All Notes Flashcards
(118 cards)
1
Q
What factors effect demand?
A
Px=Price of good x Py=Price of other goods Y=Income of consumer T=Tastes N=Population & Demographics E=Expected future Prices
2
Q
What factors effect supply?
A
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
Q
What factors effect PED?
A
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
Q
What factors effect YED?
A
Level of Income (Less income = greater proportionate change) Product Perception (Snob goods, Veblen) Lifestyle changes The Economic Climate
5
Q
Who bares the tax incidence?
A
If the product is elastic, the producer will bare more of the tax
6
Q
What is the formula for tax incidence?
A
Producer: |Ed|/Es+|Ed|
Consumer: |Es|/Es+|Ed|
7
Q
Define Completeness
A
Consumers can compare bundles of goods and rank them in order of preference
8
Q
Define Transitivity
A
Consumers ranking of goods are consistent, if A>B B>C then A>C
9
Q
Define Monotonicity
A
Having an extra unit of a good is at least as beneficial as the last
10
Q
Define Continuity
A
There are no “sudden jumps” in utility
11
Q
What is the difference between ordinal & cardinal ranking?
A
Ordinal: Best to worst
Cardinal: Exactly how much better one thing is
12
Q
What is the slope of a budget constraint?
A
-Px/Py
13
Q
What is the point of satiation?
A
Where the consumer is consuming an infinite amount of the goods
14
Q
Why is the indifference curve not a straight line?
A
DMU
15
Q
What is the slope of the indifference curve?
A
MRSxy= -Change Y/Change X= MUx/MuY
16
Q
How do you derive a demand curve from an IC?
A
Marshallian Demand: Plot the old and new equilibrium
Hicksian Demand: Plot old equilibrium and substitution equilibrium
17
Q
Describe the Net effects of an IC and budget constraint movement.
A
Both positive = Normal Good
Substitution > Income = Inferior good
Substitution < Income = Giffen Good
18
Q
What is the difference between risk and uncertainty?
A
Risk: Where possible outcomes and their probabilities are known
Uncertainty: Where we cannot assign probabilities to outcomes
19
Q
How would you calculate expected utility?
A
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
Q
What is the utility of expected payoff and the expected utility of the payoff?
A
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
Q
What are the risk attitudes?
A
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
Q
What are the risk attitudes graphs?
A
Risk Averse: Concave
Risk Loving: Convex
Risk Neutral: Straight line
23
Q
What is a certainty equivalent and how is it calculated?
A
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
Q
What is the Markowitz risk premium?
A
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
What is the requirement line?
The amount of investment required to maintain a constant level of GDP
If rate of savings increases, steady state rises
If population growth increases, requirement pivots left and steady state falls
