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1010b - Psets 6-8 - Questions + Key Concepts
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Terms in this set (20)
S6 - What happens to LM when autonomous money demand declines
LM shifts outwards/to the right
PS6 - what kind of shocks are more effective under flexible rates/why
monetary shocks/IS cannot affect Y
PS6 - what kind of shocks are more effective under fixed rates/why
fiscal shocks/e fixed so LM fixed
What could change interest rates: formula, (2) and explain
r = r
+ risk, r
declines if world supply down or investment up, risk up if default risk up
What happens to LM and IS curves if r* up and fixed
IS back, LM back because e fixed
What happens to LM and IS curves if r* up and flexible
IS back, LM forward (r up so LM must shift out)
**What happens to I, C, Y, e if animal spirits up under fixed rates?
IS out and LM out so e flat, Y up, I up, C up because disposable income (Y) up
What happens if no firms have flexible prices (SRAS)
SRAS is horizontal, s = 1, all are sticky
What happens if desired prices do not depend on output
a = 0, no effect of Y vs Ybar, SRAS is horizontal again
What is key criticism of alternative/informational model/what evidence for this?
doesn't explain deviations of y from ybar/firms also can see published info on prices
How would you combine info and sticky price theory
diff to obtain info to set prices, therefore set prices infrequently even if know aggregate info
What happens to Y, UE, inflation if unexpected announcement (draw AS/AD and PC graphs)?
Y up, inflation up, UE down because no adjustment
What happens to Y, UE, inflation if expected announcement (draw AS/AD and PC graphs)?
Y no change, inflation up higher, UE no change
If an increase inAD brings about higher P and πthat is fully anticipated by agents in the economy, then what happens to SRAS and PC?
shift at same time that AD rises, raising price but not UE or output
How do you assess income/sub effects?
use saver/borrower to assess income effect, then sub effect is just whichever increases relatively (ex. r up, pref for period 2 and saving up, if r down, pref for period 1 borrowing up)
If saver and r up, what is income effect?
income up both periods
If borrower and r down, what is income effect?
income up both periods
If saver and r down, what is income effect?
income down both periods
If borrower and r up, what is income effect?
income down both periods
Only what changes in M can affect real GDP/when can Fed change econ/why?
unexpected, when they have more info about econ people don't, because otherwise Pe = P, so Pe - P = 0, no change in Y according to Y = Ybar + a(P - Pe)
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