The Macroeconomy in the Short Run II (Aggregate Demand) Flashcards
aggregate consumption function
C = C (+ Y - T , - r , other factors)
∂C/∂(Y-T) > 0 (but less than 1)
∂C/∂r < 0 (but small in absolute terms)
or as linear functional form:
C = C(0) + C(y) • (Y - T) - C(r) • r
C(0) = other factors
C(y) = element (0,1) {MPC}
C(r) > 0
household maximizing utility with respect to current and future consumption
max U = u(C(current)) + 1/1+p • u(C(future))
instantaneous utility function
u(C) = log(C)
current, future consumption ration
C(current)/C(future) = (1+p/1+r)
MPC
marginal propensity to consume:
∂C(current)/∂(Y(current) - T(current)) = C(y)
future consumption
C(future) = (1+r) • (PVR - C(current))
current consumption
C(current) = C(future)/(1+r) + PVR
adjust consumption to changes in the interest rate
substitution effect:
increased interest rates make current consumption less attractive –> saving more attractive
income effect: (increase of interest rates)
households that are “creditors” now dispose more income so they can increase their consumption
households that are “debtors” now dispose less income so they have do decrease their consumption
aggregate investment function
I = I ( - r, other factors)
∂I/∂r < 0
specialised:
I = I(0) - I(r) • r
I(0) = other factors
Two things that influence Governments
Political process:
Interest groups may induce the government to “overspend” when the macroeconomy is not in recession, leaving the government drained at times of recession.
Economic consideration:
Besides “countercyclical spending” the government tries to ensure fiscal responsibility and debt sustainability by
- specifying limit of government expenditure
- specifying limits for the level of public debt
- prescribing a balanced government debt
government expenditure function
G = G ({+} ¥ - Y , {+} T - GT , {-} D , other factors)
¥ = long-run output
¥ - Y = (negative) output gap
D = government debt
specialised:
G = G(0) + G(y) • (¥-Y)
G(0) = other factors
trade balance function
TB = TB ({-} Y - T , {+} Y* - T* , {+} ε , other factors)
ε = ε ({-} r , {+} r* , other factors)
specialised:
TB = TB(0) + TB(ex) • (Y* - T*) - TB(im) • (Y - T) + TB(ε) • ε
TB(0) = other factors
TB(ex), TB(im), TB(ε) > 0
ε = ε(0) - ε(r) • (r - r*)
ε(0) = other factors
ε(r) > 0
bilateral nominal exchange rate
e(ij) (price quotation) = units of domestic currency
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unit of foreign currency
bilateral real exchange rate
ε(ij) = e(ij) • P(j)
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P(i)
ε(ij) up:
fall in price of domestically good relative to foreign good
—> more competitive in comparison to foreign economy
ε(ij) down:
rise in price of domestically good relative to foreign good
—> less competitive in comparison to foreign economy
effective real exchange rate
ε(i) = ∑(j=1) ω(j) • ε(ij)
∑(j=1) ω(j) = 1
interest parity relationship
1 + r(t) = 1/ε(t) • (1 + r*(t)) • ε(t+1)
1 + r(t) = return from domestic-currency government bond
in domestic currency
1/ε(t) = foreign currency value of one unit of domestic
currency in t
1 + r*(t) = return from foreign-currency government bond
in foreign currency
ε(t+1) = domestic currency value of one unit of foreign
currency t+1 (when government bond matured)
Exchange rate in relationship with interest rates in t, t+1 and in the long run
ε(t) = (1 + r*(t)/1 + r(t)) • ε(t+1)
ε(t+1) = (1 + r*(t+1)/1 + r(t+1)) • ε(t+2)
ε(t) = [π(s=0)(1 + r*(t+s)/1 + r(t+s))] P = e • P* ε = e • P* | P = 1
Mit jannis besprechen
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