Macro 3 Flashcards
What are G elements included in Covid 19 resilience package?
Spending on public health and safe reopening
Spending on investments in hardest-hit sectors
What are the T elemetns included in package?
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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What is a technical recession?
two consecutive quarters of contraction
What are business cycles?
Fluctuations
What to measure to tell whether economy is in slump?
estimates of the
economy’s Potential Output
What are the general patterns observed in recessions?
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
What is wrong with classical model prediction of what happens in labour market during recession?
Correct in predicting:
Reduction in employment can occur due to a fall in labour demand
BUT WAGES DO NOT FALL IN REALITY
What is the cause of wages not falling, unlike what classical model predicts?
Sticky wages prevent the labour market from clearing
Which part of the classical model does not predict what happens in loanable funds market well? Why?
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
What does long run and short run refer to in macro? When to use classical model?
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)
Why do the markets not clear such that classical model can be used?
Impediments in the labour and loanable fund market
What happens in keynesian short run model?
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
Which variables are autonomous in keynesian model?
r, IP, G, T, NX
What does autonomous mean?
do not change when output (Y) changes
Which variables are included in keynesian short run model?
Household(C), firms(Ip), government(G), external sector (NX)
What is the equation for the consumption function? Explain each component?
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, )
Which household would have a larger b value in the consumption equation?
poorer household
What is a affected by in the consumption equation?
all other factors that go into consumption sepnding
How to get MPC? What does MPC of 0.8 mean?
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
What is the aggregate expenditure equation?
AE= (a – bT + IP + G + NX) + bY
(AUTONOMOUS COMPONENT + COMPONENT DEPENDENT ON INCOME)
What affects a in aggregate expenditure equation?
Expected future income
Wealth
Real interest rate
What affects Ip in aggregate expenditure equation?
Business optimism
Real interest rate
What affects G and T in aggregate expenditure equation?
Fiscal policy decisions
What affects NX in aggregate expendture equation?
Other countries spending
Exchange rate
