Econ Test 2

Front 1

In IS-LM model, what is assumed in regards to prices?

Back 1

Sticky prices

Front 2

what is the government purchase multiplies:

Back 2

How much income increases with a change in $1 gov't purchase. so Delta G* (1/1-MPC)

Front 3

What is the tax multiplier?

Back 3

How much income increase with a change in $1 Tax so delta &/Delta T=

-MPC/(1-MPC)

Front 4

what graph consists of the theory of liquidity Preference?

Back 4

LM curve in IS model

Front 5

what is better in the LR? Keynesian or Classical?

Back 5

Classical..output constant. Keynesian is better in the SR when Y can move put prices are cnst

Front 6

In regards to the great depression, what is spending hypothesis

Back 6

Shocks to the IS curve...said GD due to exogenous fall in spending on goods and services.
May be due to
-Stock market crash
-Decrease in consumption
-decrease in housing
-Bank failure

Front 7

In regards to the Great Depression, what is the money hypothesis

Back 7

Main blame for GD is the Fed for not allowing M to drop so much

Front 8

What is problems with the money hypothesis in terms of the great depression?

Back 8

1. real money balance didn’t always fall since M and P dropped together. Can’t explain the initial downturn in 1929-1931
2. Behavior of interest shift…if LM curve shift, we should have seen higher r, but that didn’t happen. Nominal fell continuously.

Front 9

What is the Pigou effect?

Back 9

Said that real money balances are part of household's wealth. As p falls, M/P increase and consumers should feel wealthier, and cause an expansionary shift in the IS curve...idea of the 1930s that is false.

Front 10

In explaining how fall in prices could depress income, what is the debt-deflation theory?

Back 10

: Describes the effects of unexpected falls in price level
-Unanticipated changes in p redistribute wealth from debtor and creditor.
If p fall, then things are actually cheaper, but debtor pays more. Real debt is debt/P. So decrease in p raises the amount of debt. So good for creditors, bad for debtors

-Affects spending on goods and services
-debtor spend less, creditor spend more.
Since debtor, we assume has higher propensities to consume than creditor, there is net reduction in spending, shift in the IS and lower income.

Front 11

How does expected inflation affect income?

Back 11

If expected inflation is negative, that people believe price will fall, then r will be bigger than nominal. this increases decreases PE and IS shift down.

Front 12

When do you use Mundell Fleming Model?

Back 12

like the IS-LM so fixed prices BUT for Open economy..and assumes that economy is open with perfect capital movement

Front 13

Exchange rate vs real exchange rate formula

Back 13

E=eP/P*...but prices are fixed in MF model, so E=e

Front 14

Engodenous vs exogenous variable

Back 14

endogenous: Variable explained by a particular model (X and Y axis)
Exogenous: Variable the model takes as a given. Variable whose value is independent of the model's solution.

Front 15

floating exchange rates:

Back 15

: exchange rate is set by market forces and is allowed to fluctuate in response to changing economic conditions

Front 16

fixed exchange rate

Back 16

Central bank announces the value for the exchange rate and stands ready to buy and sell the domestic currency to keep exchange rate at the announced level.

Front 17

WHen does the nominal exchange rate affect the model?

Back 17

Only in the SR for the prices are fixed.

Front 18

If a country has a gold standard, what does that mean?

Back 18

that exchange rates are fixed.

Front 19

What is devaluation. When would a country do that

Back 19

Reduction of value of currency is devaluation...when in fixed exchange rate, devaluation would lead to an increase in aggregate income

Front 20

What is revaluation by a central bank in terms of exchange rate When would they want to do that

Back 20

increase in fixed exchange rate. decrease Nx and lowers Aggregate income

Front 21

How is Nx, S, and I related?

Back 21

NX=S-I

Front 22

What is Law of one price

Back 22

assumed that interest in small is determined by world interest rate

Front 23

If domestic r is above world, people will invest in domestic, and increase demand of domestic currency, and drive Nx down.
Why this doesn’t always apply

Back 23

1. country risk--> some countries are riskier
2. expected changes in exchange rate

Front 24

when e decreases, what does it show it terms of buying power

Back 24

decreases, so depreciates the currency

Front 25

in r+pheta example, increaase in pheta hypothetically increase r. and increases Y but that does not happen...why?

Back 25

-central bank may not want such a large depreciation of currency so may decrease M.
-depreciated of domestic currency may increase the price of imported goods, causing and increase in price level.
-Though risk premium increase, residents may respond by increasing their demand fr money…

So increase in risk not desirable…and Y would probably decrease as well.

Front 26

Pro of floating exchange rate

Back 26

-allow monetary policy used for other purposes
Fixed: monetary is committed to maintain exchange rate at announced level

Front 27

Pro of fixed exchange rate

Back 27

Say a pro of exchange rate is helps facilitate trade between countries.
Also discipline a nations’s monetary authority and excessive growth in money supply…

Front 28

Speculative attack

Back 28

speculation cause people to go to the bank and sell all their dollars→cause the dollars to dwindle and pesos do indeed lose value

Front 29

To avoid speculative attacks, economists argue that a fixed exchange rate should be supported by a currency board.
Currency board is...

Back 29

arrangemnt by which central bank holds enough foreign currency to back each unit of domestic currency.
→every peso, carry a dollar.

Front 30

Dollarization:

Back 30

Currency board's next natural step abandon own currency and let the country use the US dollar.
-happens often in high inflation econonomies.
If a country really wants tits currency to be fixed oto the dollar, most reliable is to make the currency the dollar.

Front 31

con of dollarization

Back 31

reliable but the seigniorage revenue the government gives up...US govt gets revenue that is generated by growth in money supply.

Front 32

what is the impossible trinity

Back 32

IT is impossible to have free capital flows, a fixed exchange rate, and independent monetary policy

Front 33

So US has FCF and IMP but no FER (exchange rate volatility)
Hong Kong has FCF, FER but no IMP (no monetary policy for stabilization)
China has IMP and FER but no FCF (Restrict citizens from participating in world financial market)

Back 33

So US has FCF and IMP but no FER (exchange rate volatility)
Hong Kong has FCF, FER but no IMP (no monetary policy for stabilization)
China has IMP and FER but no FCF (Restrict citizens from participating in world financial market)

Front 34

IS-LM explains AD in ____ economy
Mundell Flemming explains AD in ____economy.

Back 34

Closed; open

Front 35

what shifts AD?

Back 35

anything that changes Y with exception of P.

Front 36

what is the Phillips Curve

Back 36

the tradeoff between inflation and unemployment.

Front 37

AS market models:

Back 37

1. imperfect info model
2. sticky price model

Front 38

What is AS equation in the SR?

Back 38

Y=Ybar+a(P-EP)
so Y is not Ybar when EP deviates from P.
a in this cause is how much output responds to unexpected changes in price level and 1/a is the slope

Front 39

Sticky price model

Back 39

most widely accepted explanation for upward sloping SR AS curve...emphasizes that firms don't instantly adjust prices they change in response to changes in demand...
-don't want to annoy customers
-have contracts
-may be based to sticky wage

Front 40

A firm's desired price of p is dependent on 2 macroecon variables which are:

Back 40

1. overall prices P: higher price level=firm's costs are higher=charge more for product
2. Level of Aggregate income Y. Higher Y raises demand for the firm's product.

Front 41

What is the equation for the firm's desired price? for flexible AND sticky?

Back 41

desired price p=P+a(Y-Ybar)=for flexible firms...

sticky price firms: p=EP

Front 42

What is sticky price model say AS is associated with?

Back 42

overall price level is dependent on expected price and level of output. Y changes from Y bar when there is a change from EP and P/

Front 43

What is Imperfect info model

Back 43

Prices are free to adjust and balance supply and demand. In this model, SR and LR differ because of temporary misperceptions about prices--> each produce one good and consume many good. can't take all info in. So they confuse change in price with relative price and overall level of price change...-->cause upward slope.

Front 44

what does the imperfect info model tell us with output and price?

Back 44

that change in output occurs when people's expected price are under actual prices, suppliers raise their output.

Front 45

what is adaptive expectations:

Back 45

People form their expectations of inflation based on recently observed inflation

Front 46

what is cyclical unemployment

Back 46

u-un ( for the Phillips Curve)

Front 47

in terms of the Phillips curve, what is demand-pull inflation?

Back 47

low unemployment pulls the inflation rate up.

Front 48

In terms of the phillips curve, what is cost-push inflation?

Back 48

adverse suply shocks are typically events that push up the costs of production. If costs of production go up, there will be more inflation

Front 49

In terms of the phillips curve, policy makers can change what to change the inflation rate?

Back 49

they can change aggregate demand,and supply shocks are out of their control

Front 50

what is NAIRU

Back 50

natrual acceleration inflation rate of unemployment--> natural rate of unemployemnt when expected inflation equals previous year's inflation, so there will be a constant rise in price level due to past inflation influences expetations of future.

Front 51

What is the sacrrifice ratio?

Back 51

percentage of year's real GDP that must be forgone to reduce inflation by 1 percentage point

Front 52

What is Okun's law?

Back 52

That change in 1 percent unemployment is change in 2 percentage of GDP

Front 53

how do people think about inflation?

Back 53

Rational expectation vs. Adaptive expectation

Front 54

What is rational expectation:

Back 54

people optimally use all the available info including current government policies to forecast the future. so a change in monetary or fiscal policy will change expectations..so there is no momentum..so sacrifice ratio is not uselful...

Front 55

what does a painless disinflation, under rational expectation require?

Back 55

1. plan must be announced before the owrkers and firms that set wages and prices have formeed their expectations.
2. workers and firms must believe the announcement

Front 56

what is the natural rate hypothesis?

Back 56

change in the AD affect u and Y only in the short run. LR...econonomy returns to natural levels of Y and u

Front 57

Hysteresis:

Back 57

Long lasting effects of history on the natural rate and goes against natural rate hypothesis
ex: people lose job, and lose skills.-->so increases the cost of recessions and may increase sacrifice ratios

Front 58

inside lag:

Back 58

time between shock to the economy and policy action in respond to that shock...sometimes due to policy makers unaware of shock. short inside lag is monetary

Front 59

Outside lag:

Back 59

time between a policy action and influence on economy-->do not immediately influence spending, income and employment. fiscal policies have a short outside lag.

Front 60

What is automatic stabilizers

Back 60

not active or passive, but designed to reduce lags associaated with stabilization policy. example: income taxes

Front 61

leading indicator in terms of economic forecasting:

Back 61

data series that fluctuates in advance of the economy...so keys to show if a recession will happen etc.

Front 62

Lucas critique:

Back 62

Critique on traditional policy evaluation, that they do not adequately take into account the impact of policy on expectations.

Front 63

what is policy by rule?

Back 63

if policy makers announce in advance how policy will respond to various situations and commit themselves to following through on the announcement

Front 64

what is policy by discretion

Back 64

policy makers are free to size up events as they occur and choose whatever they think is approproate at the time.

Front 65

What is political business cycle

Back 65

manipulation of the economy for electoral gain.

Front 66

Time inconsistency of policy ad rule by discretion

Back 66

Policy makers may want to announce in advance a policy to influence expectations of private decision makers. may be tempeted to change their policy which lead to distrust.

Front 67

what are rules of policy for monetary?

Back 67

1. monetarists policy
2. nominal GDP targeting
3. inflation targeting

Front 68

What is monetarist policy ?

Back 68

Fed keep the money supply growing at a steady rate.

Front 69

What is nomminal GDP targetting

Back 69

Fed announces a planed path for nominal GDP and controls money growth for that GDP.

Front 70

What is inflation targeting

Back 70

Fed announce target inflation rate and adjust money supply. both nominal GDP targeting and inflation targeting is more stability that monetarist policy for it insulates economy from changes in velocity

Front 71

what are ways that economists try to forecast?

Back 71

macro models and leading indicators

Front 72

what is the equation of unemployment with natural unemployment

Back 72

u=un-a(Inflation-Expected inflation)

Front 73

theory of liquidity preference

Back 73

theory of interest rate and so the relationshp between intereest rate and income