Macro 3 Flashcards
What curve shifts to give equilibrium when E is flexible?
The IS curve
Which curve shifts to give equilibrium when E is fixed? Why?
The LM curve, because the fixed E fixes then IS curve (unless you change something else).
When is the LM curve not able to bring equilibrium under fixed E?
When the CE does not have enough reserves of foreign currencies or gold.
What is the difference in the effectiveness of fiscal policy under fixed and flexible exchange rates? (IS-LM-FE model)
Under flexible exchange rate fiscal policy is ineffective, as G completely crowds out net exports.
Under fixed exchange rates fiscal policy is super effective, because the central bank is forced to increase money supply in order to avoid an appreciation. Y increases by the full multiplier effect.
What is the difference in the effectiveness of monetary policy under fixed and flexible exchange rates? (IS-LM-FE model)
Under flexible exchange rates monetary policy is effective, as it also leads to an outwards shift of IS due to depreciation.
Monetary policy is not possible with fixed exchange rates.
Why is the DAD curve downward sloping in flexible and fixed exchange rates?
What is the EAD under fixed exchange rates? Under flexible exchange rates?
What is the sacrifice ratio?
What are the conditions for politicians to generate a political business cycle?
Myopic Voters
Politicians must be willing to fool voters to remain in office
What is always optimal fro the government no matter what the tarde unions expect?
Inflate
What is the optimal inflation rate under adaptive expectations? When is this true?
β/λ
This is ALWAYS the case for adaptive expectations.
What is time inconsistency?
When a plan which previously seemed the best option, no longer appears the best at the moment it needs to be executed. (making a promise is easy but actually keeping it is much harder)
What are the ways to escape the time inconsistency trap?
Modifying the constraint (SAS)
Modifying the preferences
Instrument potency
