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
`
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
What is it called when AE line shifts?
demand shock
How does output affect aggregate expenditure?
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)
Firms adjust ______ to eliminate _____________
Y
any gaps between Y and AE
slide 27
What is the assumption in modelling firms output and aggregate expenditure?
Price level fixed
Firms change output but not change prices
CAPTURES THE REAL WORLD STICKINESS IN WAGES AND PRICES
slide 28
What is the gradient of graph of firms response to spending/
1
slide 29
What is the goods market eqm condition
Y = C + IP + G + NX
Equilibrium occurs when AE and output side is satisfied with their decisions, given the decisions of the other side
slide 30
What are the 2 equations to equate in keynesian cross?
Y=AE
AE= (a-bT+Ip +G +NX) +bY
slide 31
What is the formula for eqm level of Y
Y* = (1/1-b) (a – bT + IP + G + NX)
a – bT + IP + G + NX is intercept
slide 35
When there is rise in autonomous spending, it is a _________________
positive demand shock
When planned investment changes what is change in Y*?
1/1-b (change in planned investment)
slide 39
_________ amplifies demand shock. What is the equation for that?
multiplier
1/ 1-b
How to get expenditure multiplier of planned investment?
dY*/dIp
sldie 41
Which component is the main source of demand shock/
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
Is there relationship between eqm output (Y*) and potential output (Yfe) in keynesian model?
NO
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: ___________________
Y* < YFE
Y* > YFE
protracted amount of time
Y–YFE,
(Y–YFE/YFE ) x 100
slide 44
What are automatic stabilisers?
features of the economy that automatically dampen the spending response in the multiplier process
make multiplier smaller , make economy more stable in SHORT RUN
slide 45,46
What are some automatic stabiliseers? Explain mechanism
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
What are automatic destabilisers?
….automatically strengtehn… Multiplier bigger
What are some examples of automatic destabilisers and mechanism?
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)
slide 51
What is counter cyclical fiscal policy? How to do it?
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
slide 51
What is procyclical fiscal policy during slump?
fiscal austerity during slump
What is tax multipliuer formula? Why is there negative sign for mpc?
-MPC x 1/ (1-MPC)
fall in T lead ot rise in Y*
slide 56
If mpc is 0.6, how much tax reduction is needed for 5000 increase in Y*?
3333
slide 61
What is the problem that might be encountered during countercyclical fiscal policy?
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
What are the types of deficit?
strucutral and cyclical
Why was it ok to use fiscal policy in 2008?
Recession was expected to be deep and prolonged
Automatic stabilizers and monetary policy were insufficient
Political situation allowed for quicker decision-making
