IS-LM-PS Flashcards
deflationary spiral
because of the zero lower bound constraint, central bank cannot decrease nominal interest. expected inflation is negative so more inflation makes real policy rate increase resulting in lower output and increasing deflation, moving further away from equillibrium
what are the other names for natural rate of interest
Wicksellian, Neutral
what are the effects of fiscal consolidation in the short run
-not attractive
-shifts IS curve to the left
-lowers output Y - Y’
-inflation decreases below stable rate
what are the effects of fiscal consolidation in the long run
-central bank decreases policy rate rn to rn’ SHIFT IN LM CURVE DOWNWARDS
-A’ to A’’ back to equill =A vertical
-Y’ to Yn ie. back to potential output level
-attractive
-inflation back to stable rate
- consumption low investment high
conclusions
- shocks can be short/medium
-effects of policies depend on how fast you think the economy adjusts
-movement of output around its trend are called output fluctuations (business cycles)
-economic fluctuations are a result of shocks and the dynamic effect of these shocks are propogation mechanism
propogation mechanism
dynamic effect of shocks
give three explanations why increase in price of oil has less drastic effects now then in the 70s on CPI and GDP
-inflation more anchored by nominal policy
-workers lower bargaining power
-strong improvements in tech and energy efficiency
how do we represent increase in price of oil
the markup goes from m to m’
effects of increase in price of oil
increase in markup increases price for firms therefore the real wage rate decreases and the natural rate of unemployment un increases
stagflation
if output is below potential and inflation continues to increase this will result in stagflation
why would the central bank want expectations to remain anchored
as long as expectations remain anchored the CB won’t have to increase rn beyond the natural rate and go through an economic recession.
PC equation
output gap
Y-Yn = -L(U-Un)
The IS curve shifts up with an increase in G, an increase in
T and an increase in x.
false, the IS curve shifts to the right with an increase in G aand shifts to the right with an increase in T and x.
. If (u - un) is greater than zero, then (Y - Yn) is greater
than zero.
false, if U>Un than the output gap is negative
c. If (u - un) is equal to zero, the output is at potential.
true
If (u - un) is less than zero, the output gap is negative.
true
if the output gap is positive, inflation is higher than expected inflation
true
Okun’s law says that if output growth increases by one
percentage point, the rate of unemployment drops by one
percentage point
False. For every one-percentage point increase in growth, the unemployment rate drops by .4%
At the natural rate of unemployment, inflation is neither
rising nor falling
true, at Un inflation would stabilize
In a medium-run equilibrium, the rate of inflation is
stable.
true inflation is unchanging at the medium run
. The central bank can always act to keep output equal to
potential output
false, if expected inflation is based on last inflation than the central bank might have to trigger a recession
It is easier for the central bank to keep output at potential
output if expectations of inflation are anchored
true, if expecations of inflation are anchored the CB won’t have to increase rn beyond the natural rate and trigger a recession
. A large increase in the price of oil increases the natural
rate of unemployment
true
