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Economics > Week 5 > Flashcards

Week 5 Flashcards

1
Q

Multiplier formula

A

1/(1-b*(1-t)+m)

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2
Q

Real Interest rate calculation

A

Real interest rate= nominal interest rate- inflation

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3
Q

Five factors determining the supply of loanable funds

A
  1. real interest rate
  2. disposable income
  3. expected future income
  4. wealth
  5. default risk
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4
Q

Effects of government budget surplus on SLF and DLF

A

Increases the supply of loanable funds.
Real interest falls, decreasing household saving and decreases supply of q of private funds. The lower real interest rate increases the q of loanable funds demanded and increases investment

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5
Q

Government budget deficit & its effects

A

G>T
Deficit increases demand for loanable funds.
The real interest rate rises, which increases household saving and increases q of private funds supplied. But the higher real interest rate decreases investment and the quantity of loanabe funds demanded by firms to finance investment

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6
Q

Definition monetary financial institution

A

Financial firm that gets most of its funds by taking deposits from households and firms

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7
Q

Four economic benefits provided by monetary financial institutions

A
  1. create liquidity
  2. pool risk
  3. lower the cost of borrowing
  4. lower the cost of monitoring borrowers
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8
Q

Four functions of a Central Bank

A
  1. Provides banking services to government and commercial banks
  2. Lender of last resort for commercial banks
  3. regulates and controls financial institutions and financial markets
  4. Conducts monetary policy (goals: price stability and inflation) through
    Open Market Operations
    Bank Rate Policy
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9
Q

Two types of monetary policy discussed

A
  1. Open market operations: selling and buying government bonds to or from banks
  2. Bank rate policy, together with the required reserve ratio, thereby manipulating the interest rate
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10
Q

Money depends on

A
  1. The price level P (positive relation)
  2. The nominal interest rate i (negative)
  3. Real GDP YR (positive)
  4. Transaction cost for withdrawing money TC (positive)
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11
Q

Classical “quantity theory” of money

A

MV=PT

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12
Q

Six ways the amount of money can change

A
  1. Open market operations
  2. Balance of Payments
  3. Financial transformation
  4. Government expenditure
  5. Changes to the Bank Rate
  6. Changes to required reserve ratio
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13
Q

Current Account formula

A

CA=X-M

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14
Q

Capital and financial account (KA) records

A

Receipts from the sale of assets to foreigners (investment by foreigners in our country), and
the payments for assets to foreigners (investment by our country in foreign countries).

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15
Q

KA categorization based on surplus and deficit

A 
KA surplus: net international borrower
KA deficit (KA< 0) net international lender
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16
Q

Change in official reserve assets

A

A decrease of (reserve) assets is the same as becoming more of a net borrower

An increase of (reserve) assets is the same as becoming less of a net borrower

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17
Q

Two aggregate supply curves

A
  1. Short-term (SAS): (upward sloping, and up-/downward shifting)
    This shows how supply changes in the period that the general
    price level and wages DO NOT move in sync.
  2. long-term (LAS) (vertical, and left-/right shifting)
    This shows the maximum, potential supply of an economy,
    given the technology and amount of production factors
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18
Q

Four factors aggregate depends on (& which make it shift)

A
  1. price level
  2. worl economy
  3. expectations
  4. fiscal policy and monetary policy

2-4 : shift the AD curve

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19
Q

Fiscal and monetary policy which one is and which one is not keynesian

A

fiscal : keynesian

Monetary: non-keynesian

20
Q

Wealth effect

A 
A rise(fall) in prices decreases(increases)
the real value of wealth (remember: wealth is a stock variable).
As a consequence, more(less) saving will be channeled to maintaining wealth (remember: saving is a flow variable).
Since more(less) saving implies less (more) expenditure, the result follows:

Rising prices imply
falling aggregate demand
(and falling prices imply rising demand)

21
Q

Reasons for AD curve sloping downward

A
  1. wealth effect

2. substitution effects

22
Q

AD curve and Keynesian policy

A

remember: keynesian policy is fiscal policy

An increase in G or T will increase expenditure and shift AD to the right

23
Q

AD curve and monetary policy

A

expansionary monetary policy:an increase in Ms

An increase in Ms will lower the interest rate, which increases expenditures, and shifts AD to the
right.

24
Q

AD & world economy

A

activity will raise the foreign demand for “our” goods… that means exports will rise.

As the AE curve shifts ** UP **, the
AD curve shifts ** RIGHT **

25
Q

Three schools of macroeconomic thought

A
  1. classical view: economy is self-regulating and always in full employment
  2. Keynesian view: economy rarely functions at full employment, active help from fiscal and monetary policy required
  3. monetarist view: economy is self-regulating, normally functioning at full employment as long as monetary policy is not erratic
26
Q

Classical view and its policy recommendations

A

A classical economist believes that the economy is self-regulating and that is always at full employment

best policy is nothing!
AS-AD graph: LAS and AD

27
Q

Keynesian view and its policy recommendaton

A

Keynesian economist thinks that the economy rarley operates at full employment and that to achieve and maintain full employment active help from fiscal and monetary policy is required
Policy: activist macroeconomic policy almost always needed

AD curve shifts erratically and wages are sticky so SAS does not shift up and down easily

AS-AD graph: SAS, LAS and AD

While the “Keynesian View” also accepts using monetary
policy to manage the economy, the “Keynesian Model” simply
can’t… There is no “money” in the Keynesian Model

28
Q

Monetarist view and its policy

A

economy is self-regulating, it will work at normal employment as long as monetary policy is not erratic and the pace of money is kept steady

Policy: no activist monetary policy
the quantity theory of money (YP=MV) as Y= (M/P)*V

29
Q

Supply-side view

A

supply potential of an economy is what determines growth. (opposite to Keynesian idea)

Policy suggestion: supply-side view pushes the idea that
stimulating business activity is the key
- lower corporate taxes
- promote the formation of human capital
- stimulate investment
- de-regulate the economy
AS-AD graph: SAS, LAS and AD
30
Q

Debtor nation

A

state that during its entire history has borrowed more from the rest of the world than it has lent to it

31
Q

creditor nation

A

state that has invested more in the rest of the world than other states have invested in it

32
Q

Flows & stocks

A

flows: borrowing and lending
stocks: debts

33
Q

Four big problems of deflation and inflation

A
  1. wealth redistribution
  2. income redistribution
  3. lowering real GDP and employment
  4. diverts resources from production
34
Q

Consumer Price Index

A

CPI: measure of the average of the prices paid by consumers for a fixed basket of goods and services

35
Q

Long-run Aggregate Supply

A

Money wage rate changes in step with the price level to maintain full employment
LAS curve = vertical as potential GDP is independent from price level

36
Q

Short-run Aggregate Supply

A

when money wage rate, prices of other resources and potential GDP remain constant

Change in price level brings change in q of real GDP supplied -> movement along SAS curve

37
Q

Three reasons for an increase of potential GDP

A
  1. increase in full employment quantity of L
  2. increase in quantity of capital
  3. advance in technology
38
Q

Consequences for SAS and LAS from change in money wage and other resource prices

A
  1. SAS curve shifts, rise in money wage rate decreases SAS
  2. LAS curve remains the same as the change in money wage rate is accompanied by an equal percentage change in price level
39
Q

Two reasons for a change in money wage rate

A
  1. departures from full employment

2. expectations about inflation

40
Q

Four main factors determining buying plans

A
  1. price level
  2. expectations
  3. fiscal policy
  4. world economy
41
Q

Main factors of changes in AD

A
  • expectations: increase in expected future disposable income increases the amount of consumption goods that people plan to buy today and increases AD today
  • fiscal policy and monetary policy
    fiscal policy: government’s attempt to influence the economy by setting and changing taxes, making transfer payments and purchasing goods and services
    monetary policy: changes in interest rates and in quantity of money in the economy
42
Q

Three types of short-run equilibria

A
  1. above full-employment equilibrium: real GDP exceeds potential GDP
  2. full employment equilibrium: real GDP equals potential GDP
  3. below full-employment equilibrium: potential GDP exceeds real GDP

Reminder: potential GDP is intersect LAS with AD

43
Q

Stagflation

A

combination of inflation and recession

44
Q

Reaction SAS and consequences of situation with higher energy/transport costs

A

Firms decrease production -> SAS shifts leftwards

-> price level rises & real GDP decreases (economy experiences recession)

45
Q

Neo-classical view

A

business cycle fluctuations are efficient response of well-functioning market economy bombarded by shocks that arise from uneven pace of technological change

46
Q

Herd instincts

A

expectations are most significant influence on AD

47
Q

New Keynesian view & its policy

A

money wage rate & prices of goods/ services are sticky. With sticky price level, SAS curve horizontal at price level

Fiscal and monetary policy to actively offset changes in AD that bring recession -> stimulating AD in recession can restore the full employment

Economics (8 decks)

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