Final Exam

Question 1

What does the consumption over time graph look like

Answer 1

Plots c’ (vertical) against c (horizontal)

Question 2

What is lifetime wealth?

Answer 2

y - t + (y’ - ‘t / 1+r)

Question 3

Where is the consumers’ optimal point?

Answer 3

Where MRS = 1+r when deciding c and c’

Where MRS = w when deciding c and l

Question 4

What is the formula for consumption

Answer 4

If c = c’ = we (1+r) / (2+r)

Question 5

How does changing the interest rate affect the c c’ graph

Answer 5

E remains unchanged, increase in r makes the curve steeper

Question 6

How does changing we affect the c, c’ graph

Answer 6

Increase in we shifts it out but you have to show whether this is due to y or y’

Question 7

What is riccardian equivalence

Answer 7

If the change in current tax is the same as the PV of the change in future tax, there is no change in consumption behaviour

Assumes perfect markets, binding borrowing constraints can change this

Question 8

What shifts the labour supply curve

Answer 8

Changes is we (- as higher we shifts left)

Changes in r (+ as higher r shifts right)

Question 9

What does an increase in tax do to the consumer’s choice

Answer 9

• wealth effect

lower c, lower l, higher N (also shifts Ys)

Question 10

What does an increase in rates do to the consumer’s choice

Answer 10

+ savings effect

higher s, lower c, higher N (no change in Ys)

Question 11

What do firms aim to maximise?

Answer 11

The present value of their firm = p / (p’ / 1+r)

Question 12

What is the formula for profit?

Answer 12

p = Y - wN - I (p gross = Y - wn)
p' = Y - wN + (1-d)*K'

Question 13

How do firms make their labour decision?

Answer 13

Same as in 1 prediod model - maximise gross profit

Where MPK = w

Question 14

What shifts Labor Demand?

Answer 14

Increases in current z (+ higher z shifts Nd right)

Increases in K (+ as higher k shifts Nd right)

Question 15

How do firms make their investment decision?

Answer 15

MB = MC = 1

Since (MB = MPK’ + 1 - d) / 1+r invest at MPK’ = r + d

Question 16

What does the investment graph look like?

Answer 16

Plots r against I curve is equal to MPK’ - d

Question 17

What increases I?

Answer 17

Lower in r (- as move down I curve)
Higher d (+) shift
Higher z' (+) shift
Lower K (+) shift

Question 18

What are the 3 graphs in the 2 Period Model?

Answer 18

1) Labour Market (w against N)
2) Goods Market (r against Y)
3) Credit Market (r against credit), don’t need to draw

Question 19

What underpins the Labour Market Graph in 2PM

Answer 19

Nd comes from firm decision

Ns comes from household decision

Question 20

What underpins the goods market?

Answer 20

Yd + C+I+G

Ys is based on labour decision and firm production

Question 21

What shifts Ys?

Answer 21

Shifts when Ns shifts due to we or G

Shifts when Nd shifts due to z or K

Question 22

What shifts Yd right?

Answer 22

Higher G (+)
Lower taxes (-)
Increase in y' (+)
Decrease in k (-)
Increase in z (+)

Question 23

What is the result of lower K?

Answer 23

MPN becomes lower so ND shifts left, as does Ys

R increases so Ns shifts right and I decreases

Question 24

What are the 3 RBC Graphs?

Answer 24

1) Labour Market (w against N)
2) Goods Market (r against Y)
3) Money Market (P against M)

Question 25

What drives fluctuations in output in the RBC model

Answer 25

TFP

Question 26

What drives fluctuations in output in the NK model

Answer 26

Demand

Question 27

What is the formula for money demand?

Answer 27

Md = PY - P(1+q)x

Question 28

What shifts Md right

Answer 28

Higher Y (+) or lower r (-)

Question 29

Which model is money neutral in?

Answer 29

RBC, Money is not neutral in NK

Question 30

Which model has flexible prices?

Answer 30

RBC, prices are sticky in NK

Question 31

Which model is not perfectly competitive?

Answer 31

NK

Question 32

What are the 4 markets in NK?

Answer 32

1) Firm production (plots Y against N and only has curved line where Y = zF(K,N)
2) Labour Market (only has upward sloping Ns curve)
3) Goods Market (plots r against Y, includes Ys and Yd but only Yd matters)
4) Money market (plots P against M, bank changes Ms to keep prices unchanged)

Question 33

How do you analyse changes in NK?

Answer 33

1) see if there is a shift in Firm curve
2) determine affect on YD and shift, the new Y is based only on the Yd curve at the same interest rate
3) See how Md shifts and then shift Ms to keep inflation at 0
4) see how Firms have the change N in order to meet this level of production
5) see how much they need to pay to get this level of N

Question 34

What are the 4 channels?

Answer 34

1) Y
2) Profit and Taxes
3) r
4) w
[5) M only in RBC]

Question 35

How can the CB increase MS?

Answer 35

Gov issues new bonds which the bank buys

Printing money