to:
58
The state of technology (A) is a variable that tells us
how much output can be produced from given amounts of capital and labour at any time
59
The state of technology (A) is a variable that tells us how much output can be produced from given amounts of capital and labour at any time:
60
AN is the amount of
effective labour
61
Because of decreasing returns to capital, increases in capital per effective worker lead to
smaller and smaller increases in output per effective worker.
62
Because of decreasing returns to capital, increases in capital per effective worker lead to smaller and smaller increases in output per effective worker.
63
Capital per effective worker and output per effective worker converge to
constant values in the long run.
64
Capital per effective worker and output per effective worker converge to constant values in the long run.
Figure 12.2 The dynamics of capital per effective worker and output per effective worker
65
The steady state of the economy is such that capital per effective worker and output per effective worker are constant and equal to
66
When the economy is in steady state, capital per worker and output per worker grow at the rate of
technological progress (gA)
67
On the balanced growth path (steady state or long run):
68
69
An increase in the saving rate leads to
an increase in the steady-state levels of output per effective worker and capital per effective worker.
70
An increase in the saving rate leads to an increase in the steady-state levels of output per effective worker and capital per effective worker.
71
The increase in the saving rate leads to
higher growth until the economy reaches its new, higher, balanced growth path.
72
The increase in the saving rate leads to higher growth until the economy reaches its new, higher, balanced growth path.
73
Most technological progress is the outcome of
firms’ research and development (R&D) activities.
74
The level of R&D spending depends 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).
75
Patents give a firm
that has discovered a new product the right to exclude anyone else from the production or use of that new product for some time.
76
Y=
AN
77
N=
Y/A
78
employment equals
output divided by productivity
79
In the short run, output is determined by
the IS and LM relations
80
An increase in productivity may increase or decrease the
demand for goods
81
An increase in productivity may increase or decrease the demand for goods. Thus, it may shift the IS curve to the left or to the right. What happens depends on what triggered the increase in productivity in the first place.
82
There is a strong positive relation between output growth and
productivity growth
83
There is a strong positive relation between output growth and productivity growth. But the causality runs from output growth to productivity, not the other way around.
84
In the short run, there is no reason to expect a systematic relation between movements in
productivity growth and movements in unemployment.
85
In the medium run, if there is a relation between productivity growth and unemployment, it appears to be
inverse relation
86
Fears of technological unemployment probably come from structural change –
the change in the structure of the economy induced by technological progress
87
Two economists found that mass layoffs cause enormous
relative earnings declines whether they occur in a recession or an expansion.
88
Two economists found that mass layoffs cause enormous relative earnings declines whether they occur in a recession or an expansion.
89
Wage inequality
is largely caused by a steady increase in the demand for high-skilled workers relative to the demand for low-skill workers because:
International trade
Skilled-biased technological progress
90
International trade:
U.S. firms that employ higher proportions of low-skill workers are increasingly driven out of markets by imports from similar firms in low-wage countries.
91
Skilled-biased technological progress:
New machines and new methods of production require more and more high skill workers
92
If the rate of technological progress increases, the investment rate (the ratio of investment to output) must increase to keep capital per effective worker constant. TF
True
93
In steady state, output per effective worker grows at the rate of population growth. TF
False. The steady-state rate of growth of output per effective worker is zero.
94
In steady state, output per worker grows at the rate of technological progress. TF
True
95
Even if the potential returns from research and development (R&D) spending are identical to the potential returns from investing in a new machine, R&D spending is much riskier for firms than investing in new machines. TF
True
96
In the past three decades, the real wages of low-skill U.S. workers have increased relative to the real wages of high skill workers. TF
False
97
Technological progress leads to a decrease in employment if, and only if, the increase in output is smaller than the increase in productivity. TF
True
98
Workers benefit equally from the process of creative destruction.
False, creative destruction make some skill sets outdated.
99
Linksma i
r smagu
100
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.
This proposal would probably lead to lower growth in poorer countries, at least for a while, but higher growth in rich countries.
101
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.
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.
102
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.
Presumably, this proposal would lead to a (small) decrease in the fertility of applied research and therefore to a (small) decrease in growth.
103
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.
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.
104
Where does technological progress come from for the economic leaders of the world?
The economic leaders typically achieve technological progress by generating new ideas through R&D.
105
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.
106
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)?
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.
107
Openness in goods markets:
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).
108
Openness in financial markets:
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.
109
Openness in factor markets:
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.
110
Real exchange rate:
The price of domestic goods relative to foreign goods.
111
Nominal exchange rate:
The price of the domestic currency in terms of foreign currency.
112
(Nominal) Appreciation:
An increase in the price of the domestic currency in terms of a foreign currency, i.e., an increase in the exchange rate.
113
(Nominal) Depreciation:
A decrease in the price of the domestic currency in terms of a foreign currency, i.e., a decrease in the exchange rate.
114
The real exchange rate, the price of euro area goods in terms of UK goods, is
115
real exchange rate
116
E -
exchange rate
117
P -
domestic price level
118
P* -
foreign price level
119
120
121
122
The real exchange rate, the price of euro area goods in terms of UK goods, is
123
Real appreciation:
An increase in the real exchange rate, i.e., an increase in the relative price of domestic goods in terms of foreign goods.
124
Real depreciation:
A decrease in the real exchange rate, i.e., a decrease in the relative price of domestic goods in terms of foreign goods.
125
The nominal
and the real exchange rates between the euro and the pound have moved largely together.
126
Reasons of recent euro depreciation against US dollar:
monetary policy divergence, US dollar as safe-haven currency
127
Multilateral exchange rate
is a weighted average of bilateral exchange rates, with the weight for each foreign country equal to its share in trade.
128
The nominal effective exchange rate (NEER) 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 (42).
129
Foreign exchange:
Buying and selling foreign currency.
130
Balance of payments (BOP):
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.
131
Current account, the sum of:
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
132
Capital account
measures the changes in national ownership of assets.
133
Capital account balance
is equal to capital inflows from the rest of the world minus capital outflows to the rest of the world.
134
Capital account surplus:
Positive net capital inflows.
135
Capital account deficit:
Negative net capital outflows.
136
Current account + capital account =
0
137
Statistical discrepancy:
Difference between current and capital account transactions.
138
GDP measures
value added domestically
139
Gross national product (GNP)
measures the value added by domestic factors of production
140
GNP =
GDP + NI
141
where NI denotes net income—
payments received from the rest of the world minus income paid to the rest of the world.
142
Uncovered interest parity
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.
143
Interest parity
implies that the domestic interest rate must be equal to the foreign interest rate minus the expected appreciation rate of the domestic currency.
144
Openness in goods markets allows people and firms to
choose between domestic goods and foreign goods. This choice depends primarily on the real exchange rate.
145
Openness in financial markets allows 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.
146
In an open economy, the demand for domestic goods is
147
the value of imports in terms of domestic goods
148
C, I, and G constitute the total
domestic demand for goods, domestic or foreign.
149
Graphically, equilibrium output is at the point where
demand equals output, the intersection of ZZ and the 45-degree line.
150
The goods market is in equilibrium when domestic output is equal to the
demand for domestic goods.
151
At the equilibrium level of output, the trade balance may show a
deficit or a surplus.
152
Differences from a closed economy:
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.
153
An increase in foreign demand leads to
an increase in output and to a trade surplus.
154
An increase in domestic demand leads to an
increase in domestic output but leads also to a deterioration of the trade balance.
155
An increase in foreign demand leads to
an increase in domestic output and an improvement in the trade balance.
156
Shocks to demand in one country affect
all other countries
157
Economic interactions complicate the task of policy makers. Policy coordination
coordination is not so easy to achieve.
158
Real deprecation affects the trade balance through three separate channels:
Exports, X, increase.
Imports, IM, decrease.
The relative price of foreign goods in terms of domestic goods, 1/ε , increases.
159
Marshall–Lerner condition:
A real depreciation leads to an increase in net exports.
160
Depreciation leads to a shift in demand, both
foreign and domestic, toward domestic goods
161
The shift in demand leads, in turn, to both
an increase in domestic output and an improvement in their trade balance.
162
If the government wants to eliminate the trade deficit without changing output, it must do two things:
achieve a depreciation sufficient to eliminate the trade deficit
reduce government spending so as to shift ZZ back.
163
J-curve:
The adjustment process in the trade balance in response to a real depreciation.
164
A depreciation initially increases the trade deficit and, over time,
exports increase and import decrease, reducing the trade deficit.
165
J-curve: 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.
166
If there are no statistical discrepancies, countries with current account deficits must receive net capital inflows. TF
True.
167
A nominal exchange rate is the price of the domestic currency in terms of the foreign currency. TF
True.
168
A real appreciation means that domestic goods become less expensive relative to foreign goods. TF
False, domestic goods become relatively more expensive.
169
The nominal exchange rate and the real exchange rate always move in the same direction TF
False. Differences in inflation rates can cause movements in opposite directions.
170
Opening the economy to trade tends to increase the multiplier because an increase in expenditure leads to more exports. TF
False. An increase in spending will now be spread between domestic and foreign goods.
171
Real exchange rate appreciations lead to trade deficits and real exchange rate depreciations lead to trade surpluses. TF
True.
172
A real depreciation leads to an immediate improvement in the trade balance. TF
False. Econometric evidence suggests that a real depreciation does not lead to an immediate improvement in the trade balance. Typically, the trade balance improves six to twelve months after a real depreciation.
173
Assume that the price of Cadillac, produced in the US, is $80,000, while the price of Porsche, produced in Germany, is €100,000. Nominal exchange rate is €1 = $1.5. Calculate the real exchange rate, i.e. the price of euro area goods in terms of US goods.
174
175
176
The model is an extension to the open economy of the IS-LM model and it is known as the
Mundell-Fleming model
177
then goods market equilibrium implies that output depends
negatively on both the nominal interest rate and the nominal exchange rate
178
If ε = E, then goods market equilibrium implies that output depends
negatively on both the nominal interest rate and the nominal exchange rate
179
Uncovered interest parity relation (or in short interest parity relation) –
domestic and foreign bonds must have the same expected rate of return in terms of domestic currency.
180
Interest parity implies that the domestic interest rate must be equal to the
foreign interest rate minus the expected appreciation rate of the domestic currency.
181
An increase in the domestic interest rate leads to
an increase in the exchange rate (appreciation)
182
An increase in the foreign interest rate leads to a
decrease in the exchange rate (depreciation)
183
An increase in the expected future exchange rate leads to
an increase in the current exchange rate (appreciation).
184
A higher domestic interest rate leads to a higher exchange rate —
an appreciation
185
An increase in the interest rate now has two effects:
The direct effect on investment
The secondary effect through the exchange rate
186
An increase in the interest rate leads to a decrease in
output and an appreciation.
187
An increase in government spending leads to an increase in
Output
188
If the central bank keeps the interest rate unchanged, the exchange rate also remains
unchanged.
189
NX decrease, as
higher output increases imports.
190
Some countries peg their currency to the
Dollar
191
Some countries operate under a crawling peg by moving to
an exchange rate target slowly (Vietnam, Botswana, etc.)
192
In the EMS, member countries agreed to maintain their exchange rate relative to the other currencies in the system within narrow limits or bands around a central parity —
— a given value for the exchange rate.
193
Under a fixed exchange rate and perfect capital mobility, the domestic interest rate must be equal to the
foreign interest rate.
194
Under fixed exchange rates, the central bank gives up monetary policy
as a policy instrument.
195
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.
196
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.
197
Demand and output depend:
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
198
In the medium run, if domestic and foreign inflation being equal, the real exchange rate is
constant.
199
In the short run, a fixed nominal exchange rate implies
a fixed real exchange rate.
200
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.
201
To let a currency float is to
allow a move from a fixed to a flexible exchange rate regime.
202
Expectations that a devaluation may be coming can trigger
an exchange rate crisis.
203
Faced with the expectations of devaluation, the government has two options:
give in and devalue, or fight and maintain the parity, at the cost of high interest rates and a potential recession.
204
Three important points:
The level of today’s exchange rate will move one-for-one with the future expected exchange rate.
Today’s exchange rate will move when future expected interest rates move in either country.
Because today’s exchange rate moves with any change in expectations, the exchange rate will be volatile, that is, move frequently and perhaps by large amounts.
205
A country that decides to operate under flexible exchange rates must accept the fact that it will be exposed to
substantial exchange rate fluctuations over time
206
According to Robert Mundell, an optimal currency area needs to satisfy one of the two conditions:
The countries have to experience similar shocks.
If the countries experience different shocks, they must have high factor mobility
207
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.
208
Ways to fix the exchange rate and convince financial investors that the exchange rate is fixed today and also in the future:
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.
209
Examples of a hard peg:
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)
210
The interest rate parity condition means that interest rates are equal across countries TF
False. Interest rate parity means exchange rates will adjust to equate returns in countries.
211
The central bank influences the value of the exchange rate by changing the domestic interest rate relative to the foreign interest rate. The central bank influences the value of the exchange rate by changing the domestic interest rate relative to the foreign interest rate. An increase in domestic interest rates, all other factors equal, increases exports. TF
False. Higher interest rates lead to the appreciation of domestic currency, which negatively affects exports.
212
A fiscal expansion, all other factors equal, tends to increase net exports TF
False. Fiscal expansion increases domestic output and leads to deterioration of the trade balance via higher imports.
213
If the nominal exchange rate is fixed, the real exchange rate is fixed
False. Real exchanges rates adjust as the relative price levels change.
214
A devaluation is an increase in the nominal exchange rate.
False. A devaluation is a decrease in the nominal exchange rate.
215
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?
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.
216
Consider an open economy with flexible exchange rates. Let UIP stand for the uncovered interest parity condition.
a. 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.
b. 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.
Consider an open economy with flexible exchange rates. Let UIP stand for the uncovered interest parity condition.
a. 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.
b. 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.
217
218
The European Central Bank (ECB)
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.
219
The Eurosystem
the ECB and the national central banks (NCBs) of those countries that have adopted the euro.
220
The European System of Central Banks (ESCB)
the ECB and the NCBs of all EU Member States.
221
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.
222
HICP
Focuses on a broad range of consumer prices, product weights reflect national preferences
223
EURO AREA
Only price developments in the euro area as a whole are considered
224
MEDIUM TERM
Reflects forward-looking manner as monetary policy can’t control short-term price developments
225
Asset Purchase Programme (APP) since 2015 until end-June 2022.
. Current volume outstanding: 3.4 trn Eur. On 15 December meeting key principles of portfolio reduction should be decided.
226
The budget deficit equals
spending, including real interest payments on the debt (rBt-1), minus taxes net of transfers
227
September 2022 ECB projections:
: euro area government budget balance is expected to improve, driven by the economic cycle and lower cyclically adjusted primary deficit.
228
Government debt in the euro area is expected to
decline over time, reaching about 90% of GDP in 2024.
229
The change in the debt ratio over time (the left side of the equation) is equal to the sum of two terms:
The difference between the real interest rate and the growth rate times the initial debt ratio
The ratio of the primary deficit to GDP
230
The increase in the ratio of debt to GDP is larger:
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
231
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.
232
If i-g > 0,
a primary fiscal surplus is needed to stabilise or reduce the debt-to-GDP ratio.
233
If i-g < 0,
debt ratios could be reduced even in the presence of primary budget deficits.
234
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.
235
The negative interest rate-growth differential before the pandemic helped to
contain, or even reduce, debt-to-GDP ratios.
236
The differential still stands near historic lows but is about to
become less favourable as interest rates are increasing.
237
Procyclical fiscal policy -
governments choose to increase government spending and reduce taxes during an economic expansion; reduce spending and increase taxes during a recession.
238
Countercyclical fiscal policy -
counteract the effects of the economic cycle. For example, in recession, governments would increase spending or reduce taxes.
239
To stabilize the economy, governments should run
deficits during recessions and surpluses during booms (countercyclical fiscal policy).
240
Eurosystem‘s objective is inflation measured with GDP deflator at 2%. TF
False, it is HICP measure.
241
Public Sector Purchase Programme (PSPP) constitute the largest part of Eurosystem‘s APP TF
True.
242
Taylor rule describes relationship between inflation and unemployment
False, it describes monetary policy reaction function.
243
According to Taylor rule, if unemployment gap is positive, central bank should decrease policy interest rate. TF
True.
244
Positive i-g differential imply that governments can reduce debt ratios even in the presence of primary budget deficits. TF
False, i-g differential should be negative.
245
To stabilise the economy, governments should run procyclical fiscal policy. TF
. False, it should run countercyclical fiscal policy.
246
247
248
Endogeninis
vidaus veiksnys
249
converge
suartėti
250
Capital per effective worker
is how much capital is there for a worker who can use technology. With more technology, every worker can produce more
251
output per worker
A measure of productivity calculated by dividing the total output by the number of workers.
252
Capital per worker refers to
the measure of how much capital exists in the economy and how good that capital is
253
effective labour is represented by
AN
254
Definition of the IS Curve:
The IS curve shows combinations of interest rates and levels of output such that planned spending equals income
255
Creative destruction
is the process by which capitalist enterprise creates a continuously changing economy.
256
What are the consequences of A permanent reduction in the rate of technological progress?
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.
257
What are the consequences of a permanent reduction in the saving rate?
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.
258
Where does technological progress come from for the economic leaders of the world?
The economic leaders typically achieve technological progress by generating new ideas through R&D.
259
Do developing countries have other alternatives to the sources of technological progress)?
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.
260
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)?
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.
261
The nominal exchange rate is
the amount of domestic currency needed to purchase foreign currency
262
The current account represents a
country's imports and exports of goods and services, payments made to foreign investors, and transfers such as foreign aid
263
The capital account keeps track of the net change in
a nation's assets and liabilities during a year
264
discrepancy
neatitikimas
265
NI -
National Income
266
EMS
European Monetary System
267
Technological progress leads to a decrease in employment if, and only if
the increase in output is smaller than the increase in productivity
268
Demand and output depend NEGATIVELY ON
the real exchange rate
the domestic real interest rate
on taxes
269
Demand and output depend POSITIVELY ON
government spending
foreign output through the effect on exports
