Final Topic 14

Question 1

demand pulled exapnsion

Answer 1

any event that increases C, I, G, or NX

Question 2

demand pulled contraction

Answer 2

any event that reduces C, I, G, or NX directly

Question 3

supply-pushed expansion, relationship between Y, N, and P vs. for demand-pulled expansion

Answer 3

for supply-pushed: Y goes up, N goes up, but P goes down (counter-cyclical inflation and price level)

for demand-pulled: Y goes up, N goes up, P goes up. price level and inflation is lagging and pro-cyclical.

Question 4

Keynesian perspective: the economy is driven by…

Answer 4

aggregate demand and shocks that affect consumption, investment, and government spending, as well as monetary policy [shocks in C, I, G, as well as Ms and L(.)]

(prices are sticky and labor markets clear slowly)

Question 5

classical perspective: the economy is driven by…

Answer 5

supply side, and monetary policy is neutral. (A, K and N are what matter).

(prices adjust immediately and all markets clear and are in equilibrium).

Question 6

Keynesian vs. Classicals: consumption

Answer 6

both procyclical, but causality is the difference
Keynesians: C goes up/down –> Y goes up/down.
Classicals: Y –> C

Question 7

Keynesian vs. Classicals: money supply.

Answer 7

Keynesians: changes in nominal money supply affect aggregate demand, leading to increased output.
[Ms–>AD–> Y]

Classicals: expected expansion results in an increased money demand, and CB provides more Money Supply for price stability. [Y –> Md –> Ms]

Question 8

Keynesians vs. Classicals: productivity

Answer 8

Keynesians: in an contraction, employment falls, but labor productivity increases (diminishing returns to labor)–> productivity is countercyclical. Not consistent with data. They say in response that hiring and firing costs make it so that there is a similar amount of hired labor, but less output.

Classicals: predict that productivity is procyclical, because productivity shocks affect the marginal product of labor and therefore employment and output go in the same direction.

Question 9

Keynesians vs. Classicals: real wage

Answer 9

Keynesians: real wages are acyclical because they are inflexible and don’t move during the business cycle (not consistent with data)

Classicals: real wages are procyclical because productivity shocks affect MPn and output in the same direction. (consistent with data)

Question 10

Keynesians vs. Classicals: employment

Answer 10

Keynesians: employment procyclical. AD–>output and employment.

Classicals: employment procyclical. Productivity shocks–>labor demand and employment level.

Question 11

Keynesians: policy implications

Answer 11

aggregate demand is driving output and markets adjust slowly. therefore, government should form responses to business cycles; stimulus in case of a contraction and restrictive policies in case of a boom.

policy instruments include monetary policy (targeting real interest rate) and fiscal policy (focusing on taxes, spending and transfers). Discretionary policies based on times and perceived needs rather than predictable policy rules.

Question 12

Classicals: policy implications

Answer 12

policies should follow predictable policy rules (and not be discretionary). Government interventions distort market mechanisms and make outcomes worse. Free market allows for self-adjustment, so poicies should focus on supply-side to stimulate long-run economic growth (A, K, N)

Question 13

Monetarists

Answer 13

classicals, but think that monetary policy is valuable for price stability as changes in nominal prices may lead to distorted expectations about monetary growth and inflation.

Question 14

Structural policies

Answer 14

(government) affects aggregate supply and stabilize supply shocks, BUT oftentimes slow and stabilization is delayed due to political process and implementation of structural reforms.

Question 15

fiscal policies

Answer 15

(government) can affect both aggregate demand (spending) and aggregate supply (tax rates) and can therefore stabilize demand shocks or supply shocks. However, they have long-term implications regarding debt levels and interest rates, and policymakers need to consider the trade-off between short-term and long-term implications of fiscal policies.

Question 16

monetary policies

Answer 16

(central bank) affect aggregate demand and therefore stabilize demand shocks but cannot affect aggregate supply (cannot stabilize supply shocks). However, to stabilize supply shocks and coordinate with other policymaking entities, monetary policy can stimulate short-term economic activity and buy other policy instruments time to stabilize supply shocks.