Slides2 Flashcards
Is fiscal or monetary policy more effective in an open economy
Monetary policy as fiscal policy is weakened when counteracted by foreign influences
Is fiscal or monetary policy more affective in stabilizing an economy with fixed exchange rate
Fiscal policy is more affective as there is basically no monetary policy, economy can be stabilized through spending, re and de valuation
Assume that the interest parity condition holds. Also assume the us interest rate is 8% while the uk interest rate is 6%. How will the financial markets expect the pound to depreciate or appreciate
Appreciate by 2% so they become equal?
Assume that the interest parity condition holds and that the dollar is expected to depreciate against the pound. What do we know about the us interest rate
That it is larger than the poundz
A reduction in the real exchange rate will cause
A reduction in the quantity of imports
What will happen to the investment, consumption and the domestic currency when the economy moves up and to the left of the IS curve if exchange rates are flexible
I and C decreases while e appreciates
In an open economy how would decreased government spending affect imports
It would reduce it as the central bank lowers interest rates which makes domestic wares more attractive
Assume simultaneous tax increase and monetary expansion, what would happen to the exchange rate
It would decrease, while output may stay the same
What is the mission of a central bank in a fixed exchange rate regime
That i=i* is their target
How will a higher savings rate affect a nation in the short run
Decreased consumption if no massive boost in confidence at decreased deficit
How will higher savings affect a nations economy in the long run
Increased output but no sustained gain in growth rate, just a bump. Also higher consumption due to more capital per worker if at golden ratio
What how does expectations affect monetary policy
Monetary policy is weaker if denizens think it is transitory
Why would you argue that decreasing the deficit is good for consumption in the long run
If you think the multiplier is small the decreased effect on consumption of government spending will be dwarfed by the increase in output from improved expectation. If you believe it is large you likely think that consumption will decrease short term
How does a reductions in expected future taxes affect the IS curve
It shifts it to the right as peoples expected total wealth increases leading to greater consumption
When will a reduced money supply always decrease output
When accompanied by bad news
What can the central bank do to the IS LM curves to change expectation
Move the LM curve
What is the growth rate of effective labor
ga+gn aka the technological growth rate plus the growth rate of the population
What is the most common measurement of changing living standards
The growth rate of real gdp per capita
If output per capita grows at 6% per year how much will it have grown in 3 years
19%
Assume that there is an increasing return to capital, increasing return to labor and constant return to scale. What will happen to output if both labor and capital decrease by 5%
It will decrease by 5%
When using a logarithmic scale to plot output per capita over time an upward sloping curve that becomes increasingly steep indicates
Output per capita is growing by an increasing percentage each year
Assume no population or technology growth, how do you calculate the change in capital stock
Investment minus depreciation
In the production function a 20% increase in A will lead to what concerning labor
20% increase in effective labor
What does constant return to scale imply for the production function
That when K and N or A increases by some % the entire function does so
What increases output per effective worker
Increasing the savings rate
How does capital grow when the economy reaches a balanced growth equilibrium
The growth rate of capital is equal to the growth rate of the effective workforce
Is it possible to reduce unemployment with unexpectedly high inflation in medium run
No only in the short run as unemployment reverts to its nature in the medium run
What is the danger with entrenched inflation
That it is hard to bring down again if the economic actors are adapted to it
What happens with inflation during expansionary fiscal policy according to the Phillips curve
Inflation rises if interest rates are not brought down
What happens to the PC curve with a monetary expansion in the medium run when the expectations are the same as the real rise in inflation
The PC curve moves upward which means higher inflation on all levels of output,
Why does the central bank decide both future and current inflation policy
To influence long term interest rates and to stabilize inflation expectations
What happens when businesses increase their profit margins
Real wages are lowered and equilibrium unemployment rises which leads to lower potential output
What happens to the PC curve when potential output drops
It shifts to the left leading to the same inflation for lesser output
How much do firms produce in perfectly competitive markets
Up to where their marginal costs equal product price
How old is working age
15-74
What are the criteria of being employed
Work one hour each week or bring on temporary leave or participating in some labor market program
What demographics have higher unemployment
Young, foreign borne, women
What demographics have lower participation rate
Young and old, Swedish, women
What are sime reasons for unemployment
Frictional, structural, cyclical
What are efficiency wages
Wages to motivate workers to stay longer and work harder
What is the natural rate of unemployment
The unemployment rate at which there is balance in the labor market
1/(1+m)=f(u,z)
Does price setting depend on unemployment
No only on profit margin as the function
P = (1+m)W entails
Foes z affect real wages
No only unemployment (doubt) what affect real wages is m
What happens to the wage curve when z increases
Real wages rise leading to a higher equilibrium unemployment
What is a wage spiral
Expected inflation leads to higher wages that lead to higher prices etc
What happens to the IS curve when the risk premium increases
It moves to the left
What does RHS and LHS stand for
RHS is demand and LHS is output, there is equilibrium in the goods market when RHS=LHS Y=Z
How does the central bank
control the overnight interest rate
No one will borrow for higher than the riksbanks repo rate and no one would lend for lower than the riksbanks deposit rate, thus the interest rate stays within the interest rate corridor
What is variation around potential output called
Positive and negative output gaps, booms and busts
