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Flashcards in Macro Deck (61):

What is a parameter?

an input that is fixed over time


What is an exogenous variable?

an input that can change over time, but is determined ahead of time by the model builder (exogenous = outside model)


What is an endogenous variable?

an outcome of the model, something explained by the model


3 main explanations for cross-country differences in total factor productivity?

-human capital


Causes of real wage rigidity?

-high minimum wage laws
-efficiency wage theories
-collective bargaining/trade unions


Quantity theory of money equation

M*V = P*Y


What is seigniorage?

The revenue raised by the printing of money


Fisher equation

i = r + pi


Cost of anticipated inflation

-shoe leather costs
-menu costs
-tax distortions


Costs of unanticipated inflation?

-redistribution of wealth
-erosion of fixed incomes


Benefits of inflation

-downward nominal wage rigidity
-monetary policy and the ZLB


Which variables does the MP curve relate?

nominal interest rate and real interest rate


Which variables does the IS curve relate?

real interest rate and short-run output


Which variables does the MP curve relate?

Short-run output and inflation


In the production approach, what is GDP?

The sum of value added at each stage of production


What argument justifies constant returns to scale in the production function?

Standard replication argument


What is the standard replication argument and what does it show?

-justifies constant returns to scale in production function
-does this by arguing that 1 way to double production would be to double your current setup


What 2 things does output per person (GDP per capita) depend on?

-productivity parameter
-capital per person


What does A bar represent?

represents total factor productivity


what does total factor productivity measure?

how productive a country is at using its inputs (capital and labour) to produce output


What is the reason that an economy reaches a steady-state equilibrium in the Solow growth model?

diminishing returns


Why does diminishing returns lead an economy to reach a steady-state equilibrium in the slow growth model?

-Due to diminishing returns, as capital increases, the amount by which production and investment increases falls
-But depreciation is a constant fraction of the capital stock
-eventually, new investment equals depreciation and net investment equals zero
-the economy stabilises here at a steady-state


What level of growth is there in steady-state in the Slow model?

zero growth in the long-run


Why can't the Solow model be the answer to what causes long-term economy growth?

there is zero growth in the long-run in the steady state of the Solow model


What principle/feature of the Solow model helps us to understand differences in growth rates between countries?

Transition dynamics


What 2 key things does the Solow model help us to explain?

-the long-run level of GDP per capita
-the differences in growth rates between countries


Main shortcoming of Solow model?

does not provide a theory of long-run growth


What does it mean if something is non-rivalrous?

Its use by 1 person doesn't reduce the amount available for use by other people


Does the Romer model exhibit transition dynamics?



In the Romer model, the growth rate is ........



What is the equivalent of the steady state in the Romer model?

balanced growth path


How is the balanced growth path defined?

all endogenous variables are constant


What is the key to sustained growth in GDP per capita in the Romer model?

the total stock of knowledge in the economy


What does the non-rivalry of ideas imply for the economy for the returns to ideas and objects together?

-Increasing returns to ideas and objects together
-i.e doubling of capital, labour, and knowledge leads to more than doubling of output


Why do ideas and objects together exhibit increasing returns?

-constant returns to objects according to the standard replication argument
-so, to double production of a good, replicate current production and draw on same stock of ideas (because non-rivalrous)
-implies there're increasing returns to both ideas and objects because if doubling objects enough to double production, doubling objects and knowledge stock will more than double production


Why does the Romer model but not the Solow model provide a theory of long-run growth?

-Capital runs into diminishing returns in Solow
-ideas (due to non-rivalry)do not run into diminishing returns in Romer


What is the natural rate of unemployment?

the rate that would prevail if the economy was neither in boom nor recession


What is cyclical unemployment?

Difference between the actual and natural rate, and associated with short-term economic fluctuations


What is frictional unemployment?

The inevitable unemployment that results from workers changing jobs in a dynamic economy and normal labour market churn


What is structural unemployment?

The unemployment that results from labour market institutions (e.g. firing/hiring costs and laws, level of unemployment benefits, minimum wage level)


What is the emerging academic consensus on the reasons for high average unemployment in Europe?

-adverse shocks (oil price shock and productivity slowdown) in 1970s caused unemployment to rise
-inefficient labour market institutions (e.g. generous unemployment benefits) caused unemployment to remain high


Why does the quantity theory of money show that a key determinant of the price level in the long-run is the money supply?

-velocity of money and level of real GDP exogenously given
-So if central bank increases money supply, only way the equation holds is if the price level rises too


What dos the quantity theory of money imply in the long-run about the impact of changes in the growth rate of money on the inflation rate?

Changes in growth rate of money lead to 1-for-1 changes in the inflation rate


What are 'shoe-leather costs' of inflation?

-people want to hold less money when inflation is high
-so go to the bank more often....


How, in effect, is seignorage (GVT revenue from money printing) a tax?

-increase in money supply increases the price level
-so reduces real purchasing power of rest of the economy
-acts as an inflation tax


What 3 premisses is the short-run model based on?

-economy constantly being hit by shocks
-monetary and fiscal policy affect output
-dynamic trade-off between output and inflation


The short-run model says that a booming economy leads the inflation rate to ......



What does Okun's law say?

For each 1% that output is below potential, the unemployment exceeds its natural rate by 0.5%


Why is the level of potential output exogenous to the short-run model?

determined already by the long-run model


Is an increase in the real interest rate a shift of or a move along the IS curve?

move along


Is an AD shock a shift of or a move along the IS curve?

shift of


What does the permanent income hypothesis say?

People will base their consumption On an average of their income over time rather than on current income


What does the life-cycle model of consumption say?

-Consumption is based on an average lifetime income
-so young people typically have consumption higher than income, with middle-aged people saving instead


What justifies in the IS curve the constant fraction of potential output for consumption? Why?

Permanent-income/life-cycle consumption model, which show that people will smooth their consumption over time


Want did Hsieh (2003) conclude about the evidence supporting the life-cycle/permanent income hypothesis?

-works well for large and easy to predict changes in income
-works less well for small and harder to predict shocks


Would a change in the timing of GVT spending (e.g. future spending brought forward) change current consumption?

No, because permanent income would not change and neither would consumption, therefore


Would a GVT spending increase today (new, not brought forward, spending) change current consumption?

yes, decrease because current spending must be paid for by future taxation, so permanent income decreases, and consumption decreases


What is the assumption of the short-run model that means that changes in the nominal interest rate set by the CB will lead to changes in the real interest rate?

sticky inflation


What does the sticky inflation assumption in the short-run model say?

-the rate of inflation displays inertia and so adjusts slowly over time
-inflation rate doesn't respond directly to monetary policy changes in the very short run


What is the key assumption of the MP curve?

sticky inflation assumption, so CB can effectively set the real interest rate


Why does the sticky inflation assumption hold in the short-run?

-setting/changing prices costly due to imperfect information and costly computation
-many contracts set in nominal terms
-bargaining costs
-money illusion
-social norms about fairness