Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

EC201 - MACRO TERM 2 > KEYNESIAN > Flashcards

KEYNESIAN Flashcards

(67 cards)

Start Studying
1
Q

Dynamic AS/AD model incorporates features from..

A

Keynesian and new-keynesian

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Key feature to Keynesian model

A

Frictions to adjustment of prices

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

2 positives of abandoning DSGE setting

A
  1. can represent equilibrium in as/ad diagram

2. can show BC shocks by shifts

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

AS =

A

the link between output and prices due to the price setting behaviour of firms.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

AD =

A

the link between output and prices due to the demand behaviour of consumers and firms for the final good.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What 2 types of output do keynesian models distinguish between?

A

Yt bar = potential output

Yt tilda = SR output / output gap

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Potential output =

A

level of output that prevails when FOPs are utilised at their LR level. When shocks have dissipated. Exogenous to this model.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Output gap formula

A

Yt tilda = Yt - Yt bar / Yt

% deviation of current output from potential output.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

The LR =

A

the time horizon over which effects of temporary shocks have dissipated.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

The SR -

A

the time horizon over which shocks bring the economy away from equilibrium.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

In keynesian models, it is important to distinguish between…

A

NOMINAL AND REAL

especially for IR

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Real IR =

A

the return in terms of the consumption good from investing 1 unit of the final good.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

LR Real IR formula

A

R bar = MPK - d which are steady state quantities.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Why does R≠R bar?

A

In the SR due to monetary policy,

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Nominal IR =

A

nominal return in terms of money of investing 1 unit of money.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Fisher equation

A

Rt = it - Pi t

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

National account identity

A

Yt = Ct + It + Gt

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What does Gt refer to?

A

Gt = gov purchases

Gt ≠ government spending - it does NOT include transfers.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Formula for Ct

A

Ct = (ac bar + ac,t) Yt bar

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Formula for Gt

A

Gt = (ag bar + ag,t) Yt bar

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What is ac bar?

A

The constant LR share of potential output that goes to consumption

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Does Ct depend on SR output? Why?

A

NO - only potential output. temporary shocks implicitly assumed to be smoothed by saving/borrowing.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Formula for It

A

It = (ai bar + ai,t - b(Rt - R bar)) Yt bar

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

How does It depend on real IR? explain.

A

It depends negatively on gap between real IR and R bar. If Rt > R bar, this means Rt > MPK so disincentive to invest in K, better to save retained earnings on financial market so It falls.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
IS curve shows
The equilibrium relationship between SR output and the real IR, which is negative.
26
Formula for IS curve
Yt tilda = at - b(Rt - R bar) | where at = ac,t + ag,t + ai,t
27
ac bar + ag bar + ai bar =
1
28
at refers to
An AD shock
29
How can CB control the real IR?
They change nominal IR it by changing interbank lending rate | But since inflation is sticky, they control Rt in effect.
30
4 reasons for sticky prices
1. Sticky wages 2. LR contracts between buyers and sellers 3. Direct menu costs 4. Inattention to monitoring demand conditions.
31
MP curve shows
SR real IR implied by the nominal IR the CB chooses.
32
MP rule formula
(Rt - R bar) = m(Pit - Pi bar) + €tM
33
What is €tM?
Mean zero monetary policy shock = change in monetary policy unrelated to change in inflation.
34
m bar -
how aggressive CB respond to inflation deviations.
35
3 advantages of inflation targeting
1. predictable environment for It 2. Higher inflation distorts prices (adjust at different speeds) 3. Direct menu costs if change prices
36
AD curve is derived from
IS curve + MP curve
37
AD curve formula
Yt tilda = at - bm(Pit - Pi bar) + b€tM
38
What do we assume about expectations?
Adaptive expectations Pi t E = Pi t-1 backwards looking behaviour
39
SRAS/Phillips curve formula
Pi t = Pit-1 + vYt tilda + Oc
40
v bar -
sensitivity of prices to change in demand conditions.
41
Oc =
exogenous shocks to costs of production e.g. oil shock, strikes, weather
42
How does higher expected inflation lead to higher actual inflation?
Higher expected = workers demand higher wages = higher production costs for firms = it's optimal for them to raise their prices.
43
LRAS is given by
Vertical line at Yt tilda = 0
44
Business cycles for keynesian mean...
Yt tilda ≠ 0
45
Can we do quantitative analysis with keynesian?
NO - can't do calibration
46
If a demand shock at time t+1 is temporary, what does this mean?
At time t+2, ADt+2 = ADt | AD curve back to its original position.
47
How do CB react to negative demand shock?
Rt+1 < R bar
48
At time t+2, is the economy now back to its equilibrium?
NO - AD back to normal, but because inflation fell last period, not inflationary expectations have fallen = AS curve shifts down under AE.
49
How does AS respond from t+3 onwards to the negative demand shock?
Since AS falls at t+2, but inflation higher than in t+1 since AD back to normal = inflation expectations increase relative to t+1 = AS gradually shifts back up to its original.
50
How to CB respond to negative demand shock in t+2 onwards?
Since the shift in ASt+2 causes positive output gap, CB gradually increase IR back to R bar and cause demand to contract.
51
Therefore, if a BC is demand driven, inflation is...
PRO-CYCLICAL
52
Effects of negative demand shock on output
Recession first | Then small expansion before back to equilibrium.
53
If we have a negative supply shock, how does AS change over the periods?
``` t+1 = AS shifts left and up t+2 = shock gone but since inflation risen, inflationary expectations rise relative to t, so AS above ASt still. Eventually goes back to ASt. ```
54
How to CB respond to negative supply shock over the periods?
Initially increase Rt to curb inflation But this causes a recession Gradually reduce Rt back to R bar
55
Therefore, if a BC is supply driven, inflation is...
COUNTER-CYCLICAL
56
was the great depression consistent with the model?
YES - demand driven recession and deflation
57
were the 1970s oil price shocks model consistent?
YES - stagflation
58
What's the missing deflation puzzle?
Financial crisis: huge fall in AD, but not many countries experienced deflation.
59
Possible explanations for missing deflation puzzle.
1. AS shifted up at same time | 2. Flatter slope of AS
60
3 reasons why AS may have shifted up
1. higher oil prices 2. higher inflationary expectations 3. higher production costs due to wage rigidity.
61
3 reasons why slope of AS may have become flatter.
1. Higher costs of changing prices 2. Increased market power = prices less responsive to demand 3. More international trade = prices less responsive to national demand conditions.
62
If AD falls but AS is very flat, impact on inflation and output
Large fall in output | Very little fall in inflation
63
What do Coibion & Gorodnichenko (2015) say about deflation puzzle?
Caused by high inflationary expectations | Survey from uni of Michigan: how expect prices to change over next 12 months.
64
Why were inflationary expectations so high?
expectations reacted strongly to rise in global oil prices. Gasoline prices very salient and frequently observed = disproportionate effect on expectations even though small part of consumption basket. Also rise in production costs due to higher oil prices. So AS shifts up.
65
Why don't CB just stimulate the economy forever?
€tM < 0 means Rt falls so expansionary. AE assumes agents are surprised by shocks. But if monetary shocks frequent, agents will expect them = inflationary expectations rise = output falls - opposite of intended effect.
66
2 weaknesses of fiscal policy
1. Implementation lags due to gov legislation | 2. Large public debts = constrained
67
benefit of fiscal policy
Useful when MP constrained by ZLB on it.

EC201 - MACRO TERM 2 (10 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions