SECTION 1 Flashcards
(43 cards)
why do economists care about inflation ?
- income distribution
- leads to other distortions
why do economists care about unemployment ?
because, as shown by the german socio-economic panel. being unemployed can permanently dampen your life satisfaction levels
describe the standard methodology employed by national statistics agencies for calculating real GDP growth
- prices of different goods and services are fixed in a chosen base period
- volumes of individual G&S produced each year or quarter and then weighted according to these base year prices
- once the individual quantities have been weighted in this way, they are added up to form a real gdp series
- real gap growth is then calculated as percentage change in this series from year to year or 1/4 to 1/4
what are some problems with this standard methodology employed by national statistics agencies for calculating real GDP growth ?
- as tastes evolve, the appropriate weights that tell us how relatively valuable different goods or services are should also change
- the quality of goods can improve over time so even if their normal price doesn’t fall their real price does
- changes in technology lead to the production got entirely new goods and services over time
what is the consumption multiplier ?
1 / 1-C1
what are the functions of money ?
- medium of exchange
- store of value
- a unit of account
what policy are these gov actions ?
a. buying bonds
b. selling bonds
a. monetary expansion
b. monetary contraction
what is the Lagrangian
a method of solving a max or min or optimum problem
L = U + lagrangian(P1X1 + P2X2 - B)
how does money creation work ?
loans create money into the economy and the money is spent, eventually ending up as a new deposit in the banks again
what is the equation for money demand ?
Md = $Y . L(i)
what is the money market equilibrium ?
Md = Ms
- for a given level of income , an increase in the interest rate leads to a contraction in money demand
- for a given interest rate, an increase in nominal income will shift the Md curve right .
what are the equations for
a. high powered money
b. reserve demand
a. Hs = ( C + (1-C)theta )
b. Rd = H - CUd
what is the LM relation ?
the money market is in equilibrium
MD = MS
M = $Y . L(i)
real : M/P = Y . L(i)
what dose the money market graph look like ?
supply is a straight vertical line and demand is a convex negative slope
what is the money multiplier ?
1 / ( c + theta(1-c)
what does the IS curve look like ?
negative convex slope , y axis IR and x axis Y
what 2 behavioural assumptions help us understand the IS curve ? and what equations are they
- when income rises, people spend more
- when IR falls , people spend more
- Y* = (1/1-C1)(C0+B0) - (B2/1-C1)i
- i = (C0+B0/B2) - (1-C1/B2)Y*
when IR rise how does this effect speculative money demand ?
when IR rises, households want to hold more money ( as bonds not cash ) . therefore speculative money demand falls
when nominal, natural spending rises what happens to Md ?
households hold a larger stock of transitionary needs, MD shifts right and Py rises
describe micro foundations ?
when choosing what to hold in bonds and how often to convert your bonds to cash, so as to max interest - we must calculate the cost of calling broker and lost earnings
the derivation of this is in your folder but what is the new micro founded LM relation ?
Md*/P = sqreroot(y.b/2i)
p = price level i = real interest rate b = brokers fixed fee for each call y = aggregate real spending throughout the year
list some advantages and disadvantages for micro founding macro econ ?
advantages
- internal consistency
- avoid lucas critique
- can test micro assumptions with micro econometrics
disadvantages
- potential external inconsistency
- vulnerable to fallacy of composition
- people may not be rational
- takes time and effort
what are the costs of unemployment for individuals ?
- loss of earnings
- stress
- self esteem problems
- de skilling
- drug abuse
- alcohol abuse
- crime
- family breakdown
what is the claimant count measure ?
number of people claiming unemployment benefits and the unemployment statistic
