Module 2: AS/AD Model Flashcards
how do micro foundations of macro models compare to Keynes model?
we not always have a fraction of extra income to be consumed (MPC)
2 examples of supply shocks and consequences?
-positive: internet. Everyone was more productive, increased GDP
-negative: oil embargo/bad weather. Less savings or crop for now, need loans, GDP down everyone less productive
when is inventory included in Keynes AD?
when it is wanted (buildup). Unwanted to measure GDP not Keynes AD
what do firms do if AD>output, or reverse?
they adjust quantity, price or both
“the” multiplier formula?
∆GDP / ∆G
Another way to creatr supply shocks besides technology improvements or natural changes?
Regulations (carbon based to allow renewables) or deregulations (privatization of inefficient industries)
what does micro foundations of macro model propose?
that consumption, production and savings are logically intertwined (agree with Keynes on forecasting savings and investments)
supply shock and unemployment relation?
bad weather, unempl. goes up, good weather, unempl. goes down
what differs on Keynesian?
fiscal stimulus doesn’t help unless spending only where the supply shock hit. Gov’t to stay put instead
Micro foundations on taxes?
Keynes says taxes only affect AD, but if they tax you more you work less
what implications do supply shocks have? hint AS/AD model
it shifts AS curve and NRU line too, creating inflation because GDP goes down but unempl. stays the same (so inflation but no recession) ex oil embargo
when do Keynesian fiscal stimulus work and don’t on supply shocks?
when the change was caused by the ability to produce (don’t work) but if not, it can shorten cyclical variation
principles of micro foundations?
parts of economic downturn can’t be repaired instantly (if NRU & GDP go down both, nothing to do) gov’t needs to acknowledge its limitations
what did Keynes neglect?
the supply side (supply shocks, business cycle behavior and long-run economic growth)
