Transmission and Amplification Mechanisms Flashcards
What are the five main transmission mechanisms?
- Intertemporal substitution
- Uncertainty and irreversible investments
- labour adjustment costs
- time bunching
- shocks to collateral and net worth (collateral damage)
Give an example of intertemporal substitution (hint: studying)
The sooner an exam date comes, the harder you study, turning down some opportunities to have fun, instead of studying an equal amount every day.
Explain Intertemporal substitution
Intertemporal substitution is the allocation of consumption, work, and leisure across time to maximize substitution.
The term means that a person or a business is most likely to work hard when working hard brings the greatest return.
What effect does intertemporal substitution have on economic shocks?
Intertemporal substitution magnifies negative economic shocks. (Amplifies shocks to the long-run aggregate supply curve)
What are sunk costs?
Irreversible investments, or very costly to reverse.
What are labour adjustment costs?
Labour adjustment costs are the costs of shifting workers from declining sectors of the economy to growing sectors.
What’s time bunching?
Time bunching is the tendency for economic activities to be coordinated at common points in time.
Give examples of time bunching
Most people work from 9AM to 5PM
What’s a collateral
Collateral is a valuable asset that is pledged to a lender to secure a loan.
What’s collateral shock?
Collateral shock is a reduction in the value of collateral.
Why do collateral shocks tend to amplify business cycles?
Because assets are typically worth more in booms than in recessions and the value of assets tends to be positively correlated to a firms ability to obtain investment funding.
Equity refers to the:
Difference between the value of the asset and the amount of debt owed on the asset
In what quarter does GDP consistently spike downward in the US?
During the first quarter
