Macroeconomics: Autumn Term Flashcards
Karl Popper quote on Scientific theories?
“The theories are passed on, not as
dogmas, but rather with the challenge to discuss them
and improve upon them”
When should a theory be considered scientific?
If and only if it is falsifiable (testable)
Definition of Economics?
The study of choices as they are affected
by incentives and resources.
Example of economic study and criminology by Becker (1992, Nobel Prize)?
Poverty is associated with greater criminal activity, Becker reasons, the poor have more to gain from crime than from doing a legal job. (Emphasis on rationality)
Why use mathematical models?
- Imposes consistency to theory
- Prevents contradictions
- Rely on models for predictions
- Allows for testing
Einstein quote on simplicity?
“Everything should be made as simple as possible,
but not simpler.”
What are business cycles?
Fluctuations of economic activity around a
long-term growth trend.
What are turning points in business cycles?
Peak: The last month before key indicators fall
Trough: The last
month before the indicators begin to rise.
What are persistent deviations from business cycle trends called?
Positive ones: Expansions (boom)
Negative ones:
Contractions (Recessions)
What is GDP?
Measure of national
income and input for a given country’s economy
What is the expenditure method for calculating GDP?
GDP is equal to the total expenditures for
all final goods and services produced within the country in a
stipulated period of time
Equation for GDP?
= C + I + G + (X- M)
consumption + gross investment + government spending +
(exports - imports),
Why is it gross investment when calculating GDP?
“Gross” means that depreciation of capital stock is
taken into consideration
What is the GDP implicit price deflator?
GDP in current prices (Nominal GDP) / GDP in base year prices (Real GDP)
Why do we use log transformations on time series data?
To handle exponential growth of a series and stabilize the variability
What type of variables should we consider taking logs of?
Variables expected to grow exponentially (like GDP, population, consumption)
Not variables expected to fluctuate around a fixed level around a fixed level
(inflation, interest rates, unemployment rates)
Why do business cycles occur?
Unexpected disturbances (Shocks in tech, oil, fiscal or monetary)
Why do Keynesian economists think cycles occur?
Due to nominal rigidities (wages, prices etc are not flexible in the short run)
What is the real business cycle theory?
Believe cycles are down to productivity shocks, modern markets are more flexible than Keynes thought
Keynes v Friedman on cycles?
Keynes: Gov should use policy to manage the economy which could moderate recessions
Friedman: Gov role in guiding economy should be restricted. (Monetarism- price level depends on money supply)
Why did Friedman think cycles was a misnomer?
-No regularity is amplitude, fluctuations or duration of the cycles.
What is regular in business cycles?
Comovements: macro variables move together in predictable ways
Comovement in an expansion?
Output rises, employment rises. Inflation may rise as well
Comovement in a recession?
Output of goods/services falls, employment falls