Macro Final

The great moderation

a period from 1982 until 2007 that was a time where GDP growth was moderate was positie and inflation moderated to 1-2% per year

Included in GDP

CIGNX (investment includes like a consumption of service or fixed business capital) rnet included under consumption of housing

Why does the government bother to report PPI and CPI monthly

Info in PPI helps forecast future CPI readings. Producers pass along portion of increased input costs to consumers.

Biased CPI readings

Does not count for subsitition in these stuff as well as shiftsin basket.

Household and teh Establishment sSurvey

The establishment survey asks businesses about payrolls hours and wages and household surve counts people (once even with multiple jobs).

The labor force participation rate

unemployed+employed/population IN unemployed its people actively lookng fpr jobs employed people have jobs pop includes this plus people not in labor force such as teachers over 16 not insitutitonalized. It increased because women enterd labor force and gone down with baby boom retirement.

Explain how classical model related to says law and how cobb douglass production function combined with income and spending y=c+i+g provide mathematical framework for says law

Supply creates its own demand, classical model driven by produciton and supply which provides purchasing power. The cobb douglas production function provides equation for produciton to show who gets the income understanding production comes from technology capital and labor. the income y is spent on consumption investment and gov purchases.

APL and MPL

APL divide by L and MPL take derivative for L

When looking for percent change in output with labor capital increases

1. Understand MPL=dy/dl

2. rewrite as dy/dy=(whatever the exponent of labor is) times y/l)

3. rearrrange and its dy/y=(exponent of l)(dl/l)

4. insert the 20% or whatever percent for the CHANGE IN LABOR OR CAPITAL. find dy/y that gives u cahnge in output

If we had an increase in quantity of labor bu tno change in capital what happens to MPl and MPk

More workers but same amount of capital so each worker becomes less productive meaning MPl goes down and wages will fall, the same amount of capital has more workers, becoecomes more productive and MPk rises and rent increase.

National savings

National savings=investment, public savings=t-g; private savings=y-c-t

Describe savings and investment graph

Savings verticle line, investment down wards sloping, y axis is r x axis is s,i

Describe 3 funcitons of money and desirable traints

1. medium of exchange, store of value, unit of accuont

2. acceptable, fixable, durable, portable, divisible, uniform

What is the difference between monetary mase, m1m and m2

MB is phyiscal money and banks reserves so raw money supply, m1 is money used to immediately pay so cash cehcking and deposits, m2 is m1 plus everuthign esle so everything in m1 plus savings, cds, and mm accounts

Quantity theory of Money

The quantity theory of money is that MV=PY, beleived that V and Y are tied to each other and go up and down by the same amount. if this is true M and P must be tied to each other as well.

The fisher equation

says that nominal interest rates equal expected inflation plus real interest rate NER=ei+RER

The fisher effect

says that changes in the MS cause change in inflationary expectations causing changes to NER So NER and expected inflation move in tangin

IN what ways is the FEd the “Bank of Banks”

Member banks deposit cash reserves and where they get to get laons as lenders of last resort

Using the actual mm show how a crises in financial system lead to fal in MS

Actual mm= 1+c/d divided by c/d+r/d…banks will increase reserves when bank fialures, this causes denominator to grow and multiplier to shrink. the fed can offset this by increasing monetary base through OMO, discount loans, or QE where bank creates new money to buy assets and lower r

Contractionary Money Policy Graphs

Bonds: Graph showing p on y axis and q on x axis. You have verticle supply and downwards demand of bonds —- paired with the money market showing r on y axis and q of money on x axis. upwards ms and downwards md.

Trade balances graphs

Rworld on y axis and s, i on x axis know that s-i=- if no balance. if surplus s greater than i if shortage s less than i. anyways. S is verticle. investment demand abroad increases move up along investment curve.

RER graph

ER on y axis with NX on x. Verticle s-i and downwards nx

RER equation

RER=NER(Pus/Peu)

How to solve for the nER

1. RER=NER(pus/peu)

2. Plug in

3. solve for the 1S thing.

What will happen to value of the dollar in short run if interest rates in UK fall relative to US

If inteerst rates fall in UK, the dollar will appreciate because hot money chases the higher interest rate, demand for dollar grows.

Fixed exchange rate graph

Y axis is dollar and yuan, x axis is yan. Demand and supply reach equilibrium. china sets theirs below to devalue their currency and make exports more attractive to grow job market the downside is inflation and reduced purchasing power.

In classical model, competitive firm rents capital iuntil MPK equals

rental price of capital

What happens when actual inflation rate is less than expected inflation rate?

Leaders gain because ex post real interest rate is greater than ex ante real interest rate. meaning lenders expected a higher interest rate so they set it higher ner but inflation was less so they recieved higher payments. Conversely if ex ante was greater than ex post lenders set a lower amount then actual inflation and tehy loose.

Hyperinflation is defined as

an inflation rate of 50% per month.

How to find the percentage of employed people losing jobs

Separation rate: % of ppl losing jobs, U is unemplyment, f is job finding rate. Steady state condition: s(1-u)=fu. So to plug in we have s(1-0.04)=.24(0.04)

Solow model graph

y on y axis and k on x axis. you have big y curve, beline that equals i=dk. you have investment as well look where be=i.

Steady state solow

i=dk or sy=dk. You can find the values here by plugging in.

When accounting for EL

Add n and g to depreciation (sy=d+n+g times k); the growth rate for EL when its marginal is by g when not its by g and n for total.

consumption i and savings

c=y-i; i=sy;

Finding payments of capital to owners

1. MPK times K equals alpha times y-

2. mpk equals alpha(y/k)

3. solve!

4. same with labor but its y/l and then 1-alpha.

AD AS graph

y axis is p x is y and you have verticle LRAS, horizantal SRAS and AD going downwards sloping

simple mm for taxes and not

simple mm is 1/1-mpc for tax and transfer its mpc/1-mpc

Full mm

1-c/d divided by c/d-r/d

To find how much something needs to change to get change in y; and do it when needs to be same amount

Change in y equals change in g times the mm and solve for change in y

2. For same amount: change in y equals x mm of one thing plus x mm of another.

who controls MS

fed via omo, banks thorugh mm, people through mm as well.

bank profits

assets and liabilities, assets bereak into loans and general reserve while liabilities are cash

find profit by caclulatig loan earnings, interest on liabilities, adn operations.

exchange and savings equation

s-i=x-m

keynesian cross graph

y axis ae x axis y you have y=ae and then ae=c+i+g. move along AD when p changes, move along AS when p changes,

ISLM graph

R on y axis y on x axis. LM upwards (m,/p) IS downwards

Tigth fiscal easy money loose fiscal tight money

tight fiscal: high tax low gov spend

loose fiscal: low tax high gov spend

tight money: low MS high r

loose money: high ms lower r

in keynesian cross how does equilibrium between spendign and output come to be

when ae is greater than y spending exceeds production so inventories woudl deplete and send signal to produce more. if ae less than y that means spending i ssmaller than productions o they would tell them tos top producing,

Gov policies to help ctozens shift savings rate & tech growth

1. interest rates tax polocy for pub and pruvate savings

2. increase tech via patent, grants to universities, grants to companies and schools, more immigration.

what is the actual spending multiplier that includes leakages

1 divided by (1-b+bt+m). This b is gonna go ahead and be mpc

ISLM graph

r on y y on x axis with lm going up and is going behlpw

mundell flemming model graph

same as ISLM but y axis is now ER nad LM is verticle

LM shifts

inflaation from interest rates rising anything that has to do with m and p overall

What statistical evidence contradicts that the great depression was prolonged by a shift to left of the LM curve

1. Th USLM model money supplu shoudl causeLM cureve to shift left leading higher interest rates but interest rates fell, and prices fell even more even tho MS fell meaning money balances increased during greate derpession

What happened during great depression acc to debt deflation theory

Size of real debts grwo so we see left shift of is continued and deflating reducing consumption. y and r shrink

Using the sticky price model, explain why the AS curve is upwards sloping and mention assumptions when determining slope of teh

The economy is assumed composed of sticky price firms and flexible price, sticky price firms have level absed on general price, flexible adjust in real time. the slope of the curve is the percentage of sticky firms in market realtive to flexible firms. the more flexible firms, the steeper and the more sticky firsm the flatter the slope

Okuns law

Okun’s Law states that when unemployment falls by 1 percentage point, real GDP grows about 2 percentage points faster than normal.

Solow Model: Growth Rates in Steady State

In the Solow model with population growth and technological progress, wages grow at the rate of technological progress (g), while the rental rate of capital does not grow.

The slope of AS

Verticle AS in the long run fixes output at potentail gdp where prices and wages are flexible and changes in AD effect only price level. Horizantal AS means prices are sticky, completely fixed in short run and an increase in AD raises output wihtout prices sometimes. positive sloped AS in the short run says prices are partially sticky so higher prices raise output. if its positively sloped prices are partially stickky and higher price rases output

2 modesl with upwards sloping as

Stucky price model sys some firms cannot change prices immediately and firms with flexible prices increase production when demand rises. THe more verticle the more flexible.

imperfect information model says that firms mistake general price incerase for regular price increase, this temporarolu raises output

Ratip of sticky to flexible equation

y=ybar+alpha(p-EP) where alpha in a flexible economy says a small a means a steep SRAS curve and people arent fooled. IN a Sticky economy they have flat SRAS curve, large a and people are fooled so output responds strongly

Robert Lucas and Fooling

says you can fool people if you dont mess with MS too often. If you odo it wont work, oople AS will shift and it will change y

Phillops curve orgin, relationship with ADAS

Observed inverse relationship between inflation and unemplouyment. Higher ad leads to higher output and lower unemployment and higher inflation. Friedman predicts stagflation nin 1970s which is an anomoly for phillips curve, you have inflation and a shrinking economy

Phillips curve graph

Has inflation on y and y on x wiht a downwards sloping line for PC, corresponds with p and y asad curve

Demand pull v cost push

demand pull is AD shifts to right adn P rises and cost push is as shifts upward and p rises

modern inflation formula

inflation=Einplation-B(U-Un)+v (v is supply shock, b is slope, Un is natural emploeyment or frictional+structural.

Adaptive expectations v Rational

Adaptive says people form expectations based on the past, inflation adjust slowy. Rational says people use all available info and systemic policy has no long run effect on unemployment.

Gov purchases v Tax cuts

Keymsian

• Government purchases are more effective, raise AD with larger multiplier

Anti keynsian

• tax cuts better since individuals allocate resources more efficiently tahn govenmernt and gov spending risks this

Crowding in V crowding out

Keymsian

• In recessions crowding in dominates, idel resources means gov spending raises demand wtithout raising rates and private invesment may increase due to higher sales

Anti keynes:

• crowding out dominates public spending crowsds out private spending and doesnt have an effect, government borrowing raises real interest rate and reduces long run growth (in graph you see like Gincrease, ae rises, p rises md tight r rises i down!

Deficit spending V balanced Budget

Keynes:

• defitis are necessary and focus on countercyclical policy defitis in recession surplus in booms and it stabilizes output

• Gov spencing to raise animal spirits

Anti keynes

• Balanced budgets preent excessive debt persistent deficits

• you have a misallocation of resources here

Discretionary v rule based fiscal policy (3 key sub issues)

Keynes

• Supports rdiscretionary polocy govs must be flexible to shocks and automatic stabilizers help

anti keynes

• prefer rules descretion leads to political manifpulation

Sub issues:

• Time lags weaken discretionary policy

• Automatic stabilizers favored by keyunsians

• time inconsisitency emphasized by anti keynse

Time lags

1. REcognition lag (internal)

2. decision (internal)

3. implementation (internal)

4. effectiveleness (external)

Monetary Transmission v monetarism

Keynes

• monetary policy works thorugh interest rates and fiscal policy is needed when money isnt effe tive pro cyclical and goes in way of the busizess cucle

anti keunes

• q theoru of money holds in the long run and inflation always gonny be there but stable money growth prevents instability

Rule based monetary policy

1. INterest rate targeting

   1. keynsian: Supports insterest rate targeting to stabilize output and employment

   2. anti: interst rates distort price signals risk of abuse

2. Money supply targeting

   1. keynes: money demand undstable means unrelianle stargeting

   2. anti: stable money ensures price stability minimize pol interference

3. NOM gpd targeting

   1. keynesian: attractive compromise stabilizing infltion and output allowing countercyclical flexibility

   2. anti: too discretionary and emasurement problems

4. INf;ation targeting

   1. keynes: acceptable if fixible shouldnt ignore unemployemnt

   2. anti: preferred rule and anchors expectiatons prevents bias

5. Unemployment

6. 1. Keynes: Justified due ot social costs of unemployment and labor market shifts slowly

7. anti: dangerous and inflatinoary and unemployment is determuend by real factors

AS slope debate

1. adaptive expectations says theres short run trade offand rational expectations says no systemic trade off

2. Keynesian (Adaptive Expectations)

   • People adjust expectations slowly.

   • Policy can affect real output in the short run.

   • Short-run Phillips Curve exists.

   Anti-Keynesian (Rational Expectations)

   • People anticipate policy actions.

   • Systematic policy has no real effects.

   • Long-run AS is vertical.

Debt to gdp ratio

measures sustaiability and higher ratios common in advanced economies

Debt perception

INflation erodes debt, assets gov owne unaccounted liabiliteis and ricardian equivalence (people save tax cuts)

Structureal deficit, public debt, and tax cuts

Structural s deficit at full employment, tax cuts and deficits reduce reenue and increase deficits unless offset and public debt is the accumulation of past defiicts

US facts

Total us debt 30T, inter gov debt 9T public and fed debt is 29T, dbet held by fed is 5T debt -fed=24T Unfunded debt is 105T assets is 5.7T

2008 what happened

Mortage lending: subprime adjustable rate mortage expanded iwth notes and deeds of trust providing legal claims to proprty securing loans

• led to appreasors oervaluign homes and real estate agents encouraging risky borrowing

Freddie Mae adn Fannie mac gaureneteed mortages increasing risk exposure

Securitization MBS allowed mortages to be bundled and sold as securities within shadow banks, highly leveraged and lightly regulated/

Credit rating agencies overrated risky securiteis

AIG nad CDS sold insurange on MBS wihtout capital reserves

Home [roces fell MBS collapsed, banks had to record losses leading to moral hazard bailouts encouragd future risk taking

Bailout and polocy response

TARP: bank recapitalization

QEL asset purchase

created systemic and moral hazard concerns

shifting ad as

ad represents the demand and as is the supply via firms. You shift ad when we have change in money supply, taxes, things that shift this. when left alone inflation will push as around

What moves SRPC and LRPC

What moves (shifts) the SRPC

Changes in expected inflation (πe\pi^eπe)

• Expected inflation ↑ → SRPC shifts up

• Expected inflation ↓ → SRPC shifts down Move along the SRPC during demand side changes like expansionary monetary or fiscal policy

Long-Run Phillips Curve (LRPC) What moves (shifts) the LRPC

Structural changes in the labor market, such as:

• Labor market institutions

• Matching efficiency

• Technology

• Demographics

• Education / training

• Changes in the natural rate of unemployment

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What does NOT move the LRPC

❌ Monetary policy
❌ Inflation level

How to do PC math for adaptive expectations and cyclical unemployment

How to solve for phillips curve how much unemployment must be to reduce inflation

1. start with equation inflation=inflationt-1-b(ut-u)

2. calculate change in inflation=change in inflation=inflationt=inflationt-1=-0.04

3. plug in so change in inflation=-b(ut-u)

4. solve for u

5. says how much unemployment rate must reduce to get change. ininflation

3 tax policies supply side economists support and rationale

1. Cut income tax rates supply siders beleive cut in income taxes increase desire to work and labor supplu increase shift as to right

2. cut taxes on savings and capital, give people incentive to saving more and invetsment shiting as right

3. cut corporate income taxes, allow corporatons to keep adn reinvest profits shift as right.

Why keynesians favor other ficsal tools

support tax changes to stabilize businzee cucle if tax cut, however they believe recessions cuased by lack of spending so tax methods just offset and give consumers mor edisposable income to spend. Gov purchases seen as more helpful as directly impacts spending while tax cut portions could be saved.

Fiscal policy has shorter outside lag then monetary?

True, three inside time lags recognition decision and implementation that has long inside lag for fiscal but short outside. andvice versa. Outside lag of effect can take a min for monetary

Monetary debates when teh fed sells treasury bills to banks. How do keynesians react v monetarists

Keynesians:

• fed sells bonds

• reserves decrease and money supplyd ecrease

• interest rate rises

• invesmtnet then decreases

• lm shifts left

• ad shifts left causing decrases in output and prices

monetarists says we focus on prices and expectations (money doenst affect real gdp ONLY PRICES)

• fed sells bonds and ms decreases

• BECAUSE OF THIS people expect lower inflation

• firms cut prices

• ad shifts left and sras shifts right

• price level falls

Procyclical va countercyclcial rule based

Procyclical Rule-Based Policy

A rule-based policy that reinforces the business cycle, expanding during booms and contracting during recessions, thereby amplifying economic fluctuations.

Example (Fed):
Keeping interest rates constant during an expansion forces the Fed to increase the money supply, further stimulating an already strong economy.

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Countercyclical Rule-Based Policy

A rule-based policy that leans against the business cycle, contracting during booms and expanding during recessions to stabilize output and inflation.

Example (Fed):
Raising interest rates during an expansion or cutting rates during a recession to dampen fluctuations.

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One-line memory trick

• Procyclical = pushes the cycle

• Countercyclical = cushions the cycle

Can a cut in income tax rates increase government revenue? (True/False)

True. A tax cut can increase revenue if it raises economic activity enough to expand the tax base (supply-side and Keynesian effects).

Do recessions usually cause budget deficits? (True/False)

True. Recessions reduce tax revenues and increase transfer payments (automatic stabilizers), causing deficits.

Traditional view vs. Ricardian equivalence (debt-financed tax cut) i) Effect on current consumption

Question:
How does a debt-financed tax cut affect current consumption under the traditional view vs. Ricardian equivalence?

• Traditional view: Consumption increases.

• Ricardian equivalence: Consumption does not change (people save the tax cut).

How does a debt-financed tax cut affect national saving under each view?

• Traditional view: National saving falls.

• Ricardian equivalence: National saving is unchanged.

How does a debt-financed tax cut affect interest rates under each view?

• Traditional view: Interest rates rise.

• Ricardian equivalence: Interest rates do not change.