Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

ECO2102 Macroeconomics > ECO2102 Intro to Business Cycle Analysis (2) > Flashcards

ECO2102 Intro to Business Cycle Analysis (2) Flashcards

1
Q

What is the difference between endogenous and exogenous variables?

A

Endogenous variables are determined by the exogenous whereas Exogenous are determined outside the model.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

How are shocks different for Endogenous and Exogenous variables?

A

Exogenous variables are a source of shocks whereas Endogenous variables cant generate shocks; they change as a result of shocks.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is the difference between long term economic growth and business cycles?

A

Long-run growth models explain the continuous drive upwards in GDP. Business cycle models explain the peaks ( booms ) and troughs (economic recessions).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is the economic growth identity?

A

y=C+G+I

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is the equation for aggregate demand?

A

y^D = C+I+G

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is the equation showing equilibrium between aggregate supply and aggregate demand?

A

y = y^D

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is the consumption demand function and list what all the variables are?

A

C = c0 + c1(1-t)y
c0 = autonomous consumption
c1 = marginal propensity to consume ( MPC)
y = aggregate income
t = tax rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is another name for aggregate demand?

A

Planned expenditure

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Describe the Keynesian cross diagram?

A

Y^D on the y axis and y on the x axis. A line runs at 45degress from the origin. The other line is created with the equation y=c0+I+G+c1(1-t)y

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What change does the government spending multiplier quantify?

A

It quantifies the change in output (y) divided by change in government spending (G).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

How do you work out the government spending multiplier?

A

Reorganise ( y=c0+I+G+c1(1-t)y )so that y is on the left. Then you should be able to see that the multiplier is 1/(1-c1(1-t))

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What does the multiplier apply to changes too?

A

To all exogenous components: G,I and c0

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is the spending multiplier?

A

It measures the effect of a change in an exogenous variable (G,I,c0) on output (y).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What does the IS curve represent?

A

The IS curve represents equilibrium on the goods markets, its shown by y=c0+I+G+c1(1-t)y

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What are the axis on an IS curve diagram?

A

y axis - Real interest rate
x axis - y (aggregate supply)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is the equation for investment and its variables?

A

I = a0-a1r
a0 = autonomous investment
a1 = sensitivity of investment with respect to interest rates
r = real interest rates

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What does a0 represent in the Investment equation?

A

a0 = sensitivity of investment with respect to interest rates

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is the IS equation with C and I expanded?

A

y = c0+c1(1-t)y + a0 -a1r + G

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

How would you rearrange the IS equation with I and C expanded?

A

y=k(c0+a0+G)-ka1r

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

How can you further simplify the IS equation?

A

y = A-ar
A=k(c0+a0+G)
a = ka1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What do each part of the IS-PC-MR represent.

A

IS- Keynesian cross
PC - Phillips curve
MR - Monetary Rule

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

How is the supply-side of the economy shown?

A

with a production function
y = F(K,N)
y = aggregate output ( not output per worker as in Solow)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What are some of the long-run Solow assumptions?

A

Capital grows over time depending on capital depreciation and investment
Labour grows over time
Capital and Labour behave differently.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What are the different time frames for business cycle analysis?

A

Long run, Medium run, Short run

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
What are the assumptions for Long-run?
Both labour and capital are allowed to grow
26
What are the assumptions for medium-run?
Capital is assumed to be fixed, labour doesn't grow at a constant rate and can change with supply shocks.
27
What are the assumptions for the short-run?
Capital is fixed, employment decisions are driven by demand for goods and services.
28
What drives the economy in the short run and medium run?
Short run demand drives the economy Medium run - labour market drives the economy as a whole
28
How is y (output/GDP) determined in the short and medium run?
y (output/GDP) is determined by labour market equilibrium in the medium run and is driven by the demand for goods and services in the short run.
29
How is N (labour/employment) determined in the Short/Medium run?
Employment is determined by labour market equilibrium in the medium run and is driven by demand for goods and services in the short run.
30
How do you work out where profit maximisation occurs?
Take the derivative of the profit equation with respect to N then equate too zero. F'(N) -W/P=0 F'(N) = W/P
30
What is the equation for Profit?
Profit = F(N) - (W/P)N W = money wages P = price of output W/P = Real wage
31
What does F'(N) represent?
it represents the marginal product of labour
32
What decides demand for labour in perfect competition?
MPL=W/P represents the demand for labour in perfect competitions. Firms take money wages and prices as given and they employ workers until MPL becomes equal to W/P.
33
What are the axis on a labour demand/supply diagram?
x axis - W/P = real wage y axis N - population employed
34
List some features that make labour markets imperfect.
Imperfect Information, Trade unions, minimum wages and labour market regulation.
35
What are some factors that influence wage setting?
Unemployment benefit, Net utility of unemployment, Economy-wide unemployment
36
Draw the Wage Setting curve (WS)
Check Word for Image
37
What is Trade Union Density?
the % of employees that are members of a trade union in a country.
38
What does a point on the WS curve show?
It shows the wage that has to be paid to secure adequate worker effort( at given level of unemployment)/ effective labour input
39
What determines workers willingness to exert effort?
Real Wage ( w=W/P)
40
Who are the wage setters in imperfect competition?
Employers, trade unions or both
41
What is the Wage setting equation?
W=P^E(B(N,z^w)) P^E = expected price level B = function of the level of employment z^W = a set of wage push variables
42
Why is P^E used?
What matters to workers is what the nominal wage will buy, at the time of wage-setting the price level for the coming period is uncertain so the money wage is evaluated in terms of expected consumer price level.
43
Why is N in the wage setting equation?
High employment (N) means low unemployment and firms have to pay higher wages to motivate workers. money wages W and employment N are positively related.
44
What is zW?
Institutional, policy, structural and shock variables such as unemployment benefits, net utility of unemployment and trade unions.
45
List examples of changes in zW that would shift WS down
Unemployment benefits decrease, working conditions improve, trade unions are weakened.
46
How do you create the price setting equation?
Rearrange W/P=MPL too P=W/MPL then add (1+u) where u represents the markup P=(1+u)(W/MPL) u is actually mew
47
What does the value of u (mew) depend on?
It depends on the degree of competition: more competition means lower mark-up
48
What represents the supply and demand sides of the labour market?
PS (Price setting) - demand WS(Wage setting) - supply
49
What are the axis on a PS diagram?
y axis - real wage W/P x axis - employment N
50
How do you rearrange the PS equation so its suitable to be plotted on a diagram?
P=(1+u)(W/MPL) rearrange to find real wage W/P=MPL/1+u an approximation of this is W/P = (1-u)(MPL) this approximation holds for small values of the mark up
51
What do we assume when modelling WS and PS together?
Non diminishing MPL meaning MPL and PS are horizontal. This means that MPL=APL(Average product of labour)
52
Draw the PS curve
Check Word
53
When WS and PS are modelled together why the equilibrium in the medium run?
Because medium run allows for wages and prices to have time to adjust, but long-run structural changes ( capital accumulation or tech change) haven't occurred yet
54
Draw the WS PS diagram
Check Word
55
How does equilibrium employment define medium run equilibrium output?
because y is a function of N
56
How do we notate MRE ( medium run equilibrium) of output (y) and employment (N)?
equilibrium output = ye Equilibrium employment = Ne e is meant to be small
57
What are short run fluctuations?
They are deviations of output from the MRE level so that y dosnt equal ye
58
How are business cycles generated?
By demand and supply side shocks which push the economy away from MRE
59
What shocks cause WS too shift down?
Changes in zW such as decreases in unemployment benefits or a decline in trade union strength
60
What are positive supple shocks?
Shocks that increase equilibrium level of employment
61
What are some shocks that would shift the PS curve up?
MPL increases from possibly more capital per worker or more skilled workers through investing in labour, increased competition meaning markups (u) decrease
62
What effect would a shift up of the PS curve have?
This is a positive supply shock meaning Employment (N) would rise, a new horizontal PS line also means real wages rises
63
What are nominal rigidities?
Reasons why prices and wages do not adjust immediately to shocks.
64
What is the effect of nominal rigidities on MRE?
They block the path to medium run equilibrium there forth are crucial to explaining business cycles.
65
Give examples of reasons for price stickiness.
Firms are concerned that competitors wont follow suit. Firms wait for sector wide cost increases to justify price increases. Firms expect consumers to recoil at the idea of price rises
66
List some reasons for money wage stickiness.
Money wages are set by HR departments in annual rage reviews. Labour union contracts prevent wages from being cut Lower wages decrease workers effort Lower wages would increase resignations, which would increase the cost of hiring and training new workers.
67
How do we incorporate price stickiness in modelling?
We assume prices don't respond to demand shocks but respond immediately to cost changes
68
How do we incorporate wage stickiness into modelling?
We assume wages adjust annually at the "wage round" we also assume that wage setters have adaptive expectations.
69
List the succession of events for an energy price shock.
Firstly start from MRE which says that prices increase every year from inflation (say 2%). Next the shock happens Prices increase faster than 2% because of higher costs Then at the next wage round wages pick up the higher inflation.
70
List the succession of events following an aggregate demand shock.
Start at MRE Aggregate demand shock happens Wages react first at next wage round above inflation Prices react after picking up the higher cost
71
What is the symbol for notation at any time?
πt
72
What are the differences in the time subscripts of the Solow model and IS-PC-MR model?
IS-PC-MR is a dynamic model(short-run) Solow model is (long-run)100 years after shock
73
What does the Philips Curve compare?
It is a relationship between inflation (πr) and output (yt)
74
How is the Pc curve equation derived?
From the Wage Setting (WS) and Price setting (PS) equations
75
What are the WS and PS equations?
WS: Wt=Pt^E(B(Nt,zw) PS: Pt=(1+u(mew))Wt/MPL
76
How do you view the Wage setting when deriving the PC equation?
As an equation in terms of chages: (changeW/W)t
77
What is the equation for wage setting with expected inflation + MRE output gap?
(changeW/W)t=(changeP^E/P^E)t+𝝰(yt-ye) (changeP^E/P^E)t is expected inflation (πt^E) 𝝰 - is a positive exogenous parameter ye = equilibrium output (MRE) yt-ye - is the output gap
78
What are the rules for output gaps at different time subscripts?
yt-ye=0 when at MRE yt-ye≠ 0 when away from MRE due to shocks
79
What do wage setters expect of prices (equation)?
They expect prices to increase at the same rate as the year before: (changeP^E/P^E)t=(changeP/P)t or πt^E=π(t-1)
80
What is the Wage setting change driven by?
Expected inflation and The output gap
81
What is the equation for Price setting change when deriving the PC equation?
(changeP/P)t=change(1+μ)/(1+μ) +(changeW/W)t-changeλ/λ λ- MPL
82
What do we assume about productivity (λ) and the mark up (μ)?
That they are constant, this means that the change in prices = the change in wages: (changeP/P)t=(changeW/W)t
83
How do combine the WS and PS equations?
Substitute (changeP/P)t from the PS equation in to the WS equation to get: (changeP/P)t=(changeP/P)(t-1)+𝝰(yt-ye)
84
How do we simplify the substituted WS and PS equations?
Replace % change prices (changeP/P) with notation for inflation π to get: πt=π(t-1)+𝝰(yt-ye) where π(t-1) - expected inflation
85
What is the Phillips Curve equation?
πt=π(t-1)+𝝰(yt-ye)
86
Draw the Graph of the Phillips Curve
Check Word
87
How do we get expected output(ye) and inflation πt^E from the PC?
PC crosses the equilibrium output line at the expected level of inflation. Draw a line up at ye (expected output) Label the PC at expected inflation level.
88
What are the two key shifts in the PC?
expected inflation (πt^E) changes ( higher πt^E shifts PC up output (ye) changes (higher ye shifts PC down) These are both in medium run equilibrium
89
What different parts of the IS and PC parts are effected by AD and AS shocks?
AD shocks increase A from the IS equation A=k(c0+a0+G) AS shocks change output (ye) from the PC equation
90
List examples of AD shocks
Consumer confidence change Monetary stimulus (interest rates) Fiscal Policy (gov spending)
91
List examples of AS shocks
Technological Innovation Falling input prices Improved infrastructure
92
What are the effects of supply and demand shocks on inflation?
Positive demand shocks put upwards pressure on inflation Positive supply shocks put downwards pressure on inflation
93
What is the effect of no stabilizing policymakers on inflation?
When there is an upwards pressure on inflation, inflation feeds money wage growth and leads to a wage-price spiral When there is a downwards pressure on inflation, inflation spirals downwards and becomes negative
94
What models are the IS and PC made from?
IS - keynsian cross PC- WS and PS
95
How do developed countries control inflation?
Central banks use interest rates to control inflation and stabilize the economy around the equilibrium level of output
96
What is target inflation for the bank of England?
2%
97
How long is the tenure for the bank of England governor?
8 years
98
How is inflation measured?
with the CPI (consumer price index)

ECO2102 Macroeconomics (6 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions