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ECON100B > Midterm 2 > Flashcards

Midterm 2 Flashcards

1
Q

IS curve

A

inverse relationship between output Y and real interest rate

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2
Q

what does equilibrium mean for the IS curve?

A

output = planned output (C + Ipl + G + NX)

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3
Q

IS curve: consumption

A

autonomous C
- consumer confidence
- household wealth
- expected future income

related to:
- autonomous consumption (+)
- disposable income (+)
- real interest rate (-)

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4
Q

IS curve: investment

A

autonomous I
- business confidence
- expected future profits/cash flow
- changes in technology

related to:
- autonomous investment (+)
- real interest rate (-)

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5
Q

IS curve: net exports

A

autonomous NX
- domestic preferences for foreign goods
- foreign preferences for domestic goods
- foreign trade barriers

related to:
- autonomous net exports (+)
- real interest rate (-)

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6
Q

Phillips curve

A

inverse relationship between unemployment and inflation

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7
Q

Okun’s law

A

relationship between unemployment gap and output gap

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8
Q

repo

A

short for repurchase agreement or sale and repurchase agreement

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9
Q

what happens in a repo?

A

CB borrows money by agreeing to sell bonds at t0 to p0

repurchase bonds at date t1>t0 and p1>p0

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10
Q

what happens in a reverse repo?

A

CB lends money by agreeing to purchase bonds at t0 at p0

sell bonds at date t1>t0 and p1>p0

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11
Q

three key equations in monetary policy response

A

optimal shock response

rate-rule

IS curve

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12
Q

how to calculate output gap?

A

percentage deviation of aggregate supply from potential output at a given point of time

Yt - Yp/Yp = ln(Yt) - ln(Yp)

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13
Q

how to calculate unemployment gap?

A

difference between unemployment rate and natural rate of unemployment at a given time

ut - un

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14
Q

how to get optimal rate rule from loss function?

A

sub phillips curve

minimisation for optimal path

sub dynamic is curve

isolate rt

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15
Q

fisher’s equation

A

r = i-pi

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16
Q

phillips’ fit to original data

A

wage inflation = -0.9 + 9.683u^(-1.394)

17
Q

policy rate, government bond rate, lending rate

A

policy rate set by CB
government bond rate set by bond market
lending rate set by commercial banking system

difference between government bond rate and policy rate is the term spread

difference between lending rate and government bond rate is the credit spread
- depends on riskiness of the loan and risk tolerance of the bank

18
Q

what do loops in the Phillips curve tell us?

A

time matters

wage inflation can depend on the rate of change of inflation and the rate of change of demand for labour (and therefore unemployment)

19
Q

supply shocks

A

events affect inflation independent of labour market conditions and/or inflationary expectations

20
Q

dual mandate of the central bank

A

keep inflation as close as possible to target inflation

keep output as close as possible to potential output

21
Q

primary policy tool of central banks

A

nominal short-term interest rates (Fed Funds Rate in the US)

22
Q

what is the Fed Funds Rate?

A

interest rate that banks lend to one another on an overnight loan of excess reserves

23
Q

how does the Fed control the amount of reserves in the banking system and the Fed Funds/policy rate?

A

repo and reverse repo (open market operations)

24
Q

how else can the central bank control the overnight rate apart from repos?

A

changing the reserve requirement or paying interest on reserves

25
Q

what do aggregate demand shocks do?

A

move the IS curve

positive demand shocks cause economic output to increase
negative demand shocks cause economic output to decrease

26
Q

what do aggregate supply shocks do?

A

change the Phillips curve or production function

positive supply shocks cause inflation to decrease
negative supply shocks cause inflation to increase

27
Q

business cycles are caused by sequential shocks to:

A

production function (supply shock)

IS curve (demand shock)

Phillips curve (supply shock)

28
Q

non-activists

A

wage and prices flexible so economy is self-correcting quickly

government activity to reduce high unemployment is unnecessary

classical school of thought

29
Q

activists

A

wages and prices are sticky so slow self-correcting mechanism

government activity to reduce high unemployment is justified

keynesian school of thought

30
Q

neither monetary nor fiscal policy can response immediately

A

data lag
recognition lag
legislative lag
implementation lag
effectiveness lag

ECON100B (6 decks)

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