Eco202 Test 2
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Created by:
silvershoes Plus on July 12, 2011
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47 terms
Terms | Definitions |
|---|---|
 In a flexible exchange regime what determines the exchange rate, E, and what determines the money supply? | In a flexible regime, MARKET deterimines exchange rate, and CENTRAL BANK sets money supply |
| What is the nominal exchange rate, E? | E is the price of foreign currency in terms of domestic currency |
| When foreign currency becomes stronger, or domestic currency becomes weaker, it is called ________ | Nominal Depreciation |
| What is the UIP condition and what do they each term stand for? | Domestic interest rate= foreign interest rate + (expected exchange rate - nominal exchange rate)/ nominal exchante rate |
| What is the Marshall and Lerner condition? | ML states if export and import are elastic enough, then a real deprectiation improves the trade balance. (So... a positive relationship between e and NX) |
| What is the wage-setting relation? | W= F(u, z) OR W= F (1- Y/L, z) P (− ,+ ) (-. +) |
| What is natural rate of unemployment? | natural rate of unemployment is the unemployment rate such that the real wage chosen in wage setting is equal to the real wage implied by price setting. |
| What are 2 major reasons why there's always unemployment? | Frictional Unemployment: - Problems in the matching process, time/resource consuming: imperfect information, different qualifications needed, worker's preference Structural Unemployment: - (Due to "real wage rigidities"= which is anything that dnt allow labor market to adjust freely, ex minimum wage required by law) |
| What are the 3 basic assumptions of medium run and how are they different from short run? | 1. Price is endogenous, meaning it can change 2. Capital, K, is fixed 3. Labor, L, is fixed |
| What are the 3 types of structural unemployment? (HINT: real wage rigidities which dnt allow labor market to adjust freely) | 1. Minimum Wage Laws 2. Labor Union & Collective Bargaining 3. Efficiency wages |
| What is the Efficiency Wage Theory? | The productivity of labor is increasing on the wage rate. Employers pay above market wages for higher productivity. |
| What are 4 examples of Efficiency Wages? | 1. (For poor) "Health Issues"-> employer pay higher wage to improve quality of life 2. (For rich) "Reducing labor turnover rate"-> ex) when when Ford doubled workers income, turnover rate dropped 3. (Hidden Info), "Adverse Selection"= there's asymmetric info (1 side knows more), higher wages will increase mean quality of workers in the application pool 4. (Hidden Action), "Moral Hazard"= imperfect monitoring, employers can't monitor workers all the time, so employers pay higher wage to reduce slacking and fire those who do |
| What is turnover rate? | (number pf separations/ number of workers) |
| Whats the difference between u and μ? | u= unemployment rate, negative relation to real wage, in wage setting relation μ= markup, shows how competitive the market is, in price setting relation |
| What does z represent? | - z represents all factors that affect structure of labor market and unemployment - ex) stronger labor union, minimum wage, generous EI |
| Why is the price setting curve a horizontal line? http://i.quizlet.net/i/wN-UxfHVEhDm3_9x0-UZyQ_m.jpg |  Because the price setting equation is independent of unemployment rate, (it's only affected by the markup rate, μ) |
| Why is wage setting curve negatively sloped? | Because as unemployment increases, workers have less bargaining power, so workers ok with lower wages |
| What does the aggregate supply curve represent? | AS represents the equilibrium in labor market. |
| What does the aggregate demand curve represent? | AD represents all equilibrium points in goods and financial market, since AD is derived from the IS/LM curves. |
| Why is UIP curve downward sloping? |  Intuitively, as i increase, it makes domestic bonds more attractive, capital inflow, increase demand for domestic currency, which cause nominal app'n (E drop). Hence, as i increase, E drops. Mathematically, E= fixed expected E/ (1+i +i*) , if i increase, E drops |
| T/F At full employment, unemployment is zero. | F. - When economy at full employment, y= y-bar, which means, u=natural rate of unemployment - unemployment is never zero |
| Starting at labor market equilibrium, what happens to W/P and u when EI increases? Provide intuition. | When EI increases - job finding rate falls job separation increases - natural rate of unemployment increases - output capacity falls, y-bar falls |
| Starting at labor market equilibrium, , if market becomes more competitive, what happens to W/P and u, intuitively and graphically please. | - μ drops - firms set lower price (bc markup is now lower) - real wage, W/P increases - job separation drops - natural rate of u falls - output capacity increases (PS curves shifts upwards) |
| Why is AS downward sloping? HINT: start at P=Pe, play with Y, what does change in y always implicate - think what market does AS represent? | Start with P=Pe, if Y<Y-bar, then... - u > natural u - nominal wage (w) drops - production cost (w) drops - price drops - P> Pe |
| Why is AD upward sloping? HINT: play with increase or decrease of price - think what market/(s) does AD represent? | If price, P increases, (given fixed money supply) - MS falls - purchase power of money falls - real MS shrinks(afford to buy less), people sell bonds - Price of bonds fall - i increase -I, ZZ, Y will fall |
| What's a devaluation policy? | When CB increases (fixed exchange rate)E-bar, thus depreciating value of domestic currency |
| What's an revaluation policy? | When CB decreases (fixed exchange rate)E-bar, thus appreciating domestic currency |
| In a flexible exchange regime, who determines the exchange rate and who sets the money supply? HINT: the answer is in the name | - market determines exchange rate - CB determines money supply |
| In a FIXED exchange regime, who determines the exchange rate and who sets the money supply? HINT: the answer is in the name | - market determines money supply - CB determines exchange rate |
| How does a fixed regime make the exchange rate credible? E= E-bar | By buying or selling foreign exchange or bonds |
| When there is app'n pressure in a fixed exchange regime, should CB buy or sell foreign assets? Why? | CB should buy foreign asset. - the reason there is app'n pressure is bc demand for domestic currency is higher - so, the ppl want to sell foreign assets for domestic currency - CB complies by buying up the ppl's foreign asset, since the ppl now have more domestic currency, money supply increases |
| Why is demand-side policies considered voodoo economics? What are the final result? | ... |
| What's the Balance of Payments Accounts? | parts of Systems of National Accounts, which records a country's int'l transactions |
| What's a current account (CA)? | Keeps track of flow of goods, services, transfers, and factor payments |
| What's a Capital and Financial Account (KA)? | Keeps track of flow and assets |
| What is considered a credit item? | Any transaction that involves a FLOW of funds INTO the country |
| What is considered a debit item? | Any transaction that involves a FLOW of funds OUT of the country |
| What is the aggregate demand curve in rates? | gyt= gmt - πt Growth rate of output= growth rate of money supply - inflation rate |
| What is Okun's Law? | It's the negative relationship between growth rate of real output and change in unemployment rate. |
| What is the normal growth rate? What is it's significance? | -part of okun's law - it's the output growth rate needed to keep unemployment fixed |
| What is the Sacrifice Ratio? | (Total lost employment)/(Total reduction in inflation) |
| In what 3 ways can credibility reduce the cost of disinflation? | 1. lower impact on unemployment 2. lower impact on output 3. faster reduction in inflation (shorter time) |
| Even if disinflationary policies are fully credible and politicians are honest, why are there still costs? | 1. "Nominal Rigidities" - many wages and prices are fixed in nominal terms and cannot be readjusted over time, so inflation is already built into the contract 2. "Staggering Wage Theory" (Contracts) |
| How does "Staggering Wage Theory" adds to the disinflationary cost? | - wage contracts are not signed at the same time, but staggered over time - problem: too fast decrease in money supply doesn't lead to fast decrease in inflation, but to decrease of real money, u, and recession |
| Why is short run Philip's curve downward sloping while Medium run Philip's curve is a vertical line? | ... |
| Context: Open economy, medium run (flexible vs. fixed) Given expansionary fiscal policy, how does changes in price and exchange rate vary between flexible vs. fixed exchanged rate. Explain. | In flexible regime, 1. Price is fixed 2. Exchange rate goes down (appreciates) In fixed regime, 1. Price goes down 2. Exchange rate is fixed |
| Why do we say IS shift LEFT and not UP? | ... |
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