MACRO FINAL Flashcards
• Inflation, deflation, hyperinflation
Inflation is a general increase in all prices across an economy, while deflation is a general decrease in all prices across an economy. Periods of hyperinflation are characterized by very rapid increases in the price level across the economy.
• Conflict theory
“marxism today 1974, inflation is the distributional conflict between workers and capital”
early 1970’s - high inflation
*declining in productivity rate, ending the golden age
• Income share
(w * L) / Y
• Nominal prices and wages
n
Battle of the markups
Anything that affects wage formation or unemployment rates is likely to affect inflation. Thus, fixing salaries above what they would be in a competitive labour market leads to higher prices, which increases inflation and reduces real wages. In a similar fashion, an increase in unemployment benefits drives salaries above what would naturally be determined, with similar effects. In this “battle of the mark-ups” between employers and employees, the NAIRU rises.
• Cost push and demand pull inflation
Cost-push inflation is the decrease in the aggregate supply of goods and services stemming from an increase in the cost of production. Demand-pull inflation is the increase in aggregate demand, categorized by the four sections of the macroeconomy: households, business, governments, and foreign buyers.
• Wage-price or price wage inflation
The wage-price spiral suggests that rising wages increase disposable income raising the demand for goods and causing prices to rise. Rising prices increase demand for higher wages, which leads to higher production costs and further upward pressure on prices creating a conceptual spiral.
• Raw material price shocks
raw material price shocks can also trigger cost push inflation. These cost shocks may be imported (for example, an oil-dependent nation might face higher energy prices if world oil prices rise) or domestically sourced (for example, a nation may experience a drought which increases the costs of food crops and impacts on all food processing industries).
• Quantity theory of money
In monetary economics, the quantity theory of money states that the general price level of goods and services is directly proportional to the amount of money in circulation, or money supply
• Equation of exchange
The equation of exchange is an economic identity that shows the relationship between money supply, the velocity of money, the price level, and an index of expenditures. English classical economist John Stuart Mill derived the equation of exchange, based on earlier ideas of David Hume. It says that the total amount of money that changes hands in the economy will always equal the total money value of the goods and services that change hands in the economy.
• Income policies
Incomes policies in economics are economy-wide wage and price controls, most commonly instituted as a response to inflation, and usually seeking to establish wages and prices below free market level. Incomes policies have often been resorted to during wartime.
• Phillips curve (short-run and long-run)
The Phillips curve is a single-equation economic model, named after William Phillips, describing an inverse relationship between rates of unemployment and corresponding rates of rises in wages that result within an economy
• Natural rate of unemployment
The natural rate of unemployment is a combination of frictional and structural unemployment that persists in an efficient, expanding economy when labor and resource markets are in equilibrium.
• Policy tradeoff with respect to the Phillips curve
Why is there a trade-off between Unemployment and Inflation?
If the economy experiences a rise in AD, it will cause increased output.
As the economy comes closer to full employment, we also experience a rise in inflation.
However, with the increase in real GDP, firms take on more workers leading to a decline in unemployment ( a fall in demand deficient unemployment)
Thus with faster economic growth in the short-term, we experience higher inflation and lower unemployment.
• Accelerationist hypothesis
The accelerationist hypothesis assumes that the price level accelerates more quickly than money wages and as a consequence the real wage falls. The Monetarists resurrected the Classical labour market and placed it at the centre of their attack on Keynesian macroeconomics.
• Adaptive expectations
In economics, adaptive expectations is a hypothesized process by which people form their expectations about what will happen in the future based on what has happened in the past. For example, if inflation has been higher than expected in the past, people would revise expectations for the future.
• Monetarism and New Classical economics
Simply put, the difference between these theories is that monetarist economics involves the control of money in the economy, while Keynesian economics involves government expenditures. Monetarists believe in controlling the supply of money that flows into the economy while allowing the rest of the market to fix itself.
• Hysteresis
Hysteresis is the dependence of the state of a system on its history. For example, a magnet may have more than one possible magnetic moment in a given magnetic field, depending on how the field changed in the past.
• Ricardian equivalence
The Ricardian equivalence proposition is an economic hypothesis holding that consumers are forward looking and so internalize the government’s budget constraint when making their consumption decisions
• Homo economicus
The term homo economicus, or economic man, is the portrayal of humans as agents who are consistently rational, narrowly self-interested, and who pursue their subjectively-defined ends optimally. It is a word play on Homo sapiens, used in some economic theories and in pedagogy.
• Buffer stocks (unemployment and employment)
Unemployment buffer stocks: Under a NAIRU regime, inflation is controlled using tight monetary and fiscal policy, which leads to a buffer stock of unemployment. This is a very costly and unreliable target for policy makers to pursue as a means for inflation proofing
• Inflation anchor
A central bank that credibly promises to snuff out any hint of rising inflation (and inflation expectations) can keep inflation anchored at a preferred long-run target of its choosing. Ironically, the threat of raising the short-term interest rate against inflationary pressure is what keeps nominal interest rates low
• Costs associated with unemployment
A rise in unemployment can cause a negative multiplier effect. Increase in social problems. Areas of high unemployment (especially youth unemployment) tend to have more crime and vandalism. It can lead to alienation and difficulties in integrating young unemployed people into society.
• Relationship between human rights and employment
The right to work is the concept that people have a human right to work, or engage in productive employment, and may not be prevented from doing so. The right to work is enshrined in the Universal Declaration of Human Rights and recognized in international human rights law through its inclusion in the International Covenant on Economic, Social and Cultural Rights, where the right to work emphasizes economic, social and cultural development.
• Why Minsky believed training and education is putting the cart before the horse
preferring instead to first provide jobs and then to upgrade skills through training in the workplace
• Stagflation
In economics, stagflation, or recession-inflation, is a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high. It presents a dilemma for economic policy, since actions intended to lower inflation may exacerbate unemployment
• NAIRU
NAIRU is an acronym for non-accelerating inflation rate of unemployment, and refers to a theoretical level of unemployment below which inflation would be expected to rise.
• Empirical evidence on inflation targeting
Inflation targeting is a monetary policy where a central bank follows an explicit target for the inflation rate for the medium-term and announces this inflation target to the public. The assumption is that the best that monetary policy can do to support long-term growth of the economy is to maintain price stability.
• Figure 19.2
s
• Job Guarantee, buffer employment ratio, how the JG is supposed to operate as an inflation anchor, NAIBER
The job guarantee is proposed as a way of making full employment compatible with price stability. Rather than sacrifice some employment as a means of moderating inflation, it is contended that price stability can be achieved without inflicting the costs of involuntary unemployment.
• Purchasing off the bottom
he question then arises: how do employment buffer stocks relate to this condition? We used the term loose full employment in relation to the JG because the employment generated is at minimum wages. The government expands the JG pool by purchasing off the bottom of the labour market. In that context, the automatic stabiliser response associated with the conduct of the JG represents the minimum fiscal shift that is required to maintain employment at its previous level in the face of a falling level of private demand.
• Figure 19.3
s
• Investment
Most investors aim to increase their long-term purchasing power. Inflation puts this goal at risk because investment returns must first keep up with the rate of inflation in order to increase real purchasing power. … In much the same way, rising inflation erodes the value of the principal on fixed income securities.
• Simple accelerator model
The simple accelerator model suggests that capital investment is a function of output. If there is an increase in demand and economic output, investment will rise to meet the expected demand. The simple accelerator model suggests that a fall in the growth rate can lead to lower investment.
• Limitations of the simple accelerator model
Limitations of the accelerator effect Investment is affected by many other factors, such as investor confidence and the “animal spirits” of firms
• Expectations and interest rate impacts on investment demand
Changes in interest rates affect the public’s demand for goods and services and, thus, aggregate investment spending. A decrease in interest rates lowers the cost of borrowing, which encourages businesses to increase investment spending.Mar 14, 2019
• Present value, compound interest, internal rate of return
The internal rate of return is a measure of an investment’s rate of return. The term internal refers to the fact that the calculation excludes external factors, such as the risk-free rate, inflation, the cost of capital, or various financial risks. It is also called the discounted cash flow rate of return.
• Equation 25.15 on p.406
• Kalecki’s simplified model and his view on causation
The model is an extension of the reproduction schemes developed by Marx in Volume II of Capital. As the diagram shows, total saving by the consumption goods sector is equal to total consumption by the investment goods sector. Kalecki notes that “in a sense, investment finances itself.
• Business cycle
The business cycle, also known as the economic cycle or trade cycle, is the downward and upward movement of gross domestic product around its long-term growth trend. The length of a business cycle is the period of time containing a single boom and contraction in sequence. Wikipedia
• ISLM model and how to derive the two curves
d
• Why Hicks developed the ISLM model
The IS–LM model, or Hicks–Hansen model, is a two-dimensional macroeconomic tool that shows the relationship between interest rates and assets market (also known as real output in goods and services market plus money market).[citation needed] The intersection of the “investment–saving” (IS) and “liquidity preference–money supply” (LM) curves models “general equilibrium” where supposed simultaneous equilibria occur in both the goods and the asset markets.[1] Yet two equivalent interpretations are possible: first, the IS–LM model explains changes in national incomewhen price level is fixed short-run; second, the IS–LM model shows why an aggregate demand curve can shift.[2] Hence, this tool is sometimes used not only to analyse economic fluctuations but also to suggest potential levels for appropriate stabilisation policies.[3]
• Why Hicks wanted to distance himself from the ISLM model and the why it is incoherent
w
• Empirical evidence regarding the position of the IS curve
w
• Liquidity trap
A liquidity trap is a situation in which interest rates are low and savings rates are high, rendering monetary policy ineffective. In a liquidity trap, consumers choose to avoid bonds and keep their funds in savings because of the prevailing belief that interest rates will soon rise (which would push bond prices down)
• Crowding out (financial)
Crowding out is an economic concept that describes a situation where personal consumption of goods and services and investments by business are reduced because of increases in government spending and deficit financing sucking up available financialresources and raising interest rates.
• Keynes and Pigou effects
The Pigou Effect is a theory proposed by the famous anti-Keynesian economist, Arthur Pigou. … According to Pigou, during deflation, prices are low, which leads to greater real wealth. The increased wealth then stimulates demand, leading to a rise in output and, consequently, employment.
• Why Keynes found wage and price cuts an unacceptable strategy for full employment
s
• Endogenous money, expectations and uncertainty
Endogenous money is an economy’s supply of money that is determined endogenously—that is, as a result of the interactions of other economic variables, rather than exogenously by an external authority such as a central bank.
• Market clearing
In economics, market clearing is the process by which, in an economic market, the supply of whatever is traded is equated to the demand, so that there is no leftover supply or demand.
• New Keynesian Neoclassial Synthesis
The new neoclassical synthesis (NNS) or new synthesis is the fusion of the major, modern macroeconomic schools of thought, new classical and New-Keynesianism, into a consensus on the best way to explain short-run fluctuations in the economy. … The new synthesis has taken elements from both schools.
• Monetarism and New Classical (New C)
q
• Specifically what is meant when an economist says, “the central bank (Fed) expands the money supply”
Central banks use several methods, called monetary policy, to increase or decrease the amount of money in the economy. The Fed can increase the money supply by lowering the reserve requirements for banks, which allows them to lend more money.
• Growth or inflation target for the money supply versus discretionary action
q
• Random errors of actors in the New C model
sa
• Real Business Cycle (RBC)
Real business-cycle theory (RBC theory) is a class of new classical macroeconomics models in which business-cycle fluctuations to a large extent can be accounted for by real (in contrast to nominal) shocks.
• Business cycle as undesirable versus desirable
s
• New Keynesian theory (NKE)
The New Keynesian Economics seeks to provide Keynesianism with microeconomic foundation support. … One of them is used both by NKE and NCM approach to macroeconomics, this is the assumption that economic agents, households and firms have rational expectations.
• New Keynesian’s explanation for unemployment
a
• Price and wage inflexibility (i.e., “sticky” prices, “sticky” wages)
Rather, sticky wages are when workers’ earnings don’t adjust quickly to changes in labor market conditions. That can slow the economy’s recovery from a recession. When demand for a good drops, its price typically falls too.
• Role of policy in NKE
Nike’s policies are a formal, accepted standard or approach to the way Nikeconducts business, relating to social and environmental issues. … Nike’s Code Leadership Standards communicate how supplier factories should implement the Code of Conduct.
• New Classical model (New C) o You will need to understand how decisions are made in the model and what the outcomes are
New classical macroeconomics, sometimes simply called new classical economics, is a school of thought in macroeconomics that builds its analysis entirely on a neoclassical framework. Specifically, it emphasizes the importance of rigorous foundations based on microeconomics, especially rational expectations.
• New C policy ineffectiveness
The policy-ineffectiveness proposition (PIP) is a new classical theory proposed in 1975 by Thomas J. Sargent and Neil Wallace based upon the theory of rational expectations, which posits that monetary policy cannot systematically manage the levels of output and employment in the economy.
• Rational expectations
In economics, “rational expectations” are model-consistent expectations, in that agents inside the model are assumed to “know the model” and on average take the model’s predictions as valid. Rational expectations ensure internal consistency in models involving uncertainty. Wikipedia
• Figures 11.1 – 11.2 (p.211-212)
as
• Why offsetting policy action is not feasible if there is an unanticipated decrease in private sector investment in the New C model
s
• Broader view of New C
s
• NKE critique of New C
a
• RBC model and central features
Real business-cycle theory (RBC theory) is a class of new classical macroeconomics models in which business-cycle fluctuations to a large extent can be accounted for by real (in contrast to nominal) shocks.
You will need to understand how decisions are made in the RBC model and what the outcomes are whether this is temporary or permanent
d
• Representative agent
The representative agent is a device used by economists to model the macroeconomy. The general idea is to solve a well-specified microeconomic problem, and then use the relationships between the variables in that model as a description of the macroeconomy.
• Why RBC favored “printing” money
c
• Micro foundations of macro theory
In economics, the microfoundations are the microeconomic behavior of individual agents, such as households or firms, that underpins an economic theory. … Critics and proponents of these models disagreed as to whether these aggregate relationships were consistent with the principles of microeconomics.
• Ad hoc
…a theory cannot be tested by comparing its “assumptions” directly with “reality.” Indeed, there is no meaningful way in which this can be done. Complete “realism” is clearly unattainable, and the question whether a theory is realistic “enough” can be settled only by seeing whether it yields predictions that are good enough for the purpose in hand or that are better than predictions from alternative theories. Yet the belief that a theory can be tested by the realism of its assumptions independently of the accuracy of its predictions is widespread and the source of much of the perennial criticism of economic theory as unrealistic. Such criticism is largely irrelevant, and, in consequence, most attempts to reform economic theory that it has stimulated have been unsuccessful.
• Conclusion of chapter 12
In this chapter, we have presented the arguments that John Maynard Keynes used to demonstrate the terminal flaws in the Classical theory of employment and output. His critique involved several steps and we have consid-ered them in turn. Keynes rejected the Classical labour market analysis, which presumes that labour supply and labour demand are independent of one another and independent of the level of aggregate demand. This leads to the conclusion that there are no automatic dynamics operating in the labour market that would ensure move-ment to full employment. He rejected the Classical notion of Say’s Law – the claim that ‘supply creates its own demand’ – because it presumes that all income received is spent. And, finally, he rejected the Classical argument that the equality of saving and investment is ensured by movement of the rate of interest. Each of these theoretical errors is related to the Classical belief that the economy moves automatically toward a position of full employment. By exposing the logical flaws in the Classical approach, Keynes opened the possibil-ity that persistent involuntary unemployment is possible due to problems of what he called effective demand
• Figure 13.1 and explanations
s
• Two important differences between Keynesian (i.e., NKE) and classical frameworks
s
• No way to have “controlled” economic experiments (Keynes quote p.247)
s
NAIRU DEFINITION
The Layard-Nickell NAIRU model emerged as a reply from New Keynesian Economics to the natural rate of unemployment, devised by Milton Friedman as a criticism of the Neoclassical Synthesis’ Phillips curve. This NAIRU model comes from an article entitled “Unemployment in Britain”, 1986, by Richard Layard and Stephen Nickell.
