W8P2 - Notebooklm Flashcards
Endogenous Business Cycles
Business cycles that recur regularly but are not deterministic, meaning they don’t happen at fixed intervals. The transmission mechanism of these cycles depends on conditions within the economy
Stochastic Element in Business Cycles
Modern business cycle models recognize a random, chance component in the occurrence and timing of business cycles. This means cycles are not perfectly predictable.
Steady State/Equilibrium in Models
In business cycle models, the starting point is often a steady state or equilibrium. A shock then disrupts this state, generating a cycle. The steady state is essentially another definition for equilibrium.
Productivity Shock
A change in the efficiency of production in the economy. An increase in productivity can lead to higher income, savings, and investment, acting as an initial impulse for a business cycle.
Propagation Mechanism
The process by which an initial shock, like a productivity increase, is amplified and spreads through the economy, affecting variables like output, investment, and consumption over time.
Keynesian Business Cycle Model
A business cycle model that builds upon the ASAD framework. It analyses period-by-period adjustments after shocks, considering both demand shocks (e.g., changes in money supply, government spending) and supply shocks (e.g., energy price changes). A key assumption is sticky prices. This model can generate involuntary unemployment.
Demand Shocks
Events that cause the aggregate demand (AD) curve to shift in the Keynesian model. Examples include changes in the money growth rate or government spending. These are generally ineffective in the real business cycle model.
Supply Shocks
Events that cause the aggregate supply (AS) curve to shift. Examples include an increase in energy prices or changes in productivity (especially important in RBC models).
Sticky Prices
The assumption in the Keynesian model that prices and inflation expectations do not adjust immediately to economic changes. This allows for short-run effects of demand shocks on output.
Involuntary Unemployment
Unemployment that occurs when individuals are willing and able to work at the prevailing wage rate but cannot find jobs. This can arise in the Keynesian business cycle model because the labour market is not always in equilibrium.
Real Business Cycle (RBC) Model
A business cycle model based on the idea that fluctuations are equilibrium outcomes under perfectly flexible prices. Unemployment in this model is voluntary. The primary drivers of cycles are supply shocks, particularly productivity shocks (TFP). Demand shocks are generally ineffective in this model.
Voluntary Unemployment
Unemployment that arises from individuals’ optimal choices based on their preferences and the available opportunities. This is the only type of unemployment present in the real business cycle model.
Total Factor Productivity (TFP) Shock
A shock to the overall efficiency of the production process. It reflects changes in technology, management practices, or other factors that affect how much output can be produced with a given amount of capital and labour. Also called multifactor productivity shock.
Solow Residual
A measure of TFP growth calculated as the residual after accounting for the contributions of capital and labour to output growth. It is often highly correlated with GDP growth.
Microfunded Models
Economic models, like real business cycle models, that are based on the optimal decisions of individual households and firms. These decisions are driven by factors like changes in interest rates and wage rates.
Consumption Smoothing
The tendency of households to maintain a relatively stable level of consumption over time, even when their income fluctuates. A temporary increase in income may lead to a smaller increase in current consumption and more saving. This is a key propagation mechanism in RBC models, leading to increased investment.
Substitution Effect (Labour Supply)
The effect of a wage increase that encourages individuals to work more because the opportunity cost of leisure has increased.
Income Effect (Labour Supply)
The effect of a wage increase that may lead individuals to work less because they can achieve the same level of utility with fewer hours worked due to their higher income.
Effectiveness of Stabilization Policy (RBC)
In the real business cycle model, demand-side policies like increases in government spending or the money supply are generally ineffective in changing output because prices are perfectly flexible and the economy is always at the long-run aggregate supply schedule.
Labour Supply Elasticity (RBC)
The responsiveness of labour supply to changes in real wages. A more elastic labour supply (meaning labour supply changes significantly with wage changes) is needed in RBC models for the labour channel to significantly contribute to business cycle fluctuations after a productivity shock. Empirical evidence for a highly elastic labour supply at the macro level is not always strong.
