Flashcards in Term 2 Deck (100):

1

## What is the labour growth effect?

###
How capital grows due to labour

k*=sy-(d+n)K

n=pop growth rate

d=depreciation

s=savings

2

## What is output and capital per capita in the steady state?

###
k*=(sA/d+n)^1/1-a

y*=A^1/1-a * (s/d+n)^a/1-a

c=(1-s)A(K*)^a

3

## What are the 4 endogenous growth models?

###
Learning by doing

Human Capital Accumulation

Research and Development Model

Government Spending Model

4

## Discuss Learning by doing

###
A=K^B

Put into production function, take Logs of MPK

gMPK=(a+b-1)gk+(1-a)gL

5

## Discuss the possible values of a+b?

###
<1 growth slows to zero

>1 explosive growth

1 constant growth

6

## What is the AK growth model?

### Occurs where a+b=1 therefore constant growth

7

## Discuss Human Capital Accumulation

###
Y=AK^a(uhL)^1-a

U is proportion of hours worked

gMPK=gA+(a-1)gK+(1-a)(gh+gl)

As (a-1)<0 and (1-a)>0 Increasing the growth rate of capital will not improve MPK but it will grow regardless

8

## Discuss R and D model of growth?

###
Y=K^a(ALY)^1-s

Ly is production time

gMPK=(a-1)gk+(1-a)(ga+gl)

As (a-1)<0 and (1-a)>0 Increasing the growth rate of capital will not improve MPK but it will grow

9

## Discuss the Infrastructure and Growth Model

###
Y=Ak^(1-a)G^A

Replace G with budget constraint

Sub in law of motion capital K*=s(1-t)Y

Find optimal level of taxation

Diff and solve for T

10

## Assess the endogenous growth models?

###
Cannot decompose growth in this way

What about growth before industrialisation

Researches has increased over last 50 years with a constant growth rate

Barro Model does not consider congestion effects of public capital

11

## What is solow swan convergence?

### Poor countries will grow faster

12

## How do you calcualte the beta for beta convergence

###
-(d+n)(1-a)

d-depreciation

n-pop growth

a- power of capital

13

## What is a poverty trap?

### If countries have a low savings rate, they lill converge to a lower steady state

14

## What is conditional convergence?

### Countries converge to their own steady state, regardless of growth rates

15

## What does empirical evidence say?

###
We do not see unconditional convergence

Does occur for simlar countries

16

## What is secular Stagnation?

###
Weak recovery of advanced economies after the financial crisis

Due to 0LB

17

## Why is supply side causing secular stagnation?

### Lower Levels of A due to reduced innovation and diminishing returns to ICT

18

## Why is demand side causing secular stagnation

### Investment is low

19

## What is absolute and relative inequality?

###
Absolute is a difference

Relative is a ratio

20

## What is the gini coefficent?

###
The area between the line and lorenz over the rest

1 is perfect inequality

21

## What is the skill preimum paid to skilled labourers dependant on?

###
(As/Au)^p(Ls/Lu)^(-(1-p))

Technology

22

## What is the kuznets curve?

### Inequality will first increase, then decrease

23

## Is growth good or bad for inequality?

###
Good: As MPS is higher for rich individuals, inequality causes growth

Bad: Empirical Evidence

24

## What is pickettys view of inequality and growth?

### IF IR>Growth, inequality will increase forever

25

## What is the lifetime accounts table?

###
When young, C+S=Y

When Old: C=s(1+r)+y

26

## What is the lifetime budget constraint?

### Consumption + discounted consumptio = income + discounted income

27

## How do you determine the euler equation?

###
FOC of lagrangian

And equate

28

## What is an intertemoral consumption graph?

###
Looks like normal utility

Slope of budget constraint: -MRT

Slope of IC: -MRS

29

## Discuss the effects of an increase in R?

###
Sub Effect: A-B

A rise in R causes an increase in the Opp Cost of C1 over C2

Weatlh Effect: B-C

R Rising increases C in both periods

Outcome:

C2 increases, C1 Falls

30

## What is fishers income smoothing?

### People smooth income over life by borrowing and savning

31

## What is Friedman permanent income hypothesis

### Consumption is just a fraction of life time income

32

## What is the life cycle hypothesis

### Agents consume a constant fraction of lifetime wealth

33

## How could we improve Euler?

###
Credit market Frictions

Buffer Stock Savings

Habit Formation

34

## What is Ricardian equivalence

### If G increases, people will save for higher taxes

35

## What is the Governments Lifetime consumption table?

###
When Young: G=T+B

When Old: G+B=T

Out = In

36

## What is an individuals lifetime income with taxation?

### Adding taxation to both periods has no effect on the euler equation and thus income

37

## Why does Ricardian Equivalence not hold?

###
Failings of permanent income hypotthesis

The Government does not have a binding constraint as no final period

Agents do not know if tax cut is temp or perm

38

## What is the effect of a permentant tax decrease?

###
If tax inctrease is permanent, it is same in both periods

Thus does not effect Euler equation, but the budget constraint shifts outwards

39

## What is the effect of a credit market imperfection?

###
rb>rl

Thus savers consumption in later life is higher

40

## What happens if you draw the savers and borrows budget constraint?

###
Point of intersection is the max utility without borrowing

The budget constraint becomes the inner lines

To left of point slope: -(1+r)

To the right: -(1+rb)

41

## What happens if taxes are lowered in period one with market imperfections?

###
Consumers will increase consumption in P1

Thus A moves to right

42

## What is the profit maximising level of investment?

### Kt+1-Kt

43

## What is the effect of a rise in the rental rate of capital r

### Decrease in investment

44

## What is Tobins Q

###
Measures the level of investmetn

Market Value of form / Replacement cost of capital

If positive, firms should increase investment

45

## What are the costs of changing capital?

### Large changes to capital stock cost more than small, thus only make small changes

46

## What are thw two theories on the stock market?

###
Efficent

Keynes Beauty Contest

47

## Using tobins Q and stock market valuation, how is investment determind?

###
I=1/Theta(q-1)

Theta is installation costs

Q is tobins

Investment increases when Q>1

48

## Discuss residential investment?

### Reflects the demand and supply for housing capital

49

## Why do firms hold inventories?

###
Production smoothing

Prevent missed sales

50

## Provide an overview of the overlapping generations model?

###
Individuals live for two period's

P1-Born, consume, work and save, 1 child

P2 - Consume all savings and die

51

## How can you determine the euler equation for the overlapping generations model?

### Obtain FOC and equate

52

## How do you calculate the steady state level of capital per capita?

### k*=( (B(1-a)A) / (1+B)) ^(1/1-a

53

## How does capital evolve over time?

### If it is above k*, depreciation and pop growth will move us to 45 line

54

## Discuss Altrusim in OLG models?

###
We can model transfers within and over generations

By leaving inheritance

55

## What does the new classical business cycle consider?

###
Tech shocks

Microfounded

Rational Expectations

Lucas Critique

Simulation

56

## What is the Lucas Critique?

### If you define a models paramaters using data, the paramaters cannot be used if the data changes

57

## Discuss the representative agent?

###
12 Hours in a day

Y = Consumption + investment

Normal capital depreciation

C=f(B,d,a,Theta)

B is discount,

d is depreciation

a is exponent of capital

58

## What is calibration?

### Making small changes to the paramaters of the model to get it to match the data

59

## What is the Lucas Ripping Model?

###
Compares the production function and demand for labour

If tech increases, shift PF up

This increases labour productivity raising demand

Size of shocks measured by solow residual

60

## What is Solows opinion on the real business cycle?

### It is a waste of time, as the solow residual is a measure of imprecisiness

61

## Why might labour hoarding cause issues with the Solow Residual and Lucas Ripping Model?

### In recession, firms keep on workers to avoid firing, this would be marked as a productivity regression

62

## What are the problems with the Lucas ripping model?

###
Tech shocks do not exist

Labour is not sensitive to real wage

63

## What is tautology, and how does it link to the lucas ripping model?

###
Not explaining only restating

Changes in output are caused by tech shocks which are measured by changes in output

64

## What do the New Keynesians attack about the policy ineffectiveness proposition?

###
Based on 3 assumptions

Rational expectations

Price Flexibility

Wage Flexibility

They attack final 2 arguing price and wage stickiness

65

## Why may firms fail to change prices?

### There is a menu cost, thus they will not change prices if within band of inertia

66

## What effect does the band of inertia have?

### They will overset the price in expectation of future price rises

67

## What is calvo pricing?

### Projects the unwillingness of firms to change prices into the future

68

## What is the formula for the New Keynesian Philips Curve?

###
Pit=Piet+1 + a^2Lamda / 1-a (yt-ye)

69

## How does the NKPC differ from previous models?

### Instead of being dependant on pervious rates, it is dependant on future rates

70

## What is external consistency?

### Model is microfounded with no assuptions

71

## What is the NKPC empirical failure?

###
The expectation of a deflationary announcment causes NKPC to shift downwards before the anouncment

Causing a boom

72

## Why is the NKPC not externally consistent?

### It is based on the adhoc assumption that the probability to change prices is poisson distribution

73

## What is the sticky information philips curve?

### Some firms working with outdated information

74

## What is the dynamic stochastic general equilbirium?

###
Model used by CB

3 Equations

NKPC

Intertemporal IS Curve

Taylor Rule

75

## How do the stochastic general equilbrium equations relate to our 3 equation model?

###
Taylor rule same

IS based on intertemporal consumption

NKPC v IAPC

IAPC creates involuntary unemployment

76

## What are the two reasons DSGE does not work?

###
Complexity Economics

Post Keynesain Economics

77

## What is the basis of complexity economics?

### Instead of rational agent, simulate a economic with multiple differentiated agents

78

## Why does representative agent rational expectations (RARE) fail?

### A representative agent has no reason to trade with one another

79

## How does inductive reasoning and bounded rationality interact

### It allows us to establish how agents interact, solivng the model

80

## What is the Bar problem?

###
A bar is only nice if it has less than 60 people

There is no best stratergy for deciding whether to go

Each agent has multiple different predictors, if they fail they get dropped

81

## Why is the bar problem a complex and adaptive system?

###
Complex - No Repetition

Adaptive - Agents adjust as time progresses

82

## What is Krugmans Coordination question?

###
x axis is % of retialers who stock bluray

y axis is % of households who have bluray

2 s Shaped curves

Two intercepts, one hgh and one low

Will converge to either

83

## What happends if the % of households with bluray increases?

### The S curve wil shift up, creating a boom

84

## How does the Keynesian Cross and planned expenditure S interact?

###
Drawing a 45 degree line

3 Outcomes, 2 parellls are stable

Intersect is not

85

## What is the limiation of the business cycle under this model?

### It is limited to either a high or low equilbrium, too regular

86

## What are the key points of Post Keynesian Economics?

###
Risk

Ergodicity

Liquidity Preference

87

## What is the difference between risk and uncertainty?

### Risk has prob

88

## Define Ergodicity?

### The future should be based on the repeatable past, with risk

89

## How does ergodicity link to RE?

### RE uses past information to predict the future

90

## How does ergodicity explain the economy?

### Subjective belief converges to objective as wrong people fial

91

## What is a cruical decision?

### A decision that is taken without relevance to the past, and makes the past irrelevant

92

## What happens to RE if crucial decisions exist?

### IT fails

93

## How do post kenyesians explain crucial decisions

### Economic decisions are made considering fundamental uncertainity, creating liquidity preference

94

## What is liquidity preference?

### People hold a procautionary stock of cash due to fundamental uncertaintity

95

## What is the problem with batering in the RARE model?

### Both parties must have the others wants

96

## What is the problem with liquid savings?

### They do not create demand for other goods, unlike saving that leads to investment

97

## What do liquid savings create?

### Involuntary unemployment

98

## Why do people hold money?

###
Fundamental Uncertainity

Legal tender

To create certainity

99

## How does money create certainity?

### Can set input contracts to lock price (sticky wages)

100