Week 13 Flashcards
(15 cards)
Why are macroeconomic models essential in understanding the economy?
Macroeconomic models help clarify the complex interactions within an economy where everything is interdependent, such as how income affects consumption, and vice versa, leading to general equilibrium solutions(wk13lecture).
What are the core models used in macroeconomics?
Core models include the Keynesian Cross, AD-AS model, Solow-Swan model, and foreign exchange (FOREX) market diagrams, each providing insights into different economic phenomena(wk13lecture).
What is the formula for Planned Aggregate Expenditure (PAE) in a four-sector model?
𝑃𝐴𝐸=𝐶+𝐼𝑝+𝐺+𝑁𝑋=𝐶‾−𝑐𝑇‾+𝑐(1−𝑡)𝑌+𝐼𝑝+𝐺+𝑋−𝑚𝑌
Where 𝐶 = consumption, 𝐼𝑝 = planned investment, 𝐺 = government spending, 𝑋 = exports, 𝑚𝑌 = import function, and 𝑐 = marginal propensity to consume(wk13lecture).
How does an increase in government spending (G) affect the Keynesian Cross?
An increase in 𝐺 shifts the PAE line up, leading to a higher equilibrium income as aggregate demand rises, stimulating output(wk13lecture).
How does an increase in PAE affect the AD-AS model?
An increase in PAE raises aggregate demand (AD), shifting the AD curve rightward, potentially increasing output and inflation if the economy is near or at full capacity(wk13lecture).
How does the AD-AS model handle an inflation shock?
An inflation shock shifts the short-run aggregate supply (SRAS) curve upward, increasing inflation and reducing output until adjustments bring the economy back to equilibrium(wk13lecture).
What is the effect of a permanent reduction in taxes within the AD-AS framework?
A permanent tax reduction shifts the AD curve to the right, increasing output and potentially causing upward pressure on prices (inflation) over time(wk13lecture).
How did policy mistakes contribute to the Great Inflation?
Policy mistakes, such as underestimating inflationary pressures and excessive stimulus measures, led to persistent high inflation in the 1970s, highlighting the importance of cautious monetary policy(wk13lecture).
How does the Solow-Swan model explain long-term economic growth?
The Solow-Swan model attributes long-term growth to capital accumulation, labour force growth, and improvements in total factor productivity (TFP), with technological advancements essential for sustained per capita income growth(wk13lecture).
What is the effect of a technology improvement in the Solow-Swan model?
A technology improvement shifts the production function upward, allowing higher output per worker without needing more capital or labour, boosting economic growth(wk13lecture).
How does the foreign exchange market operate under a flexible exchange rate system?
Under a flexible exchange rate, supply and demand determine the currency’s value. Higher demand for a currency appreciates its value, while an oversupply leads to depreciation(wk13lecture).
What is the role of monetary policy in the FOREX market?
In the FOREX market, expansionary monetary policy (e.g., lower interest rates) can lead to depreciation as investors seek higher returns elsewhere, while contractionary policy can appreciate the currency(wk13lecture).
How does a fixed exchange rate system impact the central bank’s actions?
Under a fixed rate, the central bank must intervene by buying or selling foreign currency reserves to maintain the target rate, limiting its ability to use monetary policy freely(wk13lecture).
What are effective study strategies for mastering macroeconomic models?
Reviewing lecture notes, using the textbook for clarification, revisiting tutorial questions, and discussing concepts with classmates can help solidify understanding(wk13lecture).
Why is it beneficial to understand key economic patterns and crises?
Recognizing economic patterns helps anticipate and respond to potential crises, promoting better policy decisions and economic literacy, which are valuable for both academic and career paths in economics(wk13lecture).
