Test 2 Flashcards
EV[Y^d] - Y^d
Expected demand - real Demand
Expectation Error
C = c(Y^disp{+ve}), dC/dY^disp > 0
Keynes Absolute income hypothosis
0 < dC/dY^disp < 1
How much you consume proportional to your Y(income)
Marginal propensity to consume (mpc)
if mpc 0
C= å + ßy
å= need to live
ß= mpc
Linear C function
Y-C=-å+(1-ß)Y
Savings (S)
dY/dI=1/1-ß>1
e.g.
mpc=0.9
1/0.9= 10
Investment multiplier
dY/dI=1/1-ß>1
e.g.
mpc=0.9
1/0.9= 10
Investment multiplier
If I increase by $1 then Y increase by $10
chnages in I changes the Y (Y=C+I) which then changes C, C then changes Y which then changes C etc etc until overall change of 10 is achieved
Keynes multiplyer
finding Eq
Y0=1/1-(1-t)ß [å+I+G]
- Y^s=Y^d=Y
- Y^d= C+I+G
3.C=C(Y^disp)=å+ßY^dsip, å>0, 0≤ß<1 - Y^dsip= Y-T
- T= tY, 0
IS curve system
W= M+B
Money and Bonds are mirrors
Money
No interest, risk free
Bonds
Positive Interest, risky and non-maturing
Walrus law
Eq in one market means eq in other market
three types of motives to hold money, T, P and S
T= transaction
P= precaution
S= speculation, (Ls) i decrease leads to increase in money demand
3 parts of LM curve
| 1
|
|
\
\ 2
\ _____ 3
- Ls=0, only holding bonds
- elastic, main part that is used
- Only holding Ls (liquidity trap)
What is the liquidity trap
Where agents are indifferent between using bonds and money, monetary policy is ineffective
What are the shift parameters for
1. IS
2. LM
- Fiscal policy G, T
- Monetary policy M
what assumption do you make about goods market and money market
Money market moves quicker as it is just digits
Wages that do no like to fall,
W stays at initial W=W
N Falls further (N)^2<(N*)^1
Wage Rigidity
What are the 3 types of unemployment?
Frictional= changing jobs in dynamic economy (searching and matching
Structural= Labour market institutions that match workers and firms (policies; hiring, firing costs, min w)
Cyclical: diff between actual and natural rate (SR fluctuations {boom, recessions})
THEORIES OF WAGE DETERMINATION
Supply and demand
collective bargaining
Individual Bargaining
Supply and demand
decided by market
Collective Bargaining (unionised wage settlement)
higher wages with unions leads to lower employment
wages>reservation wages- w cannot be below unemployment benefit, w depends on market conditions
