Lectures 6-9

Question 1

Consumption Function

Answer 1

C=a+bY

Question 2

Basic Multiplier

Answer 2

k=1/(1-b)

Question 3

Tax Function

Answer 3

T=t0+tY, t being mpt, t=Change in T/Change in Y

Question 4

Points Right/Left of G=T

Answer 4

Right - Budget Surplus
Left - Budget Deficit

Question 5

Consumption Function with Government Sector

Answer 5

C=a+b(Y-T), C=(a-bt0)+b(1-t)Y

Question 6

Equilibrium Income with Government Sector

Answer 6

Y=(a+bt0+I+G)/(1-(1-t))

Question 7

Government Sector Multiplier

Answer 7

kG=1/1-b(1-t)

Question 8

Limitations of Fiscal Policy

Answer 8

• Time Lags
• Imperfect forecasting accuracy
• Public Investment irreversible
• Financing Issues

Question 9

Exogenous

Answer 9

Determined outside the model, such as Government policy or technological advancement

Question 10

Endogenous

Answer 10

Determined by interactions inside the model, such as prices or quantity demanded

Question 11

Exports

Answer 11

Goods and Services made domestically, then sold abroad

Question 12

Imports

Answer 12

Goods and Services made abroad, bought in the UK

Question 13

Import Function

Answer 13

IM=m0+mY, where m=mpm

Question 14

Net Exports Function

Answer 14

NX=X-m0-mY=x0-mY

Question 15

Shifts in NX function

Answer 15

• Foreign GDP
• Relative International Prices
• Change in relative prices of domestic vs foreign

Question 16

Open Economy Multiplier

Answer 16

k0=1/[1-b(1-t)+m]

Question 17

Open Economy Function, Y=

Answer 17

Y=(a-bt0+x0+I+G)/[1-b(1-t)+m]

Question 18

National Income Equilibrium can also be written as S+(T-G)=I+(X-M). What does each section stand for?

Answer 18

S+(T-G)=domestic savings
I+(X-M)=domestic asset formation

Question 19

What may a country have to do after borrowing to finance budget deficit?

Answer 19

Devalue currency or reverse fiscal expansion

Question 20

Tinbergen Principle

Answer 20

To simultaneously obtain 2 objectives, authorities need 2 independent instruments

Question 21

NBPS wealth (A) consists of

Answer 21

Non-Bank Private Sector wealth, consisting of Cash, bank deposits and bonds

Question 22

Inside Wealth

Answer 22

Asset issued by agent in private sector and held by another agent in same sector

Question 23

Outside Assets

Answer 23

Held by agents in Private sector of domestic economy, issued by agent in another sector

Question 24

As P falls for given A,

Answer 24

A/P will rise –> C will rise –> AE line shifts upwards

Question 25

Relation to NX, when P falls

Answer 25

Domestic good are cheaper than foreign. Leads to NX and AE line to shift upwards

Question 26

Points where AE>Y

Answer 26

Pressure on Y to rise as firms can sell more than current output

Question 27

Points where AE

Answer 27

Pressure for Y to fall as firms cannot sell existing output

Question 28

Shifts in AD curve are caused by changes in any variables other than P that shift AE line:

Answer 28

- Autonomous consumption (a) - Taxation (t0) - Net Exports (x0) - Investment (I) - Government Spending (G) - Interest rate (r) - Exchange rate or foreign price level (P*E)

Question 29

Despite labour markets not being competitive in aggregate, 2 factors that can influence money wage rates

Answer 29

Level of Employment (N) - higher employment, higher demand for labour, wages increase Price Level (P) - workers attempt to maintain purchasing power of real wage rate

Question 30

W/Pe=

Answer 30

f(N,z)

Question 31

w=W/P=

Answer 31

(Pe/P)f(N,z)

Question 32

Price Setting Equation

Answer 32

P=(1+μ)W, where μ=markup

Question 33

Why does a rise in μ reduce real wage rate

Answer 33

Higher markups cause higher prices. decreasing real wage

Question 34

Classical production links level of output to levels on input of

Answer 34

Capital (K) and Labour (N)

Question 35

Production Function

Answer 35

Y=φN, φ is constant MPL, aka productivity

Question 36

Using the price setting relation gives:

Answer 36

P=Pe(1+μ)f(Y/φ,z)