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Ep1 > unit 14 > Flashcards

unit 14 Flashcards

1
Q

great moderation

A

Period of low volatility in aggregate output in advanced economies between the 1980s and the 2008 financial crisis.

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2
Q

why do investment projects tend to happen around the same time?

A

because firms may adopt new technology at the same time and/or firms may have similar beliefs about expected future demand

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3
Q

multiplier process

A

a mechanism through which the direct and indirect effect of a change in autonomous spending affects aggregate output.
The amount by which an increase in spending (such as a rise in autonomous consumption, investment, government spending, or exports) raises GDP in the economy

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4
Q

fiscal multiplier

A

the total change in output caused by an initial change in government spending

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5
Q

fiscal stimulus

A

the use by the government of fiscal policy via combo of tax cuts and increased spending with the intention of increasing AD

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6
Q

aggregate consumption function

A

An equation that shows how consumption spending in the economy as a whole depends on other variables. For example, in the multiplier model, the other variables are current disposable income and autonomous consumption.
=C0 + C1Y

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7
Q

autonomous consumption

A

consumption that is independent of current income=C0

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8
Q

marginal propensity to consume

A

The change in consumption when disposable income changes by one unit. the fraction of disposable income consumed. C1

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9
Q

goods market equilibrium

A

The point at which output equals the aggregate demand for goods produced in the home economy. The economy will continue producing at this output level unless something changes spending behaviour

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10
Q

capacity utilization

A

A measure of the extent to which a firm, industry, or entire economy is producing as much as the stock of its capital goods and current knowledge would allow.

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11
Q

multiplier model

A

A model of aggregate demand that includes the multiplier process

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12
Q

autonomous demand

A

Components of aggregate demand that are independent of current income.

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13
Q

precautionary saving

A

An increase in saving to restore wealth to its target level

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14
Q

target wealth

A

The level of wealth that a household aims to hold, based on its economic goals (or preferences) and expectations. We assume that households try to maintain this level of wealth in the face of changes in their economic situation, as long as it is possible to do so.

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15
Q

great depression

A

the period of a sharp fall in output and employment in many countries in the 1930s.

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16
Q

broad wealth

A

material wealth and includes household’s expected future earnings from employment, known as the value of its human capital
value of all assests minus debts

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17
Q

financial accelerator

A

The mechanism through which firms’ and households’ ability to borrow increases when the value of the collateral they have pledged to the lender goes up.

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18
Q

what is the return from investing

A

the profit rate on I

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19
Q

what is the return from saving

A

the interest rate

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20
Q

if discount rate is greater than interest and profit from investment then

A

firm will keep funds and consume now

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21
Q

if interest rate is greater than discount rate and profit rate on I then

A

firm will repay debt or purchase a financial asset

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22
Q

if profit is greater than discount rate and interest rate then

A

firm will invest at home or abroad

23
Q

risk of expropriation

A

The probability that an asset will be taken from its owner by the government or some other actor.

24
Q

what supply side conditions in the economy can increase expected rate of profit?

A

1- fall in expected input prices eg fall in price of wages or energy, or fall in taxation over the life of the project
2- improvement in the security of property rights so fall in the risk of expropriation( less likely for project to be taken from its owner)

25
Q

how do firms respond to high forecasted demand?

A

high demand raises the desired size of each project so investment increase (not rate of expected profit)

26
Q

aggregate investment function

A

An equation that shows how investment spending in the economy as a whole depends on other variables, namely, the interest rate and profit expectations.

27
Q

how can disposable income(post-tax income) be written

A

(1-t)Y

28
Q

marginal propensity to import

A

The change in total imports associated with a change in total income.The fraction of each additional unit of income that is spent on imports.

29
Q

exchange rate

A

The number of units of home currency that can be exchanged for one unit of foreign currency

30
Q

components of AD=

A

C0 + C1(1-t)Y + I + G+ X-mY

31
Q

what is the multiplier only affected by?

A

MPC
tax
MPM

32
Q

There are three main ways that government spending and taxation can dampen fluctuations in the economy:

A

1-The size of government: Unlike private investment, government spending on consumption and investment is usually stable. Spending on health and education, which are the two largest government budget items in most countries, does not fluctuate with capacity utilization or with business confidence. These kinds of government spending stabilize the economy. As we have also seen, a higher tax rate dampens fluctuations because it reduces the size of the multiplier.

2-The government provides unemployment benefits: Although households save to smooth fluctuations in income, few households save enough (that is, self-insure) to cope with an extended period of unemployment. So unem­ployment benefits help households to smooth consumption. Other pro­grams to redistribute income to the poor have the same smoothing effect.

3-The government can intervene: It can intervene deliberately to stabilize aggregate demand using fiscal policy

33
Q

co-insurance

A

A means of pooling savings across households in order for a household to be able to maintain consumption when it experiences a temporary fall in income or the need for greater expenditure.

34
Q

why do governments provide unemployment benefits instead of private insurance company?

A

1-correlation risk -In a recession, job loss will be widespread. This means that there will be a surge in insurance claims across the economy and a private provider may be unable to pay out on the scale required.
2- hidden actions - the insurance company cannot observe the reason for the job loss so it would have to insure the employee against a firm cutting back employment due to lack of demand, as well as the worker being fired for inadequate work. creates a moral hazard as a well-insured worker is likely to out in less effort
3-hidden attributes - if you know your firm is in difficulty you will buy insurance when you learn of the likely closure of the firm, and it will be provided at good rates because the insurance company does not know that you are likely to make a claim on them. Workers who know their firm is performing well will not buy insurance. The hidden attributes problem will be true about individuals (hardworking or lazy), as well as firms (successful or failing). The good prospects (those who enjoy working hard, for example) will shun the insurance and the insurer will be left with those likely to face the extra risks of losing their job.

35
Q

automatic stabilizers

A

Characteristics of the tax and transfer system in an economy that have the effect of offsetting an expansion or contraction of the economy. An example is the unemployment benefits system.

36
Q

paradox of thrift

A

if a single individual consumes less, her savings will increase; but if everyone consumes less, the result may be lower rather than higher savings overall. The attempt to increase saving is thwarted if an increase in the saving rate is unmatched by an increase in investment (or other source of aggregate demand such as government spending on goods and services). The outcome is a reduction in aggregate demand and lower output so that actual levels of saving do not increase.

37
Q

fallacy of composition

A

Mistaken inference that what is true of the parts (for example a household) must be true of the whole (in this case the economy as a whole)

38
Q

budget balance

A

The difference between government tax revenue and government spending

39
Q

austerity

A

A policy where a government tries to improve its budgetary position in a recession by increasing its saving

40
Q

when would the multiplier be 0

A

if increased government production were offset exactly by reduced private sector production

41
Q

crowding out

A

The effect of an increase in government spending in reducing private spending.
As would be expected for example in an economy working at full capacity utilization, or when a fiscal expansion is associated with a rise in the interest rate.

42
Q

what does the size of the multiplier also depend on?

A

the expectations of firms and businesses

43
Q

if multiplier is positive but less than 1

A

a fiscal stimulus would raise GDP but by less than the increase in government spending

44
Q

if multiplier is more than 1

A

a fiscal stimulus would raise GDP by more than the increase in government spending

45
Q

if multiplier is negative

A

a fiscal stimulus would reduce GDP

46
Q

when an economy is operating at full capacity, then

A

extra government spending will crowd out private spending.

47
Q

government debt

A

The sum of all the bonds the government has sold over the years to finance its deficits, minus the ones that have matured.

48
Q

primary budget deficit

A

The government deficit (its revenue minus its expenditure) excluding interest payments on its debt

49
Q

sovereign debt crisis

A

A situation in which government bonds come to be considered so risky that the government may not be able to continue to borrow. If so, the government cannot spend more than the tax revenue they receive.

50
Q

supply side aggregate economy

A

How labour and capital are used to produce goods and services. It uses the labour market model (also referred to as the wage-setting curve and price-setting curve model).

51
Q

demand side aggregate economy

A

How spending decisions generate demand for goods and services, and as a result, employment and output. It uses the multiplier model.

52
Q

production function

A

A graphical or mathematical expression describing the amount of output that can be produced by any given amount or combination of input(s). The function describes differing technologies capable of producing the same thing.

53
Q

what is held constant in multiplier model and why

A 
prices
wages
technology
capital stock
institutions
because purpose of model is to see what happens to output, AD and employment when there is a demand shock from fiscal/monetary policies or from shock in C, I or exports

Ep1 (14 decks)

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