Flashcards in All Notes Deck (118):

1

## What factors effect demand?

###
Px=Price of good x

Py=Price of other goods

Y=Income of consumer

T=Tastes

N=Population & Demographics

E=Expected future Prices

2

## What factors effect supply?

###
Px=Price of good x

Pa=Price of substitutes in production

• What else could the factory be used for?

Pi=Price of inputs

Te=Technology

Z=Number of sellers

E=Expected future prices

3

## What factors effect PED?

###
Availability of Substitutes (Many Substitutes = Elastic) Time (In the long run price elastic)

Advertising (More = Inelastic)

Type of product (Essential = Inelastic, Luxury = Elastic)

% of Income (Less = Inelastic)

Durability (More = Inelastic)

4

## What factors effect YED?

###
Level of Income (Less income = greater proportionate change)

Product Perception (Snob goods, Veblen)

Lifestyle changes

The Economic Climate

5

## Who bares the tax incidence?

### If the product is elastic, the producer will bare more of the tax

6

## What is the formula for tax incidence?

###
Producer: |Ed|/Es+|Ed|

Consumer: |Es|/Es+|Ed|

7

## Define Completeness

### Consumers can compare bundles of goods and rank them in order of preference

8

## Define Transitivity

### Consumers ranking of goods are consistent, if A>B B>C then A>C

9

## Define Monotonicity

### Having an extra unit of a good is at least as beneficial as the last

10

## Define Continuity

### There are no "sudden jumps" in utility

11

## What is the difference between ordinal & cardinal ranking?

###
Ordinal: Best to worst

Cardinal: Exactly how much better one thing is

12

## What is the slope of a budget constraint?

### -Px/Py

13

## What is the point of satiation?

### Where the consumer is consuming an infinite amount of the goods

14

## Why is the indifference curve not a straight line?

### DMU

15

## What is the slope of the indifference curve?

### MRSxy= -Change Y/Change X= MUx/MuY

16

## How do you derive a demand curve from an IC?

###
Marshallian Demand: Plot the old and new equilibrium

Hicksian Demand: Plot old equilibrium and substitution equilibrium

17

## Describe the Net effects of an IC and budget constraint movement.

###
Both positive = Normal Good

Substitution > Income = Inferior good

Substitution < Income = Giffen Good

18

## What is the difference between risk and uncertainty?

###
Risk: Where possible outcomes and their probabilities are known

Uncertainty: Where we cannot assign probabilities to outcomes

19

## How would you calculate expected utility?

###
Use the Bernoulli function:

U(x)= P1 U(X1 )+P2 U(X2 )…Pn U(Xn)

P1 is the probability of Number 1

U(X1 ) is the utility derived from number 1

U(x) is how many utils consumption provides

20

## What is the utility of expected payoff and the expected utility of the payoff?

###
The utility of the expected payoff: U[E(x)]

The utility obtained by expenditure/income

The expected utility of the payoff:E[U(x)]

The expected utility of the utility of the possible income

21

## What are the risk attitudes?

###
Risk Neutral:

U[E(X])=E[U(X)]

Risk Averse:

U[E(X)]>E[U(X)]

Risk Loving:

U[E(X)] < E[U(X)]

22

## What are the risk attitudes graphs?

###
Risk Averse: Concave

Risk Loving: Convex

Risk Neutral: Straight line

23

## What is a certainty equivalent and how is it calculated?

###
This is the amount of risk free income that we need to receive to get the same amount of utility of risk income.

Calculate expected utility of good, preform the inverse utility function

24

## What is the Markowitz risk premium?

### The difference between certainty equivalent and the expected utility of the good

25

## What is the slope of the isoquant?

###
MRTS = MPL/MPK

If MRTS = 12, for every one unit of labour there must be 12 capital

26

## Illustrate economies of scale using the production function.

###
Qnew = f (2K, 2L) vs Qbase = f (K, L)

Decreasing returns to scale: less than double output (Qnew < 2Qbase )

Constant returns to scale: double output (Qnew = 2Qbase )

Increasing returns to scale: more than double output (Qnew > 2Qbase )

27

## What is a firms shutdown condition?

###
Operating Profit = TR-VC<0

P-AVC<0

28

## How do you derive a firms supply curve?

###
Firms supply curve is the part of its MC curve that lies above its AVC

If P = MC < AVC the firm will close

The market supply curve is a horizontal summation of all firms supply curves

At each price, add together all outputs that firms are willing to supply at that price

29

## Why must a firms long run supply curve lie above the ATC?

### If price is lower than this, firm will exit industry

30

## Give examples of regulation used against monopolies

###
Policy intervention to reduce barrier to entry ○ “Antitrust laws”; tax breaks for new entrants

MC pricing rule Require firm to charge P = MC.

Direct price regulation: ATC pricing rule

31

## What is the Lerner index and how is it calculated?

###
A measurement of market power:

(P-MC)/P=-1/Ed

Larger value = more market power

32

## Name the three oligopoly models

### Bertrand, Cournot and Stackleberg

33

## What is the Bertrand model?

###
Price Competition - EC efficent

Each firm sets price, undercut each other until P=MC

34

## What is the Cournot Model?

###
Quantity Competition - Not EC efficient, better than monopoly

Both firms set Quantity, reaction curves are created.

Efficient equilibrium occurs at intersection of reaction curves

35

## What is the Stackleberg Model?

###
Quantity Competition - More efficient than Cournot

Each firm sets quantity, Qa is set before Qb therefore A works backwards and maximises own gain

36

## Why would a kinked demand curve occur?

###
Limits on Quantity

Non-linear pricing

Discounts

Varying Income

37

## Describe the varying shapes of an IC?

###
Positive Slope: One good you like, one you don’t

Negative Slope: Two goods you like/dislike

38

## How would you calculate output max and cost min?

###
For Output Max:

Hold isocost fixed and shift isoquant

For Cost Min:

Hold isoquant fixed and shift isocost

39

## What is Grim Trigger and Tit for Tat

###
Grim trigger: If you ever Defect, I Defect in all subsequent periods

Tit-for-tat: If you Defect this period, I Defect next period. If you Cooperate this round, I Cooperate next round.

40

## What is a more realistic version of the multiplier?

### 1/ (1-c(1-t)+m)

41

## What is the formula for investment?

### I=Ibar-bi

42

## What will happen if IR increases?

### Investment will fall therefore downwards transaltion of AE

43

## What is Hicks model?

###
Three markets: Goods, Money and Bonds

If two are in equilbrium the third must be

44

## What is the formula for the demand of money?

###
Ld=kY-ih

If IR go p, people will get bonds thus D falls

45

## How would you increase the money supply?

###
Open Market Ops:

Print money and purchase bonds

46

## Illustrate the effect of Open Market Ops on Bonds.

###
Bank prints money to purchase bonds

This raises their price, causing the ROR to fall

This causes IR to fall

47

## How do you calculate the ROR on bonds?

### (Maturity - Current Price) / Current Price

48

## What are the different IR?

###
iD=RoR on a savings account

iB=RoR on a bond

iL=Bank lending rate

iCB=Central bank lending rate

49

## What are the two types of money supply?

###
Exogenous = Vertical

Endogenous = Horizontal

50

## Algebraicly, what are the different money supplys?

###
M0=CU+CRES

CU=Currency held in pocket

CRES=Currency held by commercial banks

M1=CU+DEP

DEP=Deposits in bank accounts

M2=M1+DEP*

DEP*=Special Deposits

51

## What is the money multiplier?

### M1/M0 = [CU/DEP + 1]/[CU/DEP + CRES/DEP]

52

## What is the LM Curve?

### Illustrates here the demand for liquidty = M0

53

## What is the IS equation?

###
i=(I+G)/b −(1−c)Y/b

IS=Intercept - Slope

54

## What factors effect the slope of the IS curve?

###
b=Sensitivity of invesment with regards to IR

c=MPC

tax and MPM

55

## What is the equation for the LM curve?

###
i=k/hY −M/ℎ

LM=Slope-intercept

A bigger h will yield a flatter curve

56

## What effect will expansionary market ops have on ISLM model?

### M increases shifting LM1 outwards

57

## What is the effect of expansionary fiscal policy on ISLM model?

### IS shifts upwards

58

## What is the effect of expansionary fiscal policy on ISLM & Keynesian cross>

###
IS shifts upwards

Higher income increases money demand therfore CB raises IR

Higher IR therefore AE shifts upwards

Investment is depressed, AE shifts to a point between A and B

Private sector may be crowded out

59

## What is the equation for the economy at equilibrium?

###
Y= 1/1−c+(bk/h) * (I+G+b/hM)

this is ^ the multiplier

60

## What is monetary retro action?

### The extent to which the money supply diminishes due to the multiplier

61

## What is the equation for the monetary multiplier?

### ∂y/∂M=(p/h) / 1−c+(bk/h)

62

## What are the key points of Reaganomics?

###
Increase in defence expenditure therefore IS right

Reduce taxes therefore IS right / Slope changes

Contraction Market Opps to quell inflation therefore LM left

63

## What effect would maintaining the money supply have on a goods market shock?

###
Shock causes IS to shift

Constant money supply increases/decreases output with a change in interest rates

This method is the best

64

## What effect would maintaining the IR have on a goods market shock?

### IS shifts, expansionary/contractionary opps causes the buying/selling of bonds which shifts LM Right/left returning market to original position with higher/lower output

65

## What factors shift the LM Curve?

###
A reduction in demand for money will shift LM to right

Increase in demand for money will shift to left

A reduction in supply will shift LM to left

A increase in supply will shift LM right

66

## What effect would fixing the money supply have on a money market shock?

### Curve will shift due to change in demand and remain at that level

67

## What effect would fixing the IR have on a money supply shock?

### Countering the increase in money supply through contractionary market ops will shift LM back to original position

68

## Why does demand for liquidity have a non linear shape?

### As IR falls, the demand for liquidity tends to infinity, you keep all income

69

## What is a critical rate and how does it effect the demand for liquidity?

###
A critical rate of a bond determines the rate at which it is sold. Above this, the demand for liquidity is zero and all funds are invested

Below this, the demand for liquidity is infinite and none are invested

Smoothing this relationship gives the curve

At a flat point of the curve, you have a liquidity trap where monetary policy is ineffective

70

## Discuss the liquidity trap?

### When IR has reached its lower bound, monetary policy is no longer effective

71

## At which points on the Non-Linear LM curves are policies ineffective?

###
At the vertical section, expansionary fiscal policy is ineffective as an IS curve only raises IR

Here, monetary policy will shift the LM curve, improving output

At the horizontal position, expansionary monetary policy will shift the LM curve, causing no change due to zero lower bound

Here, fiscal policy will shift IS curve, improving output

72

## Discuss the effects of a run on the banks.

###
A run on the bank will increase the demand for money, shifting LM left

A collapse of confidence will raise the risk premium, shifting LM upwards - now in liquidity trap

Only option is fiscal policy

73

## Discuss negative IR

###
Commercial inter bank lending rates can be negative

Bank IR can be negative however if too negative people will not store money in banks

74

## What is the term for competetiveness?

###
R=E x P*/P

E = Exchange rate (P*/P)

P* = foreign price level

75

## Show a depreciation

###
1$=£0.85 -> $1=£0.89

Here, the pound has devalued

76

## What are the improved formula for X and M

###
X=x1Y*+x2R

M=m1Y*-m2R

77

## What is the IS equilibrium using the improved X, M equations?

###
i=−(1−c+m_1)/b x Y + (I ̅+I ̅+x_1 Y∗)/b + ((x2+m2)R)/b

I=Slope + Intercept + exchange

78

## What effect does a depreciation have on IS curve?

###
A depreciation will shift IS curve upwards

A appreciation will shift IS curve downwards

79

## What is the equation for the balance of payments?

###
BP=CA+KP

x1 Y*+X2R − (M1Y-m2R)=0

X1=MPM for rest of world

X2R=Competitiveness

M1Y=MPM of our income

80

## What is the uncovered interest parity condition?

###
Real interest rates will equalise globally

i=i*+(ETe−Et)/E

ETe is the future expected rate

k(I−i*)>0 =there will be a finanical inflow

81

## What is the Balance of Payments Equation including the UIP?

###
BP=x1 Y*+x2R−(m1Y − m2R) + k(i−i*)=0

Solving for I

i=i*+(m1Y)/k − (x1Y*)/k − (m2+x2)R)/k

82

## How do you represent the CA & KP graphically?

###
CA=Verticle

KP=Horizontal

83

## What are the key terms for currency movements?

###
Devaluation and revaluation are fixed only

Appreciation and depreciation are free float only

84

## What effect will increasing government spending have on a fixed ER?

###
G shifts IS to right

Higher IR cause financial inflows causing D£ up

This shifts LM to right until return to FE line

Effective policy

85

## What effect would monetary policy have on fixed exchange rates?

###
LM shifts outwards

Lower IR cause financial outflows S£ up

CB buy back £, returning M

86

## What effect would an increase in G have on flexible exchange rates?

###
IS shift right

Higher IR causes D£ up

£ apprecites, depressing exports

IS shifts back to original

87

## What effect would monetary policy have on flexible exchange rates?

###
Increased money supply therefore LM shifts outwards

IR falls causing a fiscal outflow

£S up therefore depreciation

Demand for exports increase

IS shifts right back to FE line

Effective policy

88

## Where does the equilibrium occur in a fixed ER?

### FE=IS

89

## What effect would raising IR have in a fixed ER

###
IR up therefore FE up

FE=IS is new equilbrium

Higher IR D£ up

CB buys foreign currencies

LM shifts left

90

## Why would you commit to a fixed ER?

###
Rely on imports, avoid depreciation - will run out of foreign reserves

Rely on exports, avoid appreciation - can print infinite domestic reseves

91

## Where does the equilbrium occur in a free exchange rate?

### FE=LM

92

## What are the IS, LM & FE Equations?

###
IS: (EP*)/P = R = (1−c+m1)/(m2+x2 )Y − (I ̅+G ̅+x1 Y*)/(m2+x2 ) + b/(m2+x2)i

LM: Y=m/k + hi/k

FE: i=i*

R,Y&I are the three variables that have to be determined

Depending on which exchange rate mechanism, one of the equations becomes redundant

93

## What does a flexible ISLMFE equibrium look like?

###
Y=m/k + hi*/k

Sub (Y) and (i,i*) into equation IS for real exchange rate

Most important variable is M

94

## What does a fixed ISLMFE equibrium look like?

###
(EP*)/P = R = (1−c+m1)/(m2+x2 )Y − (I ̅+G ̅+x1 Y*)/(m2+x2 ) + b/(m2+x2)i*

Sub into LM to work out Y

Most important variables are I, G, x1Y

95

## Derive AD in a flexible ER

###
Prices rise

Real money supply falls therefore LM shifts left

Endogenous appreciation occurs

IS1 Shifts right due to reduced demand

Price has risen and output has fallen

96

## Derive AD in a fixed ER

###
Prices increase

Less money available therefore demand falls

IS shifts inwards

IR lower, therefore financial outflows

CB buys £, money supply contracts

LM inwards

Higher price, lower output

97

## What are the shift variables for each exchange rate?

###
In fixed, shift variable is G

In float, shift variable is M/p

98

## What is the production function for an economy?

###
Y=f(A,K,N)

As capital and tech are fixed

Y=f(N) - man hours

99

## What are the neoclassical properties of the neoclassical labour market model?

###
INADA

Constant Returns to scale?

Positive but diminishing returns

100

## What is the equation for the demand of labour

###
π=P∗Y

π=P∗f(N)−W∗N

∂π/∂N=P∗fN′−W=0

Condition for optimal

w/p=fN′=MPN or W=PfN′

More hours will be demanded until wage = MPN

101

## What is the equation for the supply of labour?

###
Households are the determinant

U=U(c,L) s.t

W∗N=P∗C

12=L+N

Combining the above:

U=U(c,L)

s.t. c=w/p^e (12−L)

102

## Discuss LF

###
LF is a point of full employment, a vertical line

The distance between the equilibrium and LF is unemployment

103

## Discuss the effect of bargaining power.

###
Bargaining power shifts the supply curve upwards

High unemployment diminishes bargaining power

104

## What is the optimal conditon for labour demand

###
Optimal Condition:

w/p=(1+dP/dy∗y/p[y] )∗f_N^′

The middle section is PED

105

## What is the formula for Aggregate Supply

### P=P^e+λ(Y−Y ̅ )

106

## What factors shift the LRAS & SAS

###
Improvements in Tech will shift LRAS

Expected prices will shift SRAS

107

## Define and discuss the AD curve under flexible ER

###
P=a−bY+h(M,i*,ε^e )

Logging

p=m−bY+h(i*,ε^∗ )

M is Primary Shift Factor

M, I, and We are shift factors

M=Money supply

I* = Global interest rate

ε^e=Expected exchange rate

An improvement in all 3 will shift the curve to the right

108

## Define and discuss the AD curve under fixed ER

###
P=a−bY+(E,P*,Y*,I*,ε* )

Logging

p=e+p*−by+δY* δG−f(I*,ε^e )

G is main shift factor

P* is foreign prices

Y* is foreign output (+)

I* is foreign interest rates

ϵ^∗ is expected ER

Apart from foreign interest Rates and Expected ER, an increase will cause a rightwards shift

109

## What is monetary Neutrality?

###
Flexible ER

CB increases m - Lower IR

AD shifts outwards

Customers Raise wages

AS shifts upwards to SREquilbrium=LRAS

Repeats

Y only shifted in SR, LR = inflation

On ISLM, both curves shift outwards then slowly backwards

110

## What is the equation for SRAS when plotting inflation?

###
p=p^e+λ(Y−Y ̅ )

Subtract previous price levels

p−p_(−1)=p^e−P_(−1)^e+λ(Y−Y ̅ )

This can be combined to yield

π=π^e+λ(Y−Y ̅ ) SRAS

111

## Derive EAS?

### For an equilibrium π=π^e ⁆therefore 0=λ(Y−Y ̅ ) and (Y=Y ̅ ) therefore no output gap

112

## What shifts a SRAS when plotting inflation?

### Differences in expected inflation rates

113

## What is the equation for DAD under flexible exchange rates

###
p=m−bY+h(i*+ε*)

p_(−1)=m_(−1)−bY_(−1)+h(i_(−1)*+ε_(−1)* )

p−p_(−1)=m−m_(−1)

π=μ−b(Y−Y_(−1) )+h(Δi*+Δε* )

m−m_(−1)=μ is the growth of the money supply

114

## What is the equation for the Philips curve

###
π=π^e−g(μ−μ_N )

π^e=π_(−1)

115

## Discuss Solows neoclassical exogenous growth model

###
Y=K^a L^(1−a )

First Derivate is positive

Second is negative

More output at a diminishing rate

Constant returns to scale - PC

116

## What is the capital accumulation equation

### K ̇=sK^a L^(1−a)−dK

117

## What is the steady state?

###
Where the change in K =0

k*=(s/(d+n))^(1/(1−a))

118