Midterm 2 Flashcards
IS curve
inverse relationship between output Y and real interest rate
what does equilibrium mean for the IS curve?
output = planned output (C + Ipl + G + NX)
IS curve: consumption
autonomous C
- consumer confidence
- household wealth
- expected future income
related to:
- autonomous consumption (+)
- disposable income (+)
- real interest rate (-)
IS curve: investment
autonomous I
- business confidence
- expected future profits/cash flow
- changes in technology
related to:
- autonomous investment (+)
- real interest rate (-)
IS curve: net exports
autonomous NX
- domestic preferences for foreign goods
- foreign preferences for domestic goods
- foreign trade barriers
related to:
- autonomous net exports (+)
- real interest rate (-)
Phillips curve
inverse relationship between unemployment and inflation
Okun’s law
relationship between unemployment gap and output gap
repo
short for repurchase agreement or sale and repurchase agreement
what happens in a repo?
CB borrows money by agreeing to sell bonds at t0 to p0
repurchase bonds at date t1>t0 and p1>p0
what happens in a reverse repo?
CB lends money by agreeing to purchase bonds at t0 at p0
sell bonds at date t1>t0 and p1>p0
three key equations in monetary policy response
optimal shock response
rate-rule
IS curve
how to calculate output gap?
percentage deviation of aggregate supply from potential output at a given point of time
Yt - Yp/Yp = ln(Yt) - ln(Yp)
how to calculate unemployment gap?
difference between unemployment rate and natural rate of unemployment at a given time
ut - un
how to get optimal rate rule from loss function?
sub phillips curve
minimisation for optimal path
sub dynamic is curve
isolate rt
fisher’s equation
r = i-pi