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BMAK > Teil 2 > Flashcards

Teil 2 Flashcards

1
Q

Agg. Consumption

-> Interest Rate effect

A
  1. Substitution Effect
    * makes Savings more attractive relative to current consumption when increase of r
  2. Income Effect
  • for Creditor: increase in income -> increase in current and future consumption
  • for Debitors: decrease in income -> decrease in consumption
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2
Q

Tobin’s q

A

q = (MR / MC)

  • q > 1: Investieren
  • q < 1: firms should disinvest

Econmic Reasoning:

  • Firms that are borrowing to purchase additional phy. capital face higher cost
  • > Increase in MC from Investment realtive to MR from investment
  • Firms that do not Borrow
  • > Opportunity cost
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3
Q

Goverment Expenditure

A
  1. Negative Output Gap:
  • Long Run Y > Actual Y
    • Time for Countercyclical Spending
    • The bigger the gap the more Gov. expenditure to expect
  • Long Run Y < Actual Y
    • Positive Output Gap
    • Gov. Expenditure should be cut
  1. Net Gov Income
  2. Goverment Debt
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4
Q

Price Quotation

A

Cost of 1 Unit of foreign Currency

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5
Q

Bilateral Nominal exchange rate eij

A

Increase in eij:

  • Depreciaton of the domestic currency
    • the cost to buy one unit of of foreing currency increases

​

Decrease in eij:

  • Appreciation of the domestic currency
    • the cost to buy one unit of foreign currency decreases
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6
Q

Bilateral real exchange rate

A
  • free of units measurment
  • measures the rate at which the goods of the domestic eco. & the foreign economy can be exchanged for one another

Increase in Eij:

  • competitiveness of the domestic economy i improves
    • fall in price of domestically relative to foregin produced goods

​

Decrease in Eij:

  • competitiveness of the domestic economy i deterorates
    • ​rise in price….
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7
Q

Effective Real Exchange Rate Ei

A
  • of the domestic economy
  • measured by using the trade volume as a weight between the domestic eco. and ALL the foreign economies
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8
Q

Trade Balance

A

Increase in…

  1. Domestic Net Income: Increases Import
  2. Foreing Net Income: Increases Export
  3. Effective Real exchange rate
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9
Q

Effective Real Exchange rate und TB

A
  1. Increase in Domestic interest rate
  • Decrease in E
    • dom. currency appreciates
    • gets cheaper to buy abroad
    • import increases
  1. Foreing Interest Rate increases
  • Increase in E
    • dom. currency depreciates
    • gets chepaer to buy at home
    • export increases
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10
Q

Marginal Propensity to Consume

A
  • indicates by how much consumption increases if net income increases by one unit
  • 0 < Cy < 1
    • Household will want to increase both CURRENT and FUTURE Consumption to maintain a fixed ratio between them
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11
Q

Imports and increase in the domestic interest rate

A

Import raises as r increases

  • Because as the interest rate increases -> a higher return on dom. currency denominated bonds
  • Increase of dom. curry. denom. bonds purchases by foreign investors
  • increase in purchase of our domestic currency
  • DOM. CURRENCY APPRECIATES

–> Cheaper for us to purchase goods abroad (IMPORT)

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12
Q

Exports and increase in the domestic interest rate

A

Domestic interest rate increase:

–> Dom. Currency appreciates

–> Forein Currency depreciates

=> Foreigner purchase less from us (more Expensive)

=> Export fall

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13
Q

IS-Curve

A
  • Real Sector
  • shows all combinations of output and interest rate at which ouput supply = des. agg. demand
  • direct impact of changes to A & interest rate sensitive components are amplified by the feedback effect of the KM
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14
Q

TR-Curve

A

Financial Sector

CB:

  • keeps inflation low & stable
  • adequate level of output
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15
Q

Taylor Rule

A
  • raise rMP
    • if macro activity does “overheat”
    • Y> Y Long run
    • if actural inflation is below target inflation
  • lower rMP
    • if macro. activity is “sluggish”
    • Y< Y Long run
    • if actural inflation is below target inflation
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16
Q

“Mark- Up”

A
  • Mark up is charged by COMMERCIAL BANKS ontop the monetary policy rate
    • for the risk involved in bank lending
  • Varys over time
  • Varys across borrowin entites (household vs. firms)
    • different default risk
17
Q

What drives the “Mark UP”

A
  • Bank lending conditions determine the risk premium.
  • The Risk involved in Bank lending implies that commerical banks charg a positive Mark-Up on the monetary policy rate
  1. loan risk (borrowers may default)
  2. degree of risk averison of comm Banks
  3. amount of Equity of the comm. banks
    • its ability to bear risk
    • the less Equity you hold, the higher leverage, the higher risk, the higher the mark up charged
18
Q

Fiscal Policy Options in Deep Crises

A

Increase in Gov. Expenditure (Increase of Go)

Note:

  • Fiscal Policy will be particularly effective as long as output remins below its YZLB
    • No Crowding-Out
      • rmp cannot rise (even though Y has risen)
    • Endogenous Component of the RP falls as Y is increasing -> Crowding IN
19
Q

Issue with Goverment Spending in Deep Crises

A

Funding!!!

In deep crises

  • low tax revenue
  • high level of gov. transfers
20
Q

Unconvetional Monetary Policy in Deep Crises

A

Central Bank aims at stimulating macro. activity, beyond the normal B.C. Option

Lowering the cost of borrowing through lowering the exogenous component of the risk Premium

CB purchases up treasury bonds

leads to an increase in bond price

=> lowers the rate of return on these bonds

=> No Abitrage Condition: rate of return falls across all types of issures of bonds

=> Comm Banks will lower interest rate

21
Q

Deep Crises

A

sharp reduction of output relative to long run output occurs when:

  • rMP is constrained at ZLB
  • risk premia rises endogenously for loans by commercial bank to household and firms
  • Y < YZLB
22
Q

Mark Up Depends Postively/Negatively

A
  • NEGATIVELY on banks Equity
    • increase in the mark up when equtiy decreaes
  • POSTIVELY on banks risk aversion
  • POSTIVELY on borrowers loan risk
23
Q

Loan Supply by Commercial Banks Depend on:

A
  • Expected Return, r
  • Loan Risk
    • Borrwers may default
    • given loan risk even under perfect competiton Comm Bank need to charge a positive Mark Up
  • abillity to Bear Risk
    • measuerd by Equity, Eq
  • cost to raise external funds, rMP
  • degree of Risk Aversio
24
Q

KM

A

KM > 1

  • Feedback between Output and Desired Demand goes on infinitley
    • 1st Round, 2nd Round,..
    • effect becomes smaller each time
  • Increase in Slope -> Decrease in KM
  • Decrease in Slop -> Increase in KM
25
Q

Benefit of Low Inflation

A
  • high inflation:
    • Resources are not allocated efficiently
    • high prices
    • “inflation tax” (devaluation of money)
26
Q

Benefit of a positive rate of inflation

A
  • less risk of DEFLATION
    • Deflation = Costly for Debt holders
  • labor markets function better
    • No need to lower wages
27
Q

The role of Equtiy

A

The higher the volume of loans granted, the higher the banks leverage

  • lager extend to which the bank loans are funded by debt rather than equity
    • Tax Shield,…

=> To much Leverage

  • In times of Distress, Equity will be wiped out to fast -> Bank fails
28
Q

Interest Partiy Relationship

A

Suggest that exchange rate are driven by domestiv relative to foreign interest rate

In the LONG RUN exchange rate are driven by purchasing power partiy

29
Q

Agg. Investment and changes in the interest rate

A

Investment is highley sensitive to changes in the rate of interest and thus rather VOLATILE over the course of Buisness Cycles

Vgl. Households only SMOOTH Consumption

30
Q

Intertempoal Buget Constraint

A
31
Q

Bilateral real exchange rate

A
  • If larger then one:
    • Domestic good is more competitive
    • Foreign good is more expensive
  • in the long run it is constant (=1)
    *

BMAK (4 decks)

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