1st midterm Flashcards
(409 cards)
1
Q
Firm 1 produces steel, employing workers and using machines to do so. It sells the steel for €100 to Firm 2, which produces cars. Firm 1 pays its workers €80, leaving €20 in profit to the firm.
Firm 2 buys the steel and uses it, together with workers and machines, to produce cars. Revenues from car sales are €200. Of the €200, €100 goes to pay for steel and €70 goes to workers in the firm, leaving €30 in profit to the firm.
What is the aggregate output of this economy?
A
2
Q
Three definitions of GDP:
A
GDP is the value of the final goods and services produced in the economy during a given period.
GDP is the sum of value added in the economy during a given period.
GDP is the sum of incomes in the economy during a given period.
3
Q
Nominal GDP
A
is the sum of the quantities of final goods produced times their current price.
4
Q
Nominal GDP increases for two reasons:
A
the production of most goods increases
the price of most goods increases
5
Q
Real GDP
A
is the sum of quantities of final goods times constant (not current) prices.
6
Q
Understand the calculation of real GDP
A
7
Q
Nominal GDP is also called
A
GDP at current prices or GDP in current euros.
8
Q
Real GDP is also called
A
GDP in terms of goods, GDP in constant euros, GDP adjusted for inflation.
9
Q
Yt will denote
A
real GDP in year t
10
Q
Nominal GDP and variables in current euros will be denoted by
A
euro sign in front of them, for example, €Yt
11
Q
To assess the performance of the economy from year to year, economists focus on the rate of growth of real GDP, called just
A
GDP growth
12
Q
Expansions:
A
periods of positive GDP growth
13
Q
Recessions:
A
periods of negative GDP growth
14
Q
The formula for real GDP growth:
A
15
Q
Employment is the number
A
of people who have a job
16
Q
Unemployment is the number
A
of people who do not have a job but are looking for one
17
Q
The labour force is
A
the sum of employment and unemployment
18
Q
A
19
Q
A
20
Q
Those who do not have a job and are not looking for one are not counted in the labour force. They are known as
A
discouraged workers.
21
Q
The participation rate is
A
the ratio of the labour force to the total population of working age.
22
Q
Why do economists care about unemployment?
A
Direct effect on the welfare of the unemployed, especially those remaining unemployed for long periods of time.
A signal that the economy is not using its human resources efficiently.
23
Q
Very low unemployment can also be a problem as
A
A very low a rate of unemployment, however, can have negative consequences, such as inflation and reduced productivity. When the labor market reaches a point where each additional job added does not create enough productivity to cover its cost, then an output gap, or slack, happens.
24
Q
Inflation is a
A
sustained rise in the general level of prices – the price level.
25
The inflation rate
is the rate at which the price level increases
26
Deflation is a
sustained decline in the price level
27
Macroeconomists look at two measures of price level:
GDP deflator: the average price of goods produced in the economy
Consumer price index: the average price of goods consumed in the economy
28
GDP deflator:
the average price of goods produced in the economy
29
Consumer price index:
the average price of goods consumed in the economy
30
The Harmonised Index of Consumer Prices (HICP) is a
consumer price inflation measured in Europe.
31
Why do economists care about inflation?
Inflation affects income distribution when not all prices and wages rise proportionally
Inflation leads to distortions and to increased uncertainty
32
Okun’s law
Output growth that is higher than usual is associated with a reduction in the unemployment rate.
Output growth that is lower than usual is associated with an increase in the unemployment rate.
33
Output growth that is higher than usual is associated with a
reduction in the unemployment rate.
34
Output growth that is lower than usual is associated with
an increase in the unemployment rate.
35
Phillips curve
A low unemployment rate leads to an increase in the inflation rate.
A high unemployment rate leads to a decrease in the inflation rate.
36
A low unemployment rate leads to
an increase in the inflation rate.
37
A high unemployment rate leads to
a decrease in the inflation rate.
38
Advantages of Euro
Economic advantages due to no more changes in exchange rates including trade
Its contribution to the creation of a large economic power
39
Disadvantages of Euro
the drawback of a common monetary policy across euro countries with different fiscal policies
the loss of the exchange rate as an adjustment instrument within the euro area
40
In the short run (e.g. a few years),
year-to-year movements in output are primarily driven by movements in demand.
41
In the medium run (e.g. a decade),
the economy tends to return to the level of output determined by supply factors, such as the capital stock, the level of technology and the size of the labour force.
42
In the long run (e.g. a few decades or more),
the economy depends on its ability to innovate and introduce new technologies, and how much people save, the quality of the county’s education system, the quality of the government and so on.
43
Periods of negative GDP growth are called recessions. TF
True
44
Just after the Global Financial Crisis euro area faced another recession while economic growth in US was positive. TF
True
45
The European Central Bank lowers interest rates when it wants to avoid recession and raises interest rates when it wants to slow the rate of growth in the economy. TF
True
46
The advantage of euro is the combination of one monetary policy with different fiscal policies. TF
False
47
The goal of the European Central Bank is to have inflation 0% TF
False
48
Participation rate is the ratio of the employed people to the total population of working age. TF
False
49
The rate of unemployment tends to fall during expansions and rise during recessions. TF
True
50
If the Japanese CPI is currently at 108 and the EU19 HICP is at 104, then the Japanese rate of inflation is higher than the EU19 rate of inflation. TF
False. The level of the CPI means nothing. The rate of change of the CPI is one measure of inflation.
51
The rate of inflation computed using the CPI is a better index of inflation than the rate of inflation computed using the GDP deflator. TF
Uncertain. Which index is better depends on what we are trying to measure—inflation faced by consumers or by the economy as a whole.
52
Okun’s law shows that when output growth is lower than normal, the unemployment rate tends to rise. TF
True
53
When the economy is functioning normally, the unemployment rate is zero. TF
False. There always will be unemployment due to job switching and skill set mismatches.
54
The Phillips curve is a relation between the level of prices and the level of unemployment. TF
False. The Phillips curve is a relation between the change in inflation and the level of unemployment.
55
Explain why the Phillips curve on average is downward sloping.
When unemployment becomes very low, the economy is likely to overheat and this will lead to upward pressure on inflation.
56
. Can an economy maintain high output growth, low unemployment, and low inflation at the same time?
It would be very hard to achieve the three objectives at the same time. High output growth leads to low unemployment, which is likely to put pressure on inflation.
57
Explain what factors cause changes in output in: (1) the short run; (2) medium run; and (3) long run.
In the short run, demand factors primarily cause changes in output. In the medium run, factors such as the technology, amount of capital, and the skill and size of the labor force (supply factors) affect output. And in the long run, the education system, saving rate, and role of government affect economic activity.
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59
60
When economists think about year-to-year movements in economic activity, they focus on the interactions among
production, income and demand:
61
When economists think about year-to-year movements in economic activity, they focus on the interactions among production, income and demand:
Changes in the demand for goods lead to changes in production.
Changes in production lead to changes in income.
Changes in income lead to changes in the demand for goods.
62
Terms output and production are
synonymous
63
Consumption (C):
goods and services purchased by consumers
64
Investment (I) or fixed investment:
the sum of non-residential investment and residential investment
65
Government spending (G):
purchases of goods and services by the federal, state and local governments; excluding government transfers
66
Exports (X):
purchases of EU goods and services by foreigners
67
Imports (IM):
purchases of foreign goods and services by EU consumers, EU firms and the EU governments
68
Net exports or trade balance:
X − IM
69
trade surplus
70
trade deficit
71
Z ≡
C + I + G + X − IM
72
(Z)
total demand for goods
73
In a closed economy
X = IM = 0
Z ≡ C + I + G
74
Consumption (C) is a function of
disposable income (YD), which is the income that remains once consumers have paid their taxes.
75
C=
76
C(YD) is called the
consumption function
77
c1
is the propensity to consume
78
c1 is the propensity to consume. It gives
the effect an additional euro of disposable income has on consumption.
79
c0
is what people would consume if their disposable income equals zero
80
Changes in c0 reflect changes
in consumption for a given level of disposable income.
81
82
Disposable income is:
83
Endogenous variables:
variables depend on other variables in the model.
84
Exogenous variables:
variables not explained within the model but are instead taken as given
85
T and G describe
fiscal policy – the choice of taxes and spending by the government.
86
fiscal policy –
the choice of taxes and spending by the government
87
G and T are exogenous because:
Governments do not behave with the same regularity as consumer or firms.
We will typically treat G and T as variables chosen by the government and will not try to explain them within the model.
88
Equilibrium in the goods markets requires
Y=Z
89
In equilibrium, production (Y) is equal to demand, which in turn depends on income (Y), which is itself equal to
PRODUCTION
90
Autonomous spending:
It does not depend on output.
91
Autonomous spending is positive because
if T = G (balanced budget) and c1is between 0 and 1, then (G – c1T) is positive, and so is autonomous spending.
92
multiplier
93
Steps to characterise the equilibrium graphically:
94
Equilibrium output is determined by the condition that
production is equal to demand
95
Equilibrium output is determined by the condition that production is equal to demand:
First, plot production as a function of income.
Second, plot demand as a function of income.
In Equilibrium, production equals demand.
96
An increase in demand leads to an increase in production and income, which in turn leads to
a future increase in demand.
97
The result is the increase in output that is larger than the initial shift in demand, by a factor equal to the
multiplier
98
The multiplier depends on the
propensity to consume, c1
99
How long does it take for output to adjust?
It depends on how and when firms revise their production schedule.
100
Private saving (S) is
101
By definition, public saving =
T-G
102
Budget surplus
103
Budget deficit
104
In equilibrium:
Y = C + I + G
105
I=
106
This is the IS relation, which stands for ‘Investment equals Saving’.
107
Two equivalent ways of stating the condition for equilibrium in the goods market:
Production = Demand
Investment = Saving
108
Consumption and saving decisions are
one and the same
109
(1−c1) is called the
propensity to save, which is between zero and one
110
It seems that the government can choose the level
of G or T to affect the level of output it wants.
111
Anticipations are likely to
matter
112
The paradox of saving is that
as people attempt to save more, the result is both a decline in output and unchanged saving
113
The largest component of GDP is consumption. TF
True
114
The propensity to consume has to be positive, but otherwise, it can take on any positive value. TF
False. The propensity to consume must be less than one for our model to make sense.
115
One factor in the 2008-2009 crisis was a drop in the value of the parameter c0. TF
True. There are good reasons to interpret a large drop in consumer confidence as a reduction in c0.
116
Fiscal policy describes the choice of government spending and taxes and is treated as exogenous in our goods market model. TF
True
117
The equilibrium condition for the goods market states that consumption equals output. TF
False
118
An increase of one unit in government spending leads to an increase of one unit in equilibrium output. TF
False. The increase in equilibrium output is one times the multiplier.
119
An increase in the propensity to consume leads to a decrease in output. TF
False
120
121
122
123
124
Money
is what can be used to pay for transactions
125
Income
is what you earn and it is a flow
126
Saving
is the part of after-tax income that you do not spend and it is also a flow
127
Savings
is the value of what you have accumulated over time
128
Financial wealth
or wealth, is the value of all your financial assets minus all your financial liabilities and it is a stock variable
129
Investment
is what economists refer to as the purchase of new capital goods
130
Financial investment
is the purchase of shares or other financial assets
131
Money is used for transactions, but it pays no interest. Two types of money:
currency and deposit accounts
132
Bonds are
financial securities under which the issuer owes the holder a debt and is obliged to repay amount borrowed at the maturity date as well as interest over a specified amount of time.
133
Bonds pay an interest rate i but cannot be used for
transactions
134
The proportions of money and bonds you wish to hold depend mainly on:
Your level of transactions
The interest rate on bonds
135
Demand for money (Md) is equal to
nominal income €Y times a decreasing function of the interest rate i
136
137
Demand for money:
increases in proportion to nominal income €Y
depends negatively on the interest rate i. An increase in the interest rate decreases the demand for money, as people put more of their wealth into bonds.
138
The relation between the demand for money and interest rate for a given level of income €Y is represented by the Md curve.
139
For a given level of nominal income, a lower interest rate increases the
demand for money
140
At a given interest rate, an increase in nominal income shifts the demand for money
to the right
141
Equilibrium in financial markets requires that
money supply should be equal to money demand
142
Equilibrium in financial markets requires that money supply should be equal to money demand:
143
Suppose the central bank decides to supply an amount of money equal to M:
144
Equilibrium in financial markets we get:
145
At equilibrium point A
money supply is equal to money demand
146
Money supply is
independent of the interest rate, while money demand does depend on the interest rate.
147
Given the money supply, an increase in nominal income leads to
an increase in the interest rate
148
Given the money supply, an increase in nominal income leads to an increase in the interest rate.
Reason:
at the initial interest rate, the demand for money exceeds the supply. Higher interest rates decreases the amount of money people want to hold and re-establishes equilibrium.
149
Assuming that only central bank creates money, an increase in the supply of money leads to a
decrease in the interest rate
150
Assuming that only central bank creates money, an increase in the supply of money leads to a decrease in the interest rate.
The decrease in the interest rate increases the demand for money so it equals
new larger money supply
151
Majority of the money supply is being created by
commercial banks
152
Bank reserves at the central bank used to act as a restricting factor on money creation, but nowadays there are
abundant excess reserves
153
In the simplified version of the CB balance sheet, the assets of are the bonds it holds. The liabilities are the stock of money in the economy.
154
An expansionary open market operation in which the central bank buys bonds and issues money increases both
assets and liabilities by the same amount.
155
Suppose a bond such as a Treasury bill, or T-bill, promises to pay €100 a year from now.
If the price of the bond today is €PB, then the interest rate on the bond is:
156
If the interest rate is given and the same condition applies that the bond after one year pays €100 , the price of the bond can be calculated using this equation:
157
Zero lower bound:
interest rates cannot go below zero
158
Effective lower bound:
interest rates cannot go too far below zero
159
The economy is in a liquidity trap when
the interest rate is so low that monetary policy cannot provide additional accommodation decreasing it further.
160
Why policy rates cannot be cut further in the negative territory?
Pass through?
Cash?
161
Liquidity trap
When the interest rate is equal to zero and once people have enough money for transaction purposes, they become indifferent between holding money and holding bonds.
When the interest rate is equal to zero, further increases in the money supply have no effect on the interest rate, which remains equal to zero.
162
Saving and financial wealth are both stock variables. TF
False, saving is a flow
163
Money demand increases in proportion to real income. TF
False, money demand increases in proportion to nominal income.
164
Higher interest rate leads to lower demand for money. TF
True.
165
Majority of the money supply is being created by the central bank. TF
False, by commercial banks.
166
On the asset side of the balance sheet the central bank holds bonds. TF
True
167
Banknotes account for the majority of the Eurosystem’s liabilities. TF
False, monetary policy deposits (also called reserves) is the largest part of Eurosystem’s liabilities.
168
The situation where central bank cannot accommodate the economy further by decreasing interest rates is called the liquidity trap. TF
True
169
170
171
172
investment depends on
production Y (or sales) and the interest rate i.
173
investment depends on production Y (or sales) and the interest rate i:
174
The demand for goods is
an increasing function of output.
175
Equilibrium requires that
the demand for goods be equal to output.
176
The demand for goods is an increasing function of output.
Equilibrium requires that the demand for goods be equal to output.
177
ZZ is upward-sloping because
for a given value of the interest rate, an increase in output leads to an increase in the demand for goods through its effects on consumption and investment.
178
ZZ is a curve rather than a line, because
we have not assumed that the consumption and investment relations in equations are linear.
179
ZZ is flatter than the 45-degree line because
we have assumed that an increase in output leads to a less than one-for-one increase in demand.
180
The intersection of ZZ and the 45-degree line (point A) is the
equilibrium level of output.
181
An increase in the interest rate decreases
the demand for goods at any level of output, leading to a decrease in the equilibrium level of output.
182
Equilibrium in the goods market implies that an increase in the interest rate leads to
a decrease in output.
183
An increase in taxes shifts the IS curve to the
left.
184
Shifting the IS curve: Changes in factors that decrease (increase) the demand for goods given the interest rate shift the
IS curve to the left (right).
185
Traditional way of deriving LM relation:
186
LM:
liquidity preference – money supply
187
In equilibrium, real money supply equals the real money demand, which depends on
real income Y and the interest rate i.
188
Modern way of deriving LM relation:
Modern central banks focus directly on the interest rate i and adjust the money supply to achieve it.
189
LM relation:
190
The central bank chooses the interest rate (and adjusts the money supply to achieve it).
191
IS relation
192
LM relation:
193
The IS and LM relation together determine
output
194
Equilibrium in the goods market
implies that an increase in the interest rate leads to a decrease in output. This is represented by the IS curve.
195
Equilibrium in financial markets
is represented by the horizontal LM curve.
196
Only at point A both goods and financial markets are in
equilibrium.
197
Fiscal Policy:
198
An increase in taxes shifts the IS curve to the
left
199
Monetary Policy:
200
201
A monetary expansion shifts the LM curve
down and leads to higher output.
202
Monetary-fiscal policy mix is
the combination of monetary and fiscal policies.
203
Because the adjustment of output takes time, we need to introduce dynamics:
204
Nominal interest rate
is the interest rate in terms of dollars or euros.
205
Real interest rate is the
interest rate in terms of a basket of goods.
206
Real interest rate takes into account
207
Equation of real interest rate:
208
real interest rate is based on expected inflation (i − πe), it is sometimes called the
ex-ante (‘before the fact’) real interest rate.
209
If real interest rate is based on actual inflation (i − π), it is sometimes called
the ex-post (‘after the fact’) interest rate.
210
The interest rate that enters the IS relation is
the real interest rate.
211
Some bonds are risky, so bond holders require
a risk premium.
212
Risk premiums are determined by:
The probability of default
The degree of risk aversion of bond holders
213
Let i (kreiva) be
the nominal interest rate on a riskless bond
214
x means
the risk premium
215
p is
the probability of defaulting
216
the same expected return on the risky bonds as on the riskless bond:
217
Much of the borrowing and lending takes place through financial intermediaries –
financial institutions that receive funds from investors and then lend these funds to others.
218
Capital ratio (the ratio of capital to assets) =
20/100 = 20%
219
Leverage ratio (the ratio of assets to capital) =
100/20 = 5
220
A higher leverage ratio implies a higher expected profit rate, but also implies a higher risk of
insolvency and bankruptcy.
221
The lower the liquidity of bank assets means the more difficult they are to sell, the higher the risk of being sold at
at fire sale prices (prices far below the true value) and the risk that the bank becomes insolvent.
222
The higher the liquidity of the liabilities (e.g. demand deposits), the higher the risk of fire sales and the risk that the bank becomes insolvent and thus faces
bank runs.
223
Now we extend the IS-LM to reflect the distinction between:
the nominal interest rate and the real interest rate
the policy rate set by the central bank and the interest rates faced by borrowers
224
Rewrite the IS-LM:
225
The central bank now chooses the real policy rate r, which enters the IS equation as part of the borrowing rate (r + x) for consumers and firms:
226
An increase in x leads to a
shift of the IS curve to the left and a decrease in equilibrium output.
227
If sufficiently large, a decrease in the policy rate can in principle offset the increase in the risk premium.
The effective lower bound may, however, put a limit on the decrease in the real policy rate.
228
The main determinants of investment are the level of sales and the interest rate T/F
True.
229
The IS curve is downward sloping because goods market equilibrium implies that an increase in taxes leads to a lower level of output. TF
False, increase in interest rate leads to a lower level of output.
230
The LM curve is horizontal at the central bank’s policy choice of the interest rate TF
True.
231
The real money supply is constant along the LM curve. TF
. False. As you move along the horizontal LM curve, as output rises, the demand for real money rises and the central bank must increase the supply of real money to keep the interest rate constant.
232
The nominal interest rate is measured in terms of goods; the real interest rate is measured in terms of money. TF
False. Nominal interest rates are expressed in euros (or other currencies); real rates in goods.
233
As long as expected inflation remains roughly constant, the movements in the real interest rate are roughly equal to the movements in the nominal interest rate. TF
True
234
When expected inflation increases, the real rate of interest falls TF
True
235
All bonds have equal risk of default and thus pay equal rates of interest. TF
. False. Bonds vary significantly in terms of default risk.
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241
Which situations correspond to a liquidity trap?
Which situation has the highest risk premium? What two factors in bond markets lead to a positive risk premium?
Why is it so important when the nominal policy interest rate is at the effective lower bound to maintain a positive expected rate of inflation?
242
Some of the people classified as “out of the labour force” are much like the unemployed. They are called
discouraged workers.
243
Some of the people classified as “out of the labour force” are much like the unemployed. They are called discouraged workers. Although they are not actively looking for a job,
they will take it if they find one.
244
So, rather than the unemployment rate, economists sometimes focus on the
employment rate
245
employment rate
the ratio of employment to the population available for work.
246
When unemployment is high, workers are worse off in two ways:
employed workers face a higher probability of losing their job
unemployed workers face a lower probability of finding a job; or they can expect to remain unemployed for a longer time.
247
Sometimes wages are set by
collective bargaining – a bargaining between unions and firms.
248
collective bargaining –
a bargaining between unions and firms.
249
Workers are typically paid a wage exceeding their
reservation wage – the wage that would make them indifferent between working and being unemployed.
250
reservation wage –
the wage that would make them indifferent between working and being unemployed.
251
Wages typically depend on labour-market conditions:
The lower the unemployment rate, the higher the wages.
252
Workers’ bargaining power depends on:
How costly for the firm to find other workers
How hard for workers to find another job if they were to leave the firm
253
Efficiency wage theories
link the productivity or the efficiency of workers to the wage they are paid.
254
Firms may want to pay a wage above the reservation wage in order to decrease workers’ turnover and
increase productivity.
255
Firms that see employee morale and commitment as essential to the quality of workers’ work will pay
more than those whose activities are routine.
256
When unemployment is low, firms that want to avoid an increase in quits will increase wages to induce workers to
stay with the firms.
257
The aggregate nominal wage W depends on:
258
W formula
259
The nominal wage depends on the expected price level (rather than the actual price level) because
when nominal wages are set, the relevant price levels are not yet known.
260
An increase in the expected price level leads to
an increase in the nominal wage by the same proportion.
261
An increase in the unemployment rate ...
decreases wages.
262
Higher unemployment
unemployment either weakens worker’ bargaining power, or allows firms to pay lower wages and still keep workers willing to work.
263
z stands for
all the factors that affect wages given the expected price level and the unemployment rate
264
The prices set by firms depend on
their costs, which in turn depend on the nature of the production function
265
production function:
Y=AN
266
Y=AN
where Y is output, N is employment and A is
is labour productivity (output per worker).
267
Y=AN
Assume that A is constant and A = 1, then:
Y=N
268
Firms set their price according to:
269
M means
mark-up
270
Assume that W depends on the actual price level (P) rather than the expected price level (Pe), wage-setting relation becomes:
271
The higher the unemployment rate, the lower
the real wage chosen by wage setters.
272
The wage-setting relation is the relation between
the real wage and the rate of unemployment.
273
Price Determination
274
The natural rate of unemployment is the
unemployment rate such that the real wage chosen in wage setting is equal to the real wage implied by price setting.
275
Economy tends to
return to the natural rate of unemployment in the medium run.
276
An increase in unemployment benefits leads to
an increase in the natural rate of unemployment.
277
An increase in the mark-up leads to
an increase in the natural rate of unemployment.
278
We have assumed that the price level is equal to
the expected price level
279
We have assumed that the price level is equal to the expected price level (P = Pe). In general, the actual price level may turn out to be different from the price level expected by wage setters in the
short run
280
We have assumed that the price level is equal to the expected price level (P = Pe). In general, the actual price level may turn out to be different from the price level expected by wage setters in the short run. Therefore, the unemployment rate need not be equal
to the natural rate.
281
In 1958, A.W. Phillips found a negative relation between
inflation and unemployment.
282
Paul Samuelson and Robert Solow labeled this (In 1958, A.W. Phillips found a negative relation between inflation and unemployment.) relation the
Phillips curve, which became central to macroeconomic thinking and policy.
283
Recall the wage determination equation
284
and the price determination equation
285
What captures alfa
286
the relation between the price level, the expected price level and the unemployment rate is:
287
An increase in πe leads to an
increase in π.
288
Given πe, an increase in m, or an increase in z, leads to
an increase in π.
289
Given πe, a decrease in u leads to
an increase in π.
290
Equation (8.2) with a time index t:
291
292
Suppose expected inflation this year depends on a constant value 𝜋 ̅ with weight 1−θ, and partly on inflation last year with weight θ:
293
Most workers are typically paid their reservation wage TF
False
294
Workers who do not belong to unions have no bargaining power. TF
False/Uncertain depends on other factors.
295
It may be in the best interest of employers to pay wages higher than their workers’ reservation wage TF
True.
296
The natural rate of unemployment is unaffected by policy changes TF
False.
297
The original Phillips curve relation has proven to be very stable across countries and over time TF
. False. After 1970 the relationship between inflation and unemployment broke down.
298
For some periods of history, inflation has been very persistent for some years in a row. In other periods of history, this year’s inflation has been a poor predictor of next year’s inflation. TF
True.
299
Policy makers can exploit the inflation–unemployment trade-off only temporarily TF
True.
300
If people assume that inflation will be the same as last year’s inflation, the Phillips curve relation will be a relation between the change in the inflation rate and the unemployment rate. TF
True.
301
302
303
304
305
MATH
306
307
308
Original Phillips curve.
When inflation is not persistent, expected inflation does not depend on past inflation. Thus, the relation becomes a relation between inflation and unemployment.
309
relation between inflation and unemployment.
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With inflation varying from year to year around some value
311
Modified Phillips curve
As inflation became more persistent, expectations of inflation became based more and more on last year’s inflation. The relation became a relation between unemployment and the change in inflation.
312
. As inflation became more persistent, expectations of inflation became based more and more on last year’s inflation. The relation became a
relation between unemployment and the change in inflation
313
relation between unemployment and the change in inflation
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The natural unemployment rate (un) is the unemployment rate at which the inflation rate remains constant, i.e., actual inflation rate is equal to
the expected inflation rate: π = πe
315
Un equation
316
Equation (XXX) gives us another way of thinking about the Phillips curve
317
When actual unemployment rate u exceeds the un
inflation rate decreases
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When actual unemployment rate u is less than un
inflation rate increases
320
321
We can think about un as the rate of unemployment required to keep the inflation rate constant. This is why un is also called the
the non-accelerating inflation rate of unemployment (NAIRU).
322
The relation between unemployment and inflation today is well captured by a relation between the
change in the inflation rate and the deviation of the unemployment rate from the natural rate of unemployment.
323
When the unemployment rate is above (below) the natural rate of unemployment, the inflation rate typically
decreases (increases).
324
The natural rate of unemployment differs across countries and over time. Reasons:
labour market rigidities, employment protection and others.
325
Changes in the way the inflation rate varies over time affect how much wage setters use
wage indexation
326
Wage indexation
is a provision that automatically increases wages in line with inflation.
327
Wage indexation increases the effect of unemployment on
inflation
328
Without wage indexation, lower unemployment increases wages, which in turn
increases prices
329
At very low or negative rates of inflation, the Phillips curve relation appears to become
weaker
330
One possible reason is the reluctance of workers to accept cuts in
nominal wages
331
(IS curve):
332
Phillips curve:
333
L denotes the
labour force
334
When u = un,
natural employment is Nn = L(1 − un)
335
When u = un, potential output is
Yn = L(1 − un)
336
Output gap:
337
The difference between output and potential output is called the
output gap
338
Top graph: A lower policy rate leads to
higher output
339
Bottom graph: A higher output leads to
a larger change in inflation.
340
Over the medium run, the economy converges to potential output. The output gap is
equal to zero and inflation is stable
341
At the medium-run equilibrium (point A’), rn is called the
natural, neutral, or Wicksellian rate of interest.
342
If the central bank wants to achieve a constant level of inflation over the medium run, then the initial boom must be followed by a
recession.
343
A positive output gap generates a
higher level of inflation, rather than an increase in inflation
344
So long as inflation expectations remain anchored, the central bank does not need to
compensate for the initial boom by a recession later.
345
If the effective lower bound prevents monetary policy from increasing output back to potential, the result may be a
deflation spiral
346
More deflation leads to a higher real policy rate, and the higher policy rate in turn leads to
lower output and more deflation
347
Deflation spiral or deflation trap occurs at Y’ when
output is still below potential, and thus inflation is still decreasing
348
Fiscal consolidation leads to a
decrease in output in the short run.
349
In the medium run, output returns to potential and the interest rate is
lower
350
An increase in the price of oil is equivalent to an increase in the
mark-up, m.
351
It leads to lower real wages and a higher un -->
it also leads to a decrease in Yn.
352
As the price of oil increases, Yn decreases to
353
Along the way, lower output is associated with higher inflation, a combination called
stagflation
354
Shocks or changes in policy typically have different effects in the short run and in the
medium run
355
Disagreements about the effects of various policies depend on
how fast you think the economy adjusts to shocks.
356
Movements in output around its trend are called
output fluctuations (business cycles).
357
The IS curve shifts right with an increase in G, right with an increase in T, and right with an increase in x. TF
False. An increase in taxes (T) or risk premium (x) will shift the IS curve to the left.
358
If u - un is greater than zero, then Y - Yn is greater than zero. TF
False. When unemployment exceeds the natural rate then the output gap is negative.
359
If u - un is equal to zero, the output is at potential TF
True
360
If u - un is less than zero, the output gap is negative TF
False. The output gap would be positive if the natural rate of unemployment is greater than the actual rate of unemployment.
361
In a medium-run equilibrium, the rate of inflation is stable. TF
True
362
At the natural rate of unemployment, inflation is neither rising nor falling TF
True
363
The central bank can always act to keep output equal to potential output. TF
Uncertain, it would be more difficult at the effective lower bound.
364
It is harder for the central bank to keep output at potential if expectations of inflation are anchored TF
False. It is easier for central bank to keep output at potential when inflation expectations are well anchored.
365
A large increase in the price of oil increases the natural rate of unemployment
True
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369
370
Real GDP is
an inflation-adjusted measurement of a country's economic output over the course of a year
371
real GDP =
C + G + I + NX (where C=consumption; G=government spending; I=Investment; and NX=net exports)
372
assess means in LT
įvertinti
373
Y represents
output or income
374
distortions in LT
iškraipymai
375
How Phillips curve looks like?
376
Z means
total demand for goods
377
Y means
gross domestic product
378
Bar means
taken as given
379
Examples of endogenous variables:
supply and demand
380
What Y means in economics?
is actual output
381
What Y* means in economics?
Y* is potential output.
382
What Z means in economics?
demand for goods
383
fire sale prices
price a far below real value
383
insolvency in LT means
nemokumas
384
What is on the Y and X axis of IS curve?
385
What is on the Y and X axis of LM curve?
386
PC
principal component
387
A Phillips Curve describing
how inflation depends on output.
388
An IS Curve describing how
output depends upon interest rates.
389
390
what alpha means in macroeconomics
the active return on an investment
391
What two factors in bonds market lead to a positive risk premium
Default and risk aversion
392
Nominal Policy Interest Rate - Expected Inflation =
Real Policy Interest Rate
393
Nominal Borrowing Interest Rate - Nominal Policy Interest Rate =
Risk Premium
394
Real Policy Interest Rate + Risk premium =
Real Borrowing Interest Rate
395
Nominal Policy Interest Rate + Risk premium =
Nominal Borrowing Interest Rate
396
Nominal Policy Interest Rate - Real Policy Interest Rate
Expected Inflation
397
Real Policy Interest Rate + Expected Inflation =
Nominal Policy Interest Rate
398
Markup is the difference between a
product's selling price and cost as a percentage of the cost.
399
Government spending affects the demand
directly (1/(1-c1))
400
Taxes affect demand
indirectly, through consumption (c1/(1-c1))
401
Private saving =
Y-C-T
402
Public saving =
T-G
403
Total demand =
C+I+G
404
Assess meaning in LT
Vertinti
405
Formula of equilibrium GDP (Y)
C0 + C1 * Yd + I + G
406
The PI is
the total amount of income going to consumers before individual taxes are subtracted
407
Private saving equation
S = - C0 + (1 - C1) (Y - T)
408
L stands for
Liquidity
