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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

How does holding cash prevent the RA?

IF you hold cash, you prevent anothers employment
Paradox of thrift