Macro KCM-ISMP-ASAD equations, terminology & determinants

Adl Uni Int Macro II. Flashcards for KCM-ISMP-ASAD determinants are organised with causes listed as terms and their respective effects as definitions.

AE

= C+G+I+(X-M)

i (Taylor’s Rule)

= i* + x(actual Y - LR Y) + z(actual inf. - target inf.)

I (investment) = S (savings)

= Y-G-C-(X-M)

AS

= labour prod(1-unemp.)

JC

= (wages/L prod)nat. unemp.

WS

w(forecasted inf./ actual inf.)

Expansionary monetary policy

decreases in the target cash rate; buying gov bonds

Contractionary monetary policy

increase in the target cash rate; selling gov bonds

i*

the nominal interest rate when there is no output gap (SRAS = LRAS) and the inflation rate = inflation target. Changes in this constant lead to shifts in the MP curve.

Currency depreciation

Domestic currency buys less FOREX; AE increase b/c X increase; M decrease

Currency appreciation

Domestic currency buys more FOREX; AE decrease b/c X decrease, M increase

increase in inflation (from ASAD)

MP curve shifts up such that i is higher at an unchanged Y; real wages curve shifts down

decrease in inflation (from ASAD)

MP curve shifts down such that i is lower at an unchanged Y; real wages curve shifts up

changes in autonomous expenditure (AE) unrelated to changes in inflation

IS curve shifts

AE curve shifts up

IS curve shifts up —> AD curve shifts up

AE curve shifts down

IS curve shifts down —> AD curve shifts down

increase in inflation (demand-pull)

movement up AD; movement up MP

decrease in inflation (demand-pull)

movement down AD; movement down MP

increase in inflation (cost-push)

movement up AS; movement up MP

decrease in inflation (cost-push)

movement down AS; movement down MP

real inflation > expected inflation (supply-side effects)

increase in job creation (movement down JC b/c of a shrinkage in real wages; AS shifts up

real inflation < expected inflation (supply-side effects)

decrease in job creation (movement up JC) b/c of growth in real wages; AS shifts down

increase in labour productivity

JC curve shifts out (u falls); AS shifts up

decrease in labour productivity

JC curve shifts in (u rises); AS shifts down

i (int rate) increases

investment decreases (movement down IS curve); AE shifts down b/c X decrease

i (int rate) decreases

investment increases (movement up IS curve); AE shifts up b/c X increase

the target inflation rate increases

AD shifts up; IS shifts up

the target inflation rate decreases

AD shifts down; IS shifts down

changes in Y stemming from KCM or changes in inflation stemming from ASAD

movement along existing MP curve

changes in Y stemming from ASAD

shift of the MP curve

exogenous shocks in the money market (changes to the CB’s TCR, strategy, i*, etc.) & ASAD changes

shift in the MP curve

Changes in the labour market model

Shift in AS

Changes in either the KCM or ISMP models

Shift in AD

changes in the wage setting curve

movement along AS

AD curve

combinations of inf rates and output levels which satisfy an ISMP equilibrium (MP=IS)

expansionary/inflationary (output) gap

actual output (Y) exceeds potential output (LRAS); MP shifts downward

recessionary/deflationary (output) gap

actual output (Y) trails potential output (LRAS); MP shifts upward

if output gap = 0 or the coeff. of the output gap = 0

curve of MP is = 0 (horiz.); AD is horiz.

if the inflationary gap = 0 or the coeff. of the inflationary gap = 0

curve of AD is undefined (vert.)