Int Macro Final Flashcards
Types of variables that move with the economy:
- Procyclical- rise as the economy rises
- Countercyclical- fall as the economy improves
- Acyclical- does not move with the economy
Types of economic indicators:
o Leading- they change before the overall economy changes
o Lagging- they change after the overall economy changes
o Coincident- change at the same time as the economy changes
What shifts the IS curve?
o “animal spirits”- irrational unexpected optimism or pessimism
o Events that encourage consumers or businesses to spend more or less
o Changes in G or T
What is the Theory of Liquidity Preference
How much money people want to hold based on the interest rate
o States that the interest rate adjusts to balance the supply and demand for money
What shifts the LM curve?
o Changes in the money supply
-Increasing the money supply shifts LM to the right
o Changes in money demanded, other than a change due to Y, More D shifts LM left, less shifts it right.
o Changes in liquidity preferences
Spending multiplier:
^Y=1/1-mpc
Tax Multiplier:
^Y=mpc/1-mpc
In the Dynamic AD model what shifts AD and AS
AD:M (adjusts) and V (reverses)
Short Run Aggregate Supply Curve
-A short run relationship between inflation and economic growth
Adjusts up or down based on inflation after AD has changed.
Phillips Curve
a short run empirical relationship between inflation and unemployment
Ricardian Equivalence:
when government tries to stimulate demand by using debt-financed government spending, demand remains unchanged
This is because the public will save its excess money in order to pay for future tax increases that will be initiated to pay off the debt
Problems with activist monetary policy
o Zero lower bound- the conundrum faced when interest rates are at, or near zero which leaves the Fed unable to effectively lower interest rates to promote expansionary policy
Liquidity trap- when interest rates are low and savings rates are high
Problems with monetary and fiscal policy:
o Forecasting is difficult
o Lags
o Lucas critique
Taylor Rule-
monetary policy rule that stipulates how much the central bank should change the nominal interest rate in response to changes in inflation, output, and other economic conditions
Marxian Business Cycle Theory
Commodities are exchanged for money, but that money is not always immediately spent, instead some is saved
Some exchanges or contracts take place over time
o In the future, prices may have shifted such that one party has difficulty completing its side of the contract
o If there is a network of contracts, this harm propagates to other contracts
o Creates systematic risk
Austrian Business Cycle Theory
Central banks cause business cycles by pushing down interest rates
o This leads to an expansion of credit which in turn leads to overinvestment
Firms overinvest in long term projects as a result of unnaturally low interest rates and money illusion
o Production shifts from consumption goods to investment goods
Firms eventually realize that these investment were mistakes
Krugman on Hangover Theories
Krugman believes that recessions are caused by excess demand for money
Paul Krugman has issues with some of the aspects of the Austrian Business Cycle Theory
o If the Austrian Theory is true, why do recessions cause contractions in all industries?
Why do industries that focus on consumption goods not just stay steady, they somehow shrink during recessions?
o Why doesn’t production shift back to consumption goods from investment goods?
Market Monetarism
Sumner and most market monetarists focus on targeting the level of Nominal GDP (NGDP)
o The Fed should inject as much money as needed to reach its goals
o Money affects the economy in ways other than interest rates
Money has direct effects on spending
Monetary policy works through expectations
Why are Prices Sticky?
- Menu Costs
- Norms - our ideas of what is acceptable(prices/wages)
- Contracts
GDP Deflator
(Nominal GDP/Real GDP) x100
Asymmetric Information:
Adverse selection and moral hazard
Law of One Price
o In the absence of trade and transaction costs, the real exchange rate would be 1 due to arbitrage
Purchasing Power Parity Law
- countries should adjust nominal exchange rate to keep the purchasing power of a currency stable, relative to other currencies
The Policy Trilemma
It is impossible to have all three of the following at the same time:
A stable foreign exchange rate
Free capital movement
An independent monetary policy
Why peg the exchange rate?
o To increase exports
o Stabilize exchange rates
o Stabilize inflation
Fisher equation
r= i - ii^e
Define the golden rule steady state
- k that maximizes consumption
where the slope of the production function (MPK) is equal to the slope of the depreciation line (δ). at steady state
Crises have some common characteristics:
1) Initiation of financial crisis
2) Banking Crisis
3) Debt Deflation
Great Depression:
Due to stock market bubble bursting and animal spirits, investment spending falls.
- Banks fail due to bank panic and branching restrictions,
- Fiscal policy was mildly expansionary under Hoover, and initially mildly restrictive under Roosevelt, and later expansionary.
- NIRA and AAA imposed real negative shocks on the economy
- Smoot-Hawley tariff imposed a negative real shock and triggered retaliatory tariffs
Great Recession:
1) Financial Innovation: new subprime mortgages, CDOs (or MBSs),
2) Housing bubble bursts:
3) Policy Responses:
a) Monetary policy:QE 1, 2, and 3
b) Fiscal policy
i) Economic Recovery Act of 2008
ii) Economic Stimulus of 2008
