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EC1101E > Macro 3 > Flashcards

Macro 3 Flashcards

1
Q

What are G elements included in Covid 19 resilience package?

A

Spending on public health and safe reopening
Spending on investments in hardest-hit sectors

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2
Q

What are the T elemetns included in package?

A

Job Support Scheme: paying a portion of workers’ salaries

Recovery Grant: financial support for workers who lost jobs or were forced to take no-pay leave

Grants for workers in hardest-hit sectors
`

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3
Q

What is a technical recession?

A

two consecutive quarters of contraction

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4
Q

What are business cycles?

A

Fluctuations

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5
Q

What to measure to tell whether economy is in slump?

A

estimates of the
economy’s Potential Output

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6
Q

What are the general patterns observed in recessions?

A

Onset is relatively rapid (months)

Accompanied by ↓employment, ↑unemployment rate

Wage rates tend to fall slowly, if at all (Sticky Wages)

Due to inertia, long-term contracts, worries about morale

Prices in the g&s markets also exhibit stickiness

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7
Q

What is wrong with classical model prediction of what happens in labour market during recession?

A

Correct in predicting:
Reduction in employment can occur due to a fall in labour demand

BUT WAGES DO NOT FALL IN REALITY

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8
Q

What is the cause of wages not falling, unlike what classical model predicts?

A

Sticky wages prevent the labour market from clearing

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9
Q

Which part of the classical model does not predict what happens in loanable funds market well? Why?

A

Says law relies on loanable funds marke tclearing

but in reality:
But other forces affect interest rates, lending and borrowing, especially within relatively shorter time periods

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10
Q

What does long run and short run refer to in macro? When to use classical model?

A

Long run: all markets clear (CLASSICAL MODEL)

Short run: time period (traditionally thought to be a year or less) where some markets do not clear (CLASSICAL MODEL NOT SUITABLE)

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11
Q

Why do the markets not clear such that classical model can be used?

A

Impediments in the labour and loanable fund market

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12
Q

What happens in keynesian short run model?

A

Spending depends on output (= income):
The more output produced, the more income households receive, the more goods and services they purchase

Output depends on spending:
If spending > output, firms will increase output in response to gns purchased
If spending < output, firms will reduce output in response in response to gns purchased
Firms adjust output, rather than prices

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13
Q

Which variables are autonomous in keynesian model?

A

r, IP, G, T, NX

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14
Q

What does autonomous mean?

A

do not change when output (Y) changes

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15
Q

Which variables are included in keynesian short run model?

A

Household(C), firms(Ip), government(G), external sector (NX)

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16
Q

What is the equation for the consumption function? Explain each component?

A

C= a+b(Y-T)

a: autonomous consumption (DOES NOT DEPEND on disposable income)

b:: constant (betwen 0 and 1). The bigger b is, the more consumption changes with disposable income. For every increase in disposable income , consumption go up lkess than $1

b(Y-T): part of consumption (DEPEND ON disposable income, )

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17
Q

Which household would have a larger b value in the consumption equation?

A

poorer household

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18
Q

What is a affected by in the consumption equation?

A

all other factors that go into consumption sepnding

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19
Q

How to get MPC? What does MPC of 0.8 mean?

A

Marginal Propensity to Consume = b (C= a+b(Y-T) )

Differentiate wrt Y for C

For a 1 unit increase in income, consumption increases by 0.8

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20
Q

What is the aggregate expenditure equation?

A

AE= (a – bT + IP + G + NX) + bY
(AUTONOMOUS COMPONENT + COMPONENT DEPENDENT ON INCOME)

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21
Q

What affects a in aggregate expenditure equation?

A

Expected future income
Wealth
Real interest rate

22
Q

What affects Ip in aggregate expenditure equation?

A

Business optimism
Real interest rate

23
Q

What affects G and T in aggregate expenditure equation?

A

Fiscal policy decisions

24
Q

What affects NX in aggregate expendture equation?

A

Other countries spending
Exchange rate

25
Q

What is it called when AE line shifts?

A

demand shock

26
Q

How does output affect aggregate expenditure?

A

If output > Aggregate expenditure:
Inventories increase, I>Ip. Firms decrease output to decrease inventories

If output < Aggregate expenditure:
Inventories decrease, I<Ip. Firms increase output to increase inventories

spending depend on output, output depend on spending (slide 29)

27
Q

Firms adjust ______ to eliminate _____________

A

Y
any gaps between Y and AE

28
Q

slide 27
What is the assumption in modelling firms output and aggregate expenditure?

A

Price level fixed
Firms change output but not change prices
CAPTURES THE REAL WORLD STICKINESS IN WAGES AND PRICES

29
Q

slide 28
What is the gradient of graph of firms response to spending/

A

1

30
Q

slide 29
What is the goods market eqm condition

A

Y = C + IP + G + NX

Equilibrium occurs when AE and output side is satisfied with their decisions, given the decisions of the other side

31
Q

slide 30
What are the 2 equations to equate in keynesian cross?

A

Y=AE
AE= (a-bT+Ip +G +NX) +bY

32
Q

slide 31
What is the formula for eqm level of Y

A

Y* = (1/1-b) (a – bT + IP + G + NX)

a – bT + IP + G + NX is intercept

33
Q

slide 35
When there is rise in autonomous spending, it is a _________________

A

positive demand shock

34
Q

When planned investment changes what is change in Y*?

A

1/1-b (change in planned investment)

35
Q

slide 39
_________ amplifies demand shock. What is the equation for that?

A

multiplier

1/ 1-b

36
Q

How to get expenditure multiplier of planned investment?

A

dY*/dIp

37
Q

sldie 41
Which component is the main source of demand shock/

A

IP is the most volatile because it depends on business optimism and expectations, which are volatile

driven by “animal spirits”

For small open economes, then NX is most volatile

38
Q

Is there relationship between eqm output (Y*) and potential output (Yfe) in keynesian model?

A

NO

39
Q

The economy can be in a slump (________), or a boom (_________) for a __________

The output gap is given by __________
It can also be expressed in percentage terms: ___________________

A

Y* < YFE
Y* > YFE
protracted amount of time

Y–YFE,
(Y–YFE/YFE ) x 100

40
Q

slide 44
What are automatic stabilisers?

A

features of the economy that automatically dampen the spending response in the multiplier process

make multiplier smaller , make economy more stable in SHORT RUN

41
Q

slide 45,46
What are some automatic stabiliseers? Explain mechanism

A

Net taxes: when income increase, income tax sales tax revenue and transfers to unn and poor increase, T increase. disposable income decrease, consumption decrease.

Imports: when Y increase, consumption (which incldues spend on imports ) increase

42
Q

What are automatic destabilisers?

A

….automatically strengtehn… Multiplier bigger

43
Q

What are some examples of automatic destabilisers and mechanism?

A

Household wealth: stock prices, prices of homes increase during boom. (a isnt autonomous)

Planned investment: firms become more optimistic during boom, Ip increase (Ip isnt autonomous)

44
Q

slide 51
What is counter cyclical fiscal policy? How to do it?

A

fiscal policy aiming to dampen economic fluctuations

If Y* < YFE, countercyclical fiscal policy should be expansionary
Aim to ↑AE, by ↑G and/or ↓T

oppostie for contractionarty

45
Q

slide 51
What is procyclical fiscal policy during slump?

A

fiscal austerity during slump

46
Q

What is tax multipliuer formula? Why is there negative sign for mpc?

A

-MPC x 1/ (1-MPC)
fall in T lead ot rise in Y*

47
Q

slide 56
If mpc is 0.6, how much tax reduction is needed for 5000 increase in Y*?

A

3333

48
Q

slide 61
What is the problem that might be encountered during countercyclical fiscal policy?

A

Automatic stabilizers already provide counter-cyclical impulse

Timeliness: time used to collect and interpret data, formulate plan, get approval(lags)

irreversibility: should withdraw stimulus after recovery. BUT DIFFICULT TO REVERSE BECAUASE OF VOTERS AND BUSINESS

Availability of monetary policy(first line of attack) : fast and easy to reverse. Independent from govt, CAN NEUTRALISE FISCAL POLICY

49
Q

What are the types of deficit?

A

strucutral and cyclical

50
Q

Why was it ok to use fiscal policy in 2008?

A

Recession was expected to be deep and prolonged

Automatic stabilizers and monetary policy were insufficient

Political situation allowed for quicker decision-making

EC1101E (13 decks)

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