Principles of Economics - Macro Flashcards
What is the accounting identity?
Injections equal leakages or that AE = Y
Examples of injections and leakages
Government expenditure and taxation taken by government
Investment and savings
Imports and exports
How do accountants and economists differ?
Whilst accounts put failed investment into an inventory to keep AE = Y, economists want a behavioural statement on why this occurs and how equilibrium returns after changes are made
How does MPC and MPS change based on income level?
Lower income leads to a higher MPC and lower MPS but for macroeconomics, an average is taken
How does the propensity to import change as Y increases?
Imports increase as Y increases
What is the largest possible value for the multiplier and what is realistic?
5, but 1.5-2 is more realistic
As c, t and imports increase, how does the flatness of the AE line change?
As c increases, the line becomes steeper, whilst if t and imports increase, the line becomes flatter
Who found the Keynesian cross?
Paul Samuelson
Why is closed economy analysis acceptable for the EU and US?
Imports and exports make such a small sector of output so as to be reliably ignored
How is investment as affected by income found?
I = aY^e (t+1) where future demand will affect investment
Why is Io used as a formula for investment?
Keynes’ interest in the importance of the uncertainty of future demand, e, makes it impossible to endogenize
How is investment decided compared to interest rates?
Where the rate of return of investment is higher than the interest rate, an investment is made, therefore
I = Io - bi
How are interest rate changes shown on an AE - Y graph?
In the change in the y-intercept, where di = 0, with higher interest rates having lower intercept lines
What cases are there of linked interest rates?
Interest rate of central bank (CB) must be lower than lending rate of commercial bank which will be higher than the rate of return of bonds
What are the three motives for hoarding cash?
Transaction motive (cash as medium of exchange), precautionary motive (keeping options open) and speculative motive (dependent on interest rates)
What is the equation for the transaction and precautionary motive?
Ld = kY which often covers both motives, as they both increase as income does
What is the equation for the Ld in full?
Ld = kY - hi = M
What is an expansionary open market operation?
Where the CB buys bonds, injecting money into the supply from the monetary base
What is the opposite of an expansionary open market operation?
A contractory open market operation where CB bonds are sold to commercial banks, with the funds from these absorbed back into the monetary base and out of the monetary flow
How do open market operations change the interest rates?
Expansionary ones, where money supply is increased, will cause a decrease in interest rates as the bonds bought buy the CB will become more expensive with the same maturity in place, decreasing the rate of return; this follows the equation M = kY - hi
What affect does an expansionary open market operation have on the LM curve?
As interest rates drop, in order to keep M = kY - hi, output must decrease so LM curve shift left. In cases of higher interest rates when the monetary flow is decreased, there is an expansion in output so the graph shifts right
What have the previous shifts been predicated on?
M being exogenous and with the CB in control directly
What are the three parts to the money supply?
Mo - banknotes and coins circulating in the economy
M1 - monetary base + Mo + deposits
M2 - wider measures
Why would a bank not lend all that it receives in income?
In voluntary or involuntary reserves
Which two ways do firms raise money?
Through bank loans and issuing bonds
What is the secondary monetary policy LM curve?
M = Mo + a( i + io) - a flatter curve
How do shocks to the IS curve change the economy in fixed and variable interest rates?
In flexible interest rates, shifts in the IM curves will create a new crossing point at a different interest rate. In fixed exchange rates, where the IS curve shifts, the LM curve will also shift due to central bank intervention so the interest rate remains at the same level
What is the variation in output?
The difference between Ya and Yb which are the different outputs due to shocks in the economy shifting IS and LM curves
What is lm on an interest-output graph?
The interest rate when it is fixed by a central bank, a horizontal line on the graph
How do shocks to the LM curve change the economy in fixed and flexible interest rates?
A new output level is created in flexible rates with a different interest rate. In fixed rate situations, where the LM curve has shifted backwards (left), expansionary market operations can be taken to return it to it’s original position, and visa versa, making it a superior policy in this case
What is shown on an i - Ld graph?
Money demand as downward sloping, crossing the vertical money supply at the equilibrium interest rate io. Left of the supply line is excess supply, whilst right of it is excess demand
What is price level equal to?
Nominal income / real income
What is added on to the bottom of the IS multiplier due to monetary policy?
bk/h which is monetary retroaction - higher interest rates due to increase in Y is shown here
What shape is the money demand curve on an i - Ld graph?
A downward concave curve, as at high interest rates almost all money will be not cash, whilst at very low interest rates there will be no difference between cash or bonds so lots of cash holdings
What is the liquidity trap?
As the LM curve is a concave upward sloping curve on the i - Y graph, when the interest rate is low and Y is low, any changes to monetary policy will not affect output where the zero lower bound for interest rates is reached - fiscal stimulus required
What is the reverse of the liquidity trap?
Where interest rates and output is high, a change in fiscal stimulus will only make small changes to the overall output, so interest rate changes are required
What are the three methods for foreign exchange?
Use of current account, use of capital account, and central bank selling currency using official reserves (ignored as not always available)
How does the use of current accounts work for foreign exchange?
Current account is balanced, where the price of imports into domestic market equals exports from domestic market, so foreign currency can be accepted for exports, then used to pay for imports
How does the use of capital accounts work for foreign exchange?
Differences in current account are balanced by change in capital account, where foreigners are offered domestic bonds in return foreign currency
What are the formulas for exports and imports and current account?
EX = (x1)(Y*) + (x2)(R) IM = (m1)(Y) - (m2)(R) CA = EX - IM
What does a higher R value equate to?
Higher competitiveness, such as when foreign prices increase or domestic prices decrease
What is the result of a depreciation in currency?
Cheaper for foreigners to buy goods, increase in imports, where interest rates are fixed there is a worsening in the current account as domestic output increases, increasing imports
How do higher values of R and Y* impact on the current account on the i-Y graph?
Higher values lead to higher Y values, with the line as vertical as interest rates do not change the current account
What is CIP?
Covered interest parity, where the exchange rate for maturing bonds payments is specified
What is UIP?
Uncovered interest parity, so the value of maturing bonds must be countenanced with future exchange rates
UIP = i* + (Future exchange rate E^e - E)/E
How does the relationship between i and i* change the capital account?
i > i* leads to capital inflow
i < i* leads to capital outflow
What does the CP (capital account) line show on an i - Y graph?
The CP line is a horizontal line, and when the domestic interest rate is above this line, depreciation in the domestic currency is expected and there is a balance of payments surplus, and visa versa
What is the FE curve?
The aggregate of the CA and CP curve, so an i=Y line. When capital mobility is perfect, the FE line is rotated clockwise until it is horizontal and equalling i*
Why does the FE curve become flat in cases of perfect capital mobility?
Having further wealth no longer offers better interest rates, so the CP curve becomes steeper leading to a flat FE curve - only i* is important
Capital flows > current account flows when perfect capital mobility exists
How does R change is the ultra-short-run?
Only foreign price, P*, changes
How does the IS curve shift as R changes?
Higher R leads to leftward shift on graph, and visa versa
How are interest rates fixed by the central bank?
Using official reserve currency to avoid changes in the capital account that could alter interest rates - when reserves run out, an official devaluation of the currency occurs
How does an expansion in the money supply affect the LM curve in flexible rates?
LM shifts rightwards, creating a lower interest rate and a resultant capital outflow as foreign bonds are purchased instead of domestic ones
How does an expansion in the money supply affect the IS curve in flexible rates?
Capital outflow (and a larger desire to buy in foreign currency therefore) leads to a currency depreciation, increasing competitiveness, R, so that the IS curve shifts rightwards until LM and IS cross on the FE curve on a higher Y value than before
What conditions allow for increases in output after changes to money supply in flexible exchange rates?
Marshall-Lerner conditions, so that (x2)(R) > (m2)(R), or the benefit from extra exports due to an increase in competitiveness is not outweighed by the increase in imports
How does an expansion in the money supply affect the IS and LM curve in fixed exchange rates?
LM curve shifts rightward, leading to the central bank withdrawing money from the supply to avoid the lower interest rate, so the LM curve shifts back to where it was originally
What is the impossible trinity?
No perfect capital mobility, fixed exchange rate and independent monetary policy
How does an increase in government expenditure in flexible rates affect the IS and LM curve?
Shift of IS curve rightwards by the size of the multiplier leads to increased interest rate (upward pressure) leading to a currency appreciation, and the negative resultant effect on net exports leads to the IS shifting back to original position
How does the composition of Y change after government expenditure in flexible rates?
Government expenditure crowds out net exports as a part of Y, without any real change to Y
How does an increase in government expenditure in fixed rates affect the IS and LM curve?
The rise in interest rates leads to excess demand for domestic currency (appreciation) which are printed by the central bank in order to lower the interest rate. This expansionary market policy shifts the LM curve rightwards
When should one use fiscal and monetary policy?
Fiscal for fixed rates, monetary for flexible rates
What are the three equations for the LM IS graph and what are the unknowns?
IS : Y = c(1-t)Y + Io - bi + G + (x1)(Y) + (x2)(R) - (m1)(Y) + (m1)(R)
LM : M = kY - hi
FE : i = i
Unknowns are i and Y, and R and M can be found from this
How does one find the equilibrium point for the LM IS graph in flexible rates?
LM and FE curves are important
M = kY - hi leads to Y = M/k + (h/k)i*
Y can therefore be found, as can R from the IS curve
How does one find the equilibrium point for the LM IS graph in flexible rates?
IS and FE curves are important as monetary policy LM is fixed
IS equation is changed with -bi changing to -bi*
Y and i*, as well as M
When prices can vary in the long term, how does an increase in government expenditure affect the LM IS graph in fixed rates?
Shift of IS rightwards, followed by LM moving rightwards as before. However due to the increases in domestic prices, R decreases so both curve return to their original positions
How does price affect output?
As price increases, output decreases in a linear fashion
How does the money supply affect the P-Y graph?
In fixed rates, increases in money supply shifts the line outwards, and visa versa. In flexible rates, fiscal policy changes are the only way to shift the line in a similar way
What are the assumptions of the neoclassical labour market equilibrium model?
Positive but diminishing returns to factors, constant returns to scale in Inada conditions
When y=f(N), what is profit and how is it maximised?
Pf(N) - WN or TR - TC
Take derivative dN, so Pf’n - W
What is the difference between real and nominal wage?
Real wage = W/P = f’n
Nominal wage = W = Pf’n
What is f’n equal to?
Marginal product of labour, increase in profit for every man hour increased, which dictates the demand for labour
What factors do households supply labour around?
Utility = u(c, L) and budget constraint (P^e)c = WN which will be shortened to Pe and time constraint
N + L = 12
c = consumption of goods, L = leisure, e = expected price level and WN = labour income
Why is e important in terms of wages?
It represents the time lag between earning and spending
How is the time constraint built into the consumption equation?
w/Pe x (12-L)
What is LF in terms of wages?
Maximum possible hours of work in a workforce
How is leisure seen in terms of wages?
An opportunity cost, which if wages are high enough, can be overcome so that in fact all unemployment is voluntary
How do bargaining structures change unemployment figures?
A move from atomistic bargaining (or perfectly competitive labour supply) to a union wage bargaining schedule leads to higher unemployment, as wages are increased with supply therefore shifting rightwards (up) and demand shifting leftwards (down)
What is the formula for labour demand when there is wage bargaining and what does this induce?
(1 + dP/dY x Y/P(Y)) x f’n
The difference between this line and f’n is the level of involuntary employment
What influences the ability of unions to bargain?
Employment rate - if low, then lots of replacement labour so hard to bargain for wages
How will output change after bargaining?
Output will decrease. This is shown in dP/dY x Y/P(Y) which must be negative, showing how wages will be higher as well
What is the effect of an increase in prices in the labour market?
Loss of purchasing power leads unions to increase their bargaining level, as well as increases in prices leading to an increase in demand for labour
What is the difference between the LRAS and SRAS in terms of wages in the P-Y graph?
As unions in the short run may not be able to correctly predict future prices increases, then SRAS is not vertical. Change in P may be more than change in Pe
What happens when unions underestimate the wage rate?
More men hours hired so higher output until unions change bargaining schedule in response to loss of purchasing power. SRAS shifts upwards as Pe does until equilibrium reached
How is an increase or decrease in prices shown on the P-Y graph?
LRAS shifts to the right when prices rise and visa versa
What is the adaptive method for finding Pe and how does this inform wage demands?
Future changes in price based upon difference between past and current price level so that Pe+ = Pt-1
Wage demanded is difference between expected price level and current price level
How are logs used in price levels?
In order to linearize SRAS, logs of the nominal wage is taken as the price level. The differences between current and previous SRAS lines are therefore the differences used in find Pe
What is P in terms of the LM curve?
M/P = kY - hi
How does an increase in prices affect the LM curve?
It shifts rightwards and there is a reduction in the real money supply
What is the equation for aggregate demand in flexible rates?
P = m - bY + h9i* + E^e) where E^e is the expected appreciation rate
What is the equation for aggregate supply?
P = Pe + λ(Y-Y*)
How is money neutrality shown on an P-Y graph with AS and AD in flexible rates?
If AD shifts upwards due to an increase in M, output will increase but prices/wages will not. Therefore wage bargaining will kick in, increasing the Pe function of the AS so that it rises as well, shifting Y value backwards by a bit in the process
What is aggregate demand in fixed rates?
P = P* + e - bY + δG - f(I* + E^e) where delta is a shift factor
What happens to the AS and AD in fixed rates when inflation occurs?
Both lines shift up equally, so that the same Y level is attained at the LAS (long run aggregate supply). In terms of AS, Pe was underestimated so has to be raised
What occurs after wage bargaining in fixed rates?
In terms of AD, the increase in prices as a result of wage bargaining leads to a decrease in competitiveness, so there is a devaluation of currency to induce exports, leading to further inflation, so a cycle is create
What is the equation for inflation in terms of prices?
P-P(-1) = Pe - P(-1) + λ(Y-Y*)
What is the equation for inflation in terms of money supply in flexible rates (AD curve)?
Inflation = u - b(Y-Y(-1)) + h (Δi* + ΔE^e) where u = growth rate of domestic money supply or m - m(-1)
What is the equation for inflation in fixed rates?
E + π* - b(Y-Y(-1)) + δΔG - f(Δi* + ΔE^e)
The last part of this equation should be 0 in fixed rates
Where is there equilibrium supply or EAS in fixed rates?
Where expected inflation equals inflation, or that Y = Y*
How is equilibrium demand or EAD reached in flexible rates?
Inflation equals growth rate of domestic money supply (u)
How is equilibrium demand reached in fixed rates?
Inflation rate = inflation rate* of other nations, as other factors are controlled domestically
What is the SAS?
The surprise aggregate supply caused by underestimation of inflation by trade unions. When this occurs, the SAS rises to match inflation
What is great moderation?
Where unions are able to reach an equilibrium inflation rate as changes are only one off
What is systematical expectational error?
When inflation continues to rise over a time frame, unions are always lagging behind in their estimations. Yet in the case when the rise is linear, it may be possible to predict future changes so the model is not rational
How is a boom or recession shown on an inflation-output graph with EAS and EAD?
If the output is to the right of EAS, shown by a shift to the right by the DAD, then boom occurs and visa versa
What is hysteresis?
Output today has an impact on output tomorrow, such as boom today with the DAD to the right causing benefits tomorrow
How is money neutrality shown on an EAD EAS graph?
When the money supply is increased, the inflation rate increases causing higher output, until the unions react to the loss of purchasing power eventually leading to a slightly worse output, and then return to original position
What are the two factors that cause economic growth?
Technological change and capital accumulation
What empirical evidence is there for the Solow Model?
Population growth lowers Y, increased investment increases Y, and where SS are the same there is convergence
What is comparative and absolute advantage?
Absolute - same inputs for creating two goods, more goods of both created than any other country
Comparative - lower opportunity cost to create a single good than anyone else
How do countries specialise in industry?
Even with absolute advantages, a country will specialise in the one good it has with the lowest opportunity cost and the largest comparative advantage
How does the type of product affect the spread of prices?
Homogenous products have one price, differentiated products have a wider spread of prices
What factor changes quantity demanded that is not shown in terms of elasticity?
Number of consumers - the more consumers, the more demanded
How does price generally affect elasticity?
Lower prices on the same line give an inelastic result, showing how producers can tamper with prices more at this level
How can durability affect elasticity?
In the short run, consumers can postpone purchases making them elastic, whilst in the long run cars need replacing so they are inelastic
Apart from income, how is the income elasticity affected?
Snob appeal of products, lifestyle changes ie eating out more as less time to cook, and economic climate in terms of slumps and booms
What kind of tax is VAT?
An ad valorem tax
What is a repugnant market?
One it which it would be immoral to trade in such as slavery, or human organs?
What is the difference between inward and outward kinks in the budget constraint?
Outward ones lead to a lower y-value than expected and visa versa
What are the assumptions about preferences not already covered?
Convexity - averages are better than extremes, or at least no worse
Continuity - no sudden jumps in preference orders due to tiny changes
What are the two approaches towards changing prices in indifference curves?
Compensation variation approach of Hicks and equivalent variation method of Slutsky, which has a smaller income effect
Who separated risk and uncertainty?
Frank Knight
What is the risk premium?
The difference between the expected utility (using probability) and a lower guaranteed utility level which the individual is indifferent to
How can individuals be shown to be more or less risk averse?
More risk averse if stronger curvature in line
What is it called when insurance premiums are most efficient for the consumer?
Actuarially fair, expected net premiums are zero
What is the area of efficient production in terms of returns to inputs?
Where diminishing returns to scale sets in, up to when MPL turns negative, then output is efficient
What are the accounting costs?
Direct costs of operating a business, not opportunity costs
What are sunk costs?
Unavoidable fixed costs, cannot be recuperated by selling appliances if you go out of business, ie specific capital - they create the sunk costs fallacy
How are fixed costs created?
In short term there are more of them, they are also created by a lack of rental and resale market and fixed labour contracts
How are returns to scale shown in the long run?
The first part of the U-shaped long run ATC art increasing returns to scale, whilst in the second half there are decreasing returns to scale, and diseconomies of scale
What production function is based on no substitutability?
Leontief Production Function
How are short-run costs found in an isoquant map?
Keep K as a constant horizontal line, and where this crosses the production function at different points will show the short-run results
What are the efficiencies created by the market?
Allocative efficiency, where last product sold MR=MC, and Pareto efficiency, no feasible way of distributing goods without making one person better off and another worse off
What is the consumer in perfect competition?
Sovereign
How are costs described in the long run?
LRATC = LRAVC as there are no fixed costs
What does the term monopolistic competition refer to?
Basic tension between market power and competitive forces existing, still leading to
What is the difference between oligopoly and monopolistic competition?
Lower barriers to entry in monopolistic competition and firms don’t worry about other firms actions
How does the demand curve change in monopolistic competition as firms join?
Demand curve becomes less steep and more elastic
What is largest type of switching cost?
Network cost, where quantity demanded increases the switching
What is Lerner’s Index of Monopoly power?
L = P-MC/P or -1/E(d)
E(d) is elasticity of demand for a firm, if large then mark-up is small
What is the grounding idea of oligopolies?
The market clears as quantity demanded by consumers = quantity supplied
What is the basis of the Cournot model?
Firms compete around quantity rather than price, basing supply on the actions of the other
What is the profit function for Cournot?
Profit = q(a) x (a - b (q(a) + q(b) - c)
What are the curves that affect the Cournot model?
Residual demand curve - remaining demand for a firms output after competitors production quantities
Reaction curve - best response to competitors actions
How does the Betrand model work?
Firms set prices lower than the competition. Only not MR=MC when there are capacity constraints
How does one calculate the Stackleberg model?
Substituting so that price can be given in entirely Qleader or Qfollower
What is the Nash Equilibrium?
If players had chosen a strategy and once being told of the other, they would not change
When is there a Nash Equilibrium in a mixed strategy case?
Only when the chances of an action are 50%
What is the answer to the prisoners’ dilemma?
The tit-for-tat strategy of punishing the opponent for defecting until cooperation/collusion occurs
What are the statistics for cartels?
They are illegal, and OECD says for every one detected, six or seven go undetected
What is important for collusion to occur?
High levels of market concentration
How is a game with two Nash Equilibriums fixed?
Credible commitments, rather than empty threats (or burning bridges behind yourself) or a hierarchy of players or due to focal points due to societal factors
What kind of barriers to entry are there?
Innocent or structural (exogenous, and strategic or behavioural (endogenous)
What is predation?
Setting prices lower than costs, given the profits gained once rivals leave is superior
What is the Marginal Revenue Product of Labour?
Addition revenue from output from additional unit of labour - MPL x MR - compared to w showing when to hire or not
What are the efficiencies apparent in the market?
Pareto, exchange, input and output efficiencies
What happens when firms cannot sell goods and they do not go bust?
It is called unplanned investment, or involuntary investment build-up
Why is the aggregate planned expenditure at an angel?
Because the of the marginal propensity to consume - consumers spend more (Aggregate Expenditure) or less based on output
How is the multiplier effect showed graphically?
Aggregated planned expenditure raises, and then use horizontal and vertical lines to reach new intercept with AE=Y, with this showing the required labour to pay for expenditure or other increased consumer spending
How is a flatter line shown graphically in terms of AE as factors are added in examples?
The line pivots around the same point as previous, the same Y value - when not in example case, pivot from y-axis same point
What can cause c to increase and decrease based on income?
If increased in income is expected to be permanent, then larger c and visa versa for transitory increases
How can policy on commercial banks affect the money supply?
If reserve requirements increase, money supply decreases. Where discount rate increases, money supply decreases
What shifts the angled money demand curve and vertical Ms curve on an I-Ld graph?
Increase in income shifts Md upwards (increase in i to offset Y increase for same Ms value), shift in Ld shifts Ms right in exogenous form
How does an increase in Ld affect the LM curve?
Downward shift as in i-Ld graph the Ms curve shifts rightwards
What causes the return to old Y values after LM-IS shifts?
Contraction in monetary base in order to combat rising inflation - however Y value still higher than before
What causes positive and negative shocks in the IS?
Increased and decreased consumer confidence
When tampering with Ms, how does the central bank deal with shocks to the IS?
Positive shocks - open market operations increasing Ld
Negative shocks - contraction open market operations, decreasing Ld
What is the result of tampering with the Ms when shocks to the IS occur?
There is a large change in output, so instead the same Ms level should be aimed for
How does the central bank best deal with shocks to the money supply?
Aim for the same interest rate, as since commercial banks are lending more, you simply lend less
Which kind of shocks are more volatile?
Shocks in money market, so therefore interest rate should be set as level
What causes a clockwise rotation in the IS?
Taxes increased, interest sensitivity reduced
What does R equate to?
E x P* / P
What does a depreciation of currency cause?
Increase in exchange rate and competitiveness - increased exports, decreased imports
Why are a lack of barrier to capital outflows important?
So that foreigners have no problem with either purchasing in their currency, or in our bonds - keeps current account working
When does i=i*?
When the bond market is in equilibrium
What causes i in UIP?
i* + (E(e, t +1) - E(t))/E(t)
What is the Mundell-Fleming model?
LM-IS-FE
When exchange rates are fixed and IS shifts, what causes the LM to shift as well?
Excess demand for home currency causes central bank to supply more money so LM shifts rightwards - capital inflows occur beforehand
What are the formulas for the demand and supply of labour?
Demand - W/P = f’(n)
Supply - W/P^e = g(n)
Why is some unemployment voluntary?
Employment is forfeited for more leisure
What is the equation for imperfect competition for labour demand?
W/P = (1 + dP/dy x y/P(y))f’N
What is the equation used for wage bargaining?
P^e x c = WN
What is the LRAS?
When expected prices equal actual prices due to correct predictions of trade unions - same output always
What happens to labour demand when technology increases?
Given that there is more output for every labour input, there is raise in the MPL so more demand for labour - shifts LRAS rightwards
How are prices mapped onto income?
As the LM curve shifts backwards as prices increase due to M/P as formula, and the IS moves as well, there is a lower output leading to a downward slope on P-Y graph - this shows aggregate demand
How is money neutrality shown in the AD-AS curve in flexible rates?
There is only ever a change in the nominal, rather than real value of money. Expansion in Ms leads to forward shift of LM and IS. Then AD shifts upwards as output does, creating a new price where it intersects the LRAS at a higher level. This forces the LM-IS curves backwards a bit. They move all the way backwards when the SRAS shifts upwards up to the new price level where the AD and LRAS intersect
How is the AD curve found mathematically and how does it shift in flexible exchange rates?
Through logarithms such as M/P going to m-p and R=E x P/P going to e + p - p
AD curve shifts rightwards when there is a higher i* or E^e value
How is a downward sloping AD curve found in flexible rates?
Instead of M/P causing LM shifting backwards, increases in prices decrease competitiveness shifting IS down with the LM moving with it
What affects the AD curve in fixed rates?
High i* and E^e values lead to shift backwards in AD curve, as LM curve will shift to accommodate changes in these values
What is delta g?
Elasticity relative to government spending
What shifts the AS in both cases?
Upwards - increase in expected price
Rightwards - increase in Y (along with movement in LRAS)
Real wage falls as we move up the AS
What does u equate to in flexible rates DAD?
Growth rate in the money supply
What affects the DAD in different exchange rates?
Flexible - money growth (u) or i and E factors
Fixed - Mainly world inflation, also Y, G, i* and E factor
Method used for future stuff?
Adaptive method
What can lamda equal in the fixed rate DAD?
Between 0 and 1
How do shifts occur in SAS and DAD in fixed and flexible rates?
In flexible, normal uHi and uLo case. In fixed rates, no shift in EAS or EAD, just in DAD when G or similar factor changes, increasing Y, leading to spiral back to original position
How do you stop the currency depreciating in fixed rates, as Y decreases?
Purchase sterling bonds using foreign currency - a finite resource than can run out and force a depreciation, ruining fixed rates
How did the Phillips curve fail?
Stagflation - instead of one curve of inflation and unemployment, there was two types, single LRPC and many SRPCs
What causes Phillips’ idea of the curve?
Inflation and price increase shifts labour demand upwards, reducing unemployment
How can the government try to tamper with the natural rate of unemployment?
Increase in government expenditure - increasing inflation and lowering u but still causing constant raise in inflation after as TUs adjust
What is the line showing capital accumulation in terms of things breaking down in Solow?
Requirement line
Why is there a convergence in SS in a mathematical sense?
Time derivative of capital is positive
Which graph shows convergence in Solow?
y-k, rather than the?-k graph, showing the increased growth rate of countries with less capital investment (difference between curved sy line and horizontal requirement line)
What is the requirement for convergence?
Homogenous countries, same SS
What is the exogenous technology Solow model called?
Neo-classical exogenous model, with g as part of requirement line, plotted against y and k of effective worker
What is the assumption of Schumpeterian models?
Imperfect competition (no Inada conditions therefore)
