Macro Theorists

Question 1

Fishers quantity theory of money

Answer 1

• Increase in injections into the economy
• Increases money supply as more £ is flowing around the circular flow of income
• Increases P.L = more people chasing the same number of G+S
• leading to inflation

Question 2

Easterlin Paradox

Answer 2

At low Y’s, when national incomes rise, happiness rises. Above a certain average income, growth in Y doesnt lead to greater levels of happiness

Question 3

Harrod Domers saving equation

Answer 3

• Savings/ capital output ratio
• When a firm saves, they have more £ to invest
• Increase in investment allows more firms to invest in growth and development

Question 4

Solow’s growth model

Answer 4

• Economic measure of output
• It assumes that labour and capital is fixed
• The factors are population rate, savings and technological advances

Question 5

Describe Marshall- Lerner condition

Answer 5

PEDx + PEDm >1
PED for net exports is greater than 1: CA deficit will be resolved= surplus

Question 6

What is the Marshall- Lerner condition

Answer 6

A currency depreciation will only correct a current account deficit if
* Demand for X increases= increase revenue generated by them
* Demand for M falls= decreases expenditure spend on them
PEDx + PEDm >1

Question 7

What is the J-curve effect

Answer 7

A depreciation (WIDEC) : demand for imports and exports are inelastic
Takes time to adjust to the fact that imports are more expensive (takes time to adjust to changes in E.R.)
Net exports demand is inelastic in short run so current account deficit will worsen before improving

Question 8

According to the J-curve affect, why would the CA deficit improve in the long run

Answer 8

FoP are more varied and change

Question 9

(heavy dependency)

Pre Bisch- Singer hypothesis

Answer 9

In the LR, P’s of primary G/S (natural resources) declines in proportion to manufactured G/S
Those dependent on primary X will see a decline in their ToT
X must increase to fund same quantity of M
Advice: Use X revenues to promote diversification

Question 10

Ohlin Heckshler

The factor abundance model

Answer 10

Countries export the factor they have a lot of

Question 11

Gravity model

Answer 11

Countries near each other should trade with one another

Question 12

David Ricardo

Comparative advantage

Answer 12

A country should specialise in a G/S it can produce at the lowest opportunity costs, and then trade with another country

Question 13

Paul Krugman said…

Answer 13

The ability of a country to produce a particular product at a lower opportunity cost than its trading partners, is due to different natural resources and other factors

Question 14

Vertical specialisation

Answer 14

Country that imported intermediate parts to create a G/S it later exports

Question 15

Dutch disease

Answer 15

Success in specialisation increases the E.R. making other sectors less internationally competitive.

But E.R. always fluctuate through automatic adjustments

Question 16

Keynesian consumption function formula.

Answer 16

C= a + bYd

Question 17

Explain keynsian consumption function

Answer 17

At low incomes, people will spend a higher proportion of their income beacuse they have less to save (spend more on necessities)
As incomes rise, people can afford the luxury of saving a higher proportion of their income
Spending ↑ at a lower rate than disposable income
High incomes= low APC

Question 18

Milton Friedman

Permanant income hypothesis/ Rational expectation theory

Answer 18

People consume based on their future predicted income
* If income tax decreases, consumption wouldnt ↑ as a result of people knowing that its temporary and will rise again
* A persons assets determine their permanant income eg wealth

Question 19

Equation for permanent income hypothesis

Answer 19

C=KyP

K= constant average and MPC
P= permanent income

Question 20

Life cycle hypothesis

Answer 20

At low incomes people have ↑ MPC
High incomes = ↑MPS
older people save more as they have their peak income

Question 21

What is debt jubilee

Answer 21

• ‘Jubilee’ – biblical practice of a year of rest and forgiveness of debt that was held every 50 years. I
• In modern era, idea of debt jubilee has been proposed as a solution to the problem of unsustainable levels of debt, particularly in low-income countries.
• By forgiving all debts, a country can reset its economy and start afresh

Question 22

What is Piketty’s argument in the ‘Capital in the 21st centrury’

Answer 22

• The ratio of wealth to income is growing in all developed countries
• Absent extraordinary interventions, we should expect that trend to continue
• If it continues, the future will look like the 19th century, where economic elites have predominantly inherited the wealth rather than working for it
• The best solution would be a globally coordinated tax wealth

Question 23

Macro policies in a global context

Principles of Keynsianism

Answer 23

• In favour of expansionary fiscal policy
• In a recession/ liquidity trap, the govt can increase AD + real output through govt borrowing and increase in govt spending
• Stress the importance of decreasing unemployment rather than inflation

Question 24

Keynsianism

Paradox of the Thrift

‘Glut’ of savings

Answer 24

In a recession, people resonded to the threat of unemployment by increasing savings and decreasing their spending, which is rational but results in an even greater decrease in AD and GDP. So govt intervention is needed.

Question 25

Macro policies in a global context

Why does Keynesianism reject crowding out

Crowding out is presented by Monetarists

Answer 25

Argue is there is an increase in private sector saving (and decrease in spending), govt can offset this decline in private sector spending. This can result in crowding in.

Question 26

Keynsianism

Explain sticky wage rates

Answer 26

Keynsianism believe there is a degree of wage rigidty. In a recession, Keynes said wages might be ‘sticky downwards’ as union resists nominal wage cuts, which lead to real wage unemployment.

Question 27

Monetarism principles

Answer 27

1. Critical of the ability of fiscal policy
2. Believe wages are moe flexible and more likely to adjust downwards to prevent real wage unemployment
3. Stress the importance of contrlling the M.S. to keep inflation low
4. Place an emphasis on decreasing inflation than low unemployment. Monetary policy should be used to support price stability.