Intermediate Macroeconomic Test 2
Terms in this set (74)
Physical Objects are rival in the sense that
When they are used in one activity they cannot be used in another
Nonrivalrous character of technological ideas suggests that
ideas can be used over and over again
Knowledge and skills that workers have built up through education and training programs is known as
3 ways government can encourage research and devolpment
direct government spending, tax incentives, and patents
Goal of endogenous growth theory is to explain
the causes of technological advance
Change in which of the following can change the long-run growth rate of the economy in the Romer model?
The fraction of the population engaged in and the productiveness of research and development
If the level of technology rises from 8 to 8.2 in one period, the growth rate of technology is
2.5% You divide the delta by the original percentage so, .2/8 = .025
Romer model suggests that there is a trade-off between
Per capita output in the short-run and long-run
Spending on education is likely to raise output/person
Increasing the productiveness of R&D
In a business cycle a period from a peak to trough may be referred to as
Depression, contraction, and recession
Economic activity that is above potential output
Results from an economic shock to which the economy has yet to adjust fully
A characteristic of stock prices is that
They are a leading indicator, they tend to go down on the downswing of the cycle, they tend to go up on the upswing of they cycle.
believe that monetary policy affect aggregate output and the real interest rate, believe that the classical dichotomy does not hold in the short run, observe that prices are slowly respond to changes in supply and demand.
Under monopolistic competition
It is good or brand differentiation that likely accounts for some price stickiness
Rational inattention refers to
firms making infrequent price decisions because of the time and effort those decision require
Total aggregate demand includes
net exports, planned investment spending, consumption expenditures
If disposable income falls, consumption expenditure falls
by an amount smaller than the decrease in disposable income due to the mpc
An increase in the real interest rate will cause an increase in
An decrease in the real interest rate will cause an increase in
Consumption, net exports, and planned investment
Planned investment spending
Is closely related to the real interest rate, is equal to planned fix investment spending plus the amount of inventory investment planned by firms, is heavily influenced by expectations about the future.
When the U.S. real interest rate increases
Makes U.S. exports more expensive in foreign countries
If aggregate output is above its equilibrium level
There is an excess supply of goods
We may infer from the downward slope of the IS curve that lower interest rates are associated with
Higher investment, Lower saving and/or lower net exports, and higher output.
If the government increases military spending
The unemployment rate could fall
An increase in autonomous consumption
Raises equilibrium output for any level of the interest rate
A central bank can control the real interest rate precisely, so long as what remains constant?
The MP curve indicates that the relationship between what two factors?
The real interest rate and the inflation rate
If the central bank did not follow the Taylor Principle, an increase in inflation would lead to a decrease in
the real interest rate
A shift of the MP curve
Implies a direct policy action of the Federal Reserve
A movement along the MP curve, not a shift, implies
The automatic response of monetary policy to an increase in the inflation rate
The AD curve
is downward sloping, because with higher inflation comes higher interest rates and lower spending, so equilibrium aggregate output declines. Indicates the level of aggregate output corresponding to inflation. Explains how inflation affects output in the short run.
The Federal Reserve
Controls the interest rate in the short run
The factors that shift the AD Curve include
Government spending, taxes, and autonomous investment.
The idea behind the Phillips curve is that
When firms raise wages to attract new workers, prices will also increase. Tight labor markets lead to inflationary pressures. When the unemployment rate is low, wages will increase.
Milton Friedman and Edmund Phelps contributed which insight to the Phillips curve analysis?
Firms and workers care about real wages.
What can be concluded from Milton Friedman and Edmund Phelps expectations-augmented Phillips curve?
That there is a short run trade-off between unemployment and inflation. That there are two types of Phillips curves. There is no long run trade-off between unemployment and inflation.
Which of the following might cause an outward shift in the Phillips curve?
Wage agreements that include compensation for inflation. An increase in oil prices. An increase in the price of imports.
If expectation about inflation are adaptive, they are
Consistent with the notion of sticky prices.
Shows a negative relationship between the output and unemployment gaps.
In the long run
the economy reaches the potential output level consistent with the natural rate of unemployment.
If the unemployment rate is below its natural rate, then
Wages and prices will rise more rapidly and the AS curve will shift ot the left. There is excess tightness in the labor market. Output is above its potential level.
If consumers suddenly became more optimistic
They would spend more at any give inflation rate.
In the short run, as output rises above potential
Inflation will rise from its current level which explains the upward-sloping nature of the aggregate supply curve
A fall in import prices or an increase in productivity
Constitute a positive supply shock
5 ways to promote productivity
Build Infrastructure. Increase human capital (knowledge and skills). Encourage Research and Development (Government spending, tax incentives, patents). Enforce Property Rights. Have a strong legal system.
Endogenous Growth Theory
Explains why advances in technology endogenously fuel sustained economic growth.
Output/person grows at a constant rate which is called a balanced growth rate. Balanced growth rate is 1.43%.
Factors in Romer that can change the economy growth rate.
The fraction of the population that is engaged in R&D. Productiveness of R&D. Total population of the economy.
Short Run Business Cycle
Shocks to aggregate Demand (AD) are the basic sources of of business cycle volatility.
Is not the same as demand in micro. It is the total amount of planned spending/output demanded expressed in current nominal dollars.
A significant change in desired spending by consumers, business firms, the government, or foreigners. Any change to C, I, G, Nx.
Shocks to Aggregate Supply
Significant changes in costs of production for business firms, including wages and the prices of raw materials, like oil.
Goods Market Equilibrium
Total amount of spending the households, firms, and government want to make. Ype = C + I + G + Nx. Ype = planned expenditure.
Goods market in equilibrium when planned = actual.
Consumption depends on interest rates, income, & other factors.
C = Cbar + mpc - cr. Cbar = autonomous consumption. mpc = marginal propensity to consume. r = real interest rates. c = responsiveness to interest rates.
Fixed investment and inventory investment. Depends on animal spirits (sentiment) and real interest rates. I = Ibar - dr. Ibar = autonomous investment. d = responsiveness to interest rates.
Y = (Cbar + Ibar + Gbar + NXbar - mpc
1/(1-mpc) - ((c + d + x)/(1-mpc))*r
They occur in the short run b/c monopoly power on monopolistically competitive market due to brand loyalty. Menu costs/rational inattention. Staggered price setting/interdependency of firms. contracts.
The management of the amount of money in the economy through manipulation of real interest rates & other tools.
Federal Funds Rate
Controlled by varying liquidity available to banks.
Fisher Sticky prices, and the FED
Changes to i will only change r if pi^e stays the same. r = i - pi^e. If prices are sticky, pi^e does not change in the short run.
Expansionary Monetary Policy
Increasing M, increases liquidity for banks and lowers the fed funds rate. Holding pi^e constant, r also decreases in the short run.
Contractionary Monetary Policy
Decreasing M raises i & r in the short run. R is determined by savings & investment in the long run.
Monetary Policy (MP) Curve
Relates inflation and the real interest rates. r = rbar + lambda*pi. real interest rate = autonomous component + plus responsiveness to inflation times inflation.
Shifts to MP Curve
When the FED seeks to lower inflation, pi, at any real interest rate; it wants to shift the MP Curve. This requires autonomous tightening of monetary policy. Curve shifts in.
Aggregate Demand (AD) Curve
Shows the relationship between the expected inflation rate & aggregate demand. Derived from the IS Curve and MP Curve. MP curve tells us as inflation raises r rise. IS curve tells us as r rises, Y decreases.
AD Curve equation
AD curve relates the MP Curve and IS Curve. Y = (Cbar + Ibar + Gbar + NXbar - mpc
1/(1-mpc) - ((c + d + x)/(1-mpc))
(r + lambda
Aggregate Supply (AS)
Shows the supplier relationship between pi & Y. Derived from Phillips Curve.
Relationship between pi and unemployment U. Found correlation between low unemployment and inflation. The implication is that you cannot have low unemployment and low inflation.
Modern Phillips Curve
Original Curve leaves out expectations. New curve measures unemployment gap & inflation expectations. Pi = pi^e - omega*(U-Un). Inflation = expected inflation - sensitivity to inflation times(unemployment minus the natural rate of unemployment).
Long Run Phillips Curve
With flexible prices, inflation = expected inflation & U = Un. Flexible prices exist in the Long Run.
Short Run Phillips Curve
B/C of sticky prices. Includes expectations and price shocks.
Pi(e) = pi^e(t-1) - omega(U-Un) + p.
Relates Y & Pi. Uses Phillips curve and Okun's Law.
Okun's Law U-Un = -.5(Y-Yp). For each % point that output is above potential, the unemployment rate is 1/2 pt below Un.
Pi = Pi^e + .5omega(Y-Yp) + p