Diagrams

Question 1

What is the equation of the production function?

Answer 1

Y=AF(K,N)
Y=AK^aN^(1-a)

Question 2

What shifts the production function?

Answer 2

Supply shocks

Question 3

How is the demand function for labour derived?

Answer 3

pi = p x Y(.) - W x N
Differentiate wrt N
MRPN=W
MPN=w

Question 4

What shifts the demand for labour?

Answer 4

Supply shocks
Changes in capital stock

Question 5

How is the supply of labour derived?

Answer 5

U=U(c,L)
SE: opportunity costs can affect work supply
IE: change in income in the same amount of work time can affect labour supply
Pure SE: one day increase in wages
Pure IE: change in wealth or expected future wage
IE stronger in LR

Question 6

What shifts the individual labour supply curve?

Answer 6

Wealth
Expected future real wage

Question 7

What shifts the aggregate labour supply?

Answer 7

Wealth
Expected future real wage
Participation rate
Working age population

Question 8

What are the budget constraints for current period consumption and future period consumption?

Answer 8

a^f = y - c + a
C^f = y^f + (1+r)a^f

Question 9

What is the equation of the intertemporal budget constraint?

Answer 9

c^f = y^f + (y+a)(1+r) - (1+r)c

Question 10

What is the no borrowing no lending point?

Answer 10

When y^f=y+a

Question 11

What shifts the intertemporal budget constraint?

Answer 11

y^f
y
a

Question 12

What is the effect of a change in r on the intertemporal budget constraint?

Answer 12

Assume increase in interest rates:
SE= future consumption becomes cheaper relative to current consumption
- Shift angle of budget more steep, make sure tangent to utility function
IE:
Lender: increase in income/wealth, increase in consumption and future consumption, less saving
- Shift curve outwards, make sure it goes through no borrowing no lending point
Borrower: decrease in income/wealth, decrease current consumption and future consumption. Increase saving
- Shift curve inwards

Question 13

What is the function of the user cost curve?

Answer 13

uc = rp +dp - change in value of p

Question 14

What is the equilibrium of the investment diagram?

Answer 14

MPK^f=uc

Question 15

What shifts the uc curve?

Answer 15

Interest on capital
Depreciation rate
Change in the value of p
P
Tax

Question 16

What shifts the MPK^f curve?

Answer 16

Technological changes

Question 17

What is the goods market equilbrium?

Answer 17

Where Y=Yad
Y=C^d+I^d+G
Y-C^d-g = I^d
S^d=I^d

Question 18

What shifts the savings curve?

Answer 18

Wealth
Expected future income
G
Income
Effective tax rate
Expected future output

Question 19

Explain the effect of increased G on the goods market?

Answer 19

Increased G
Decrease in national saving
Increased interest rates
Lower investment
===Crowding out

Question 20

What shifts the investment curve?

Answer 20

Technology changes
uc
Effective tax rate

Question 21

Derive the demand function in the bond market

Answer 21

i =F/Pb -1

Question 22

What shifts the demand for bonds?

Answer 22

Wealth
Risk
Relative interest rates of other assets
Expected inflation rate
Liquidity

Question 23

What shifts the supply of bonds?

Answer 23

Budget deficit
Expected profitability of investment opportunity
Expected inflation

Question 24

Explain the Fisher effect

Answer 24

Increase in inflation
Increased supply of bonds
Decrease demand for bonds
Causes increase in interest rates

Question 25

Business cycle expansion on bond market

Answer 25

Increased wealth Increased demand for bonds Increased supply of bonds as more profitable opportunities Increase in Q r change ambiguous

Question 26

What are the variables that affect money demand?

Answer 26

Price level Real income Interest rates on non-monetary assets Inflation Wealth Risk Liquidity of alternative assets Payment technologies

Question 27

What is the money demand function?

Answer 27

M^d = p x L(Y,i) M^d/p = real money demand

Question 28

What is the function of the FE line?

Answer 28

Ybar=AF(K,Nbar)

Question 29

What shifts the FE line?

Answer 29

Supply shock Change in capital

Question 30

What shifts the IS curve?

Answer 30

Y G C Wealth MPK^f Taxes

Question 31

What shifts the LM curve?

Answer 31

Changes in the price level Anything that affects Ms of Md

Question 32

Effect of temporary adverse supply shock on IS-LM

Answer 32

FE shifts inwards Prices increased LM curves inwards

Question 33

Effects of monetary expansion

Answer 33

Shift LM to right Prices adjust LM curve shifts inwards

Question 34

What shifts AD

Answer 34

Any change in IS or LM

Question 35

What shifts SRAS

Answer 35

Change in cost of production

Question 36

Whats shifts LRAS

Answer 36

Change in FE

Question 37

Increase in G in classical model

Answer 37

Decreased saving, shift rightwards of IS. Expected future taxes higher, income effect, increase labour supply. Prices increase so LM shifts to the left to restore equilibrium. Higher output, higher interest rates.

Question 38

What is the weakness of the classical model? Explain how these are accounted for.

Answer 38

Doesn't explain why unemployment rises in a recession. - Changes in the natural rate of unemployment Money neutrality - Misperceptions theory

Question 39

Explain misperceptions theory

Answer 39

Producers have imperfect info on the general price level. Misinterpreted changes in price level seen as relative price change. SRAS upwards sloping

Question 40

Unanticipated change in money supply in Classical model

Answer 40

Shift AD to right SR equilibrium at SRAS1,AD2 as actual prices exceed expected. Output increased. (Money non neutral) People get info on true price level, expectations change, SRAS shifts up. Prices increase General equilibrium met

Question 41

Anticipated change in the money supply Classical

Answer 41

Increase in AD. People has more knowledge on prices. SRAS shifts straight away restoring equilibrium. Money neutral in SR and LR.

Question 42

What else does MPN depend on in the Keynesian model?

Answer 42

Effort per worker

Question 43

Increase in nominal money supply Keynesian

Answer 43

Shift AD up. SRAS1 and AD SR equilibrium. In LR prices increase, SRAS shifts up. Higher price level and same output.

Question 44

Increased government purchases

Answer 44

Shift IS to the right. SR equilibrium at LM=IS. Prices increase in LR, LM shifts to the left. Increased interest rates and same output in LR.

Question 45

Lump sum taxes cut Keynesian

Answer 45

Shift IS to the right due to greater cosnumption. SR equilibrium at IS=LM. Prices increase in LR, LM shifts to the left.

Question 46

Negative shock to IS Keynesian and no stabilisation policy.

Answer 46

Leftwards shift or IS. SR equilibrium at IS=LM, lower output and employment in LR. In LR, prices fall. LM shifts to the right. LR equilibrium met.

Question 47

Negative shock to IS keyenesian with monetary policy.

Answer 47

Leftward shift of IS. No SR equilibrium where IS=LM. LM shifts to the right due to increase in money supply. LR equilibrium with higher price.

Question 48

3Negative shock to IS Keynesian with government intervention

Answer 48

Leftward shift of IS. No SR equilibrium at IS=LM. IS2 shifts back to IS1. Increased prices same output.