Macroeconomics Midterm #2

non-rival

ideas are _____

ideas

Romer: ____ produce goods more efficeintly

sustained growth

the Romer model is good to show _____ ___

use y_t = Y_t / N_t to show g_y_t+1 = gamma g_A_t+1

Step 1) of the Romer Model

find BGP (g_A*); show g_y* = gamma nbar

Step 2) of Romer model

population growth

The key takeaway of Romer: _____ ____ drives living standards - people create ideas (nonrival)

t ln(y_t)

in Romer model graph, x-axis is __ and y-axis is _____

countries

shortcoming of Romer model : assumes no interaction between _____

u* frictional structural

natural unemployment denoted by . equals ______ + ______

Diamond-Mortenson-Pissarides/bathtub model

DMP model

gradually time

DMP: labor markets adjust ____ as employed workers lose jobs and unemployed workers find new jobs over ___

unemployed employed

the TWO types of workers in the DMP model are

fixed

DMP assumes the labor force is ____. BUT, workers can flow between U and E

#unemployed / labor force

unemployment rate (u) equation

separation rate

in DMP, sbar is

job finding rate

in DMP, fbar is

change from # s to rates (divide by Lbar)

the first step of DMP two-equation model

find unemployment rate by converting to steady state

second step of DMP two-equation model

sbar / sbar + fbar

resulting equation for u*, steady state unemployment, in DMP

u_t u_t+1 upward sbar 45 degree

For the DMP graph, put __ on the x-axis, __ on the y-axis, and draw the [downward/upward] linear graph from starting point __, as well as the __ line

u line intersects 45 degree line

in DMP model, u* (steady state unemployment) is where

medium of exchange, store of value, unit of account

money is these three things

real GDP * Price level (GDP deflator)

Nominal GDP equation

fixed neutral

key assumptions of the Quantity theory of money: velocity is ____ and money is ____

percentage change in price level

inflation definition

convert to percentage change by taking log

how to solve quantity theory of money model

interest rates

key critique of quantity theory of money: doesn’t account for ______ ____

the cost of consuming

what is the benefit of saving equal to?

Keynes

Who said consumption is roughly linear in disposable income?
C = MPC * (Y-T) + A

perfectly elastic

Keynes consumption model says consumption is ______ _______

Lifecycle hypothesis

Franco Modigliani challenges Keynes, arguing instead for the ______ ________

permanent income hypothesis

Franco Modigliani challenges Keynes, arguing instead for the ______ ________ _______

dynamic optimization, rational expectations, auxiliary assumptions

Neoclassical consumption model and PIH/LCH : key assumptions

dynamic optimization

key assumption of the Neoclassical consumption model and PIH/LCH; there are multiple time periods, and consumers are forward looking

Rational Expectations

key assumption of the Neoclassical consumption model and PIH/LCH; consumers understand uncertainties

auxiliary assumptions

key assumption of the Neoclassical consumption model and PIH/LCH; perfect credit market (can borrow/lend)

Two time periods positive more negative diminishing today interest limited

MOdel Specific Neoclassical Consumption model

1) ____ _____ _____

2) Period Utility Function u(c) where
- first derivative [negative/positive], more consumption = [more/less] utility
- second derivative [negative/positive], ________ returns
- utility separable across time periods

3) Discounting (prefer to consume _____)
- key parameter 0<beta<1

4) ______
- saving $1 today earns (1+r)$1 next period
5) budget constraints - resources are _____

maximize c_0, c_1, s_0

the objective of the neoclassical consumption model is to

take derivative (maximum) wrt s_0

Step one of solving neoclaswsical consumption model

U’ (c_0) = beta(1+r)U’(c_1)

euler equation (step two of neoclassical consumption model)

c_0 + c_1/1+r = ybar_0 + t_0 + (ybar_1 + t_1)/1+r

budget constraint (step three of neoclassical consumption model)

s r upward

For the Neoclassical consumption graph, put __ on the x-axis, __ on the y-axis, and draw the [downward/upward] linear graph

increase

the neoclassical consumption models says that when current income increases, savings

decrease

the neoclassical consumption models says that when future income increases, savings

income

Neoclassical model: changes in ____ can lead to shifts in the savings curve

less than

the neoclassical consumption model has a [less than/more than/perfectly] elastic response of consumption plans with respect to current income

ybar_0 - t_0 +(ybar_1 - t_1/1+r)

in neoclassical consumption model, part of the equation that equates to the PDV of lifetime disposable income

timing of lump sum taxes does not matter for real outcomes

Ricardian equivalence

rational expectations credit markets lump sum

critiques of neoclassical consumption model
1) perfect foresight / _____ _______

2) perfect _____ ______

3) _____ ______ taxation

government bond

financial claim on US government

Q_t

variable for the price of a dollars worth of a bond; = 1/(1+i)

decrease (BP)

as interest rates increase, bond prices decrease

real cost

Fiscal theory - if we raise s_0 today, the ___ ____ of outstanding bonds is lowered

inflation tax

FTPL bondholders “pay” for decreasing government surpluses (inflating away the debt)

euler equation PDV PDV increases < PY MV

Two-period problem takeaways

1) _____ _____ intuition: marginal cost = marginal benefit of saving

2) budget constraint extends the one-period model: in one period, expenditure = income, in two period ___ of expenditure = ___ of income

3) saving generally [increases/decreases] with interest rate

4) elasticity of consumption wrt ybar_0 is {[<,>,=]
5) ________ equivalence: taxes don’t matter for welfare

6) Fiscal theory of the price level: _ * _ = _ * _

potential GDP

level of GDP that can be maintained on a sustained basis (stable inflation)

output gap

percentage deviation from potential GDP Ytilde_t

okuns law

relates output gaps to cyclical unemployment; actual unemployment minus natural unemployment equals dbar * output gap

u_t - ubar_t = dbar Ytilde_t

okun’s law equation

IS curve, Monetary policy, Phillips Curve

Building blocks for IS-MP-PC model

nominal interest = real rate * inflation rate

Fischer equation

i_t = R_t + pi_t

simplified (variables) fisher equation

future growth income

IS curve features:
investment in context of two-period model - firm focused on _____
Investing today means future ____, less _____ for workers and owners today

take derivative of I, getting max PDV of firm’s profits

first step of solving IS curve

negative

key takeaway from IS model: ______ relationship between interest rates and income

Ytilde r downward

For the IS (loanable funds) graph, put __ on the x-axis, __ on the y-axis, and draw the [downward/upward] linear graph

investment

in IS, we say that _____ is the most volatile of GDP components

Y = C + G + I + Ex-Im

GDP expenditure equation

Ytilde_t = abar - bbar (R_t - rbar)

IS curve equation

dual mandate

stable/low inflation and employment at natural rate

money i_t downward vertical

For the Money supply graph, put __ on the x-axis, __ on the y-axis, and draw the [downward/upward] linear graph. also draw a [horizontal/vertical] line, the money supply line which the Fed determines

open market helicopter commercial

3 ways the fed controls i_t / R_t

____ _____ operations
________ drops

_____ bank exchanges

fed funds rate

banks can borrow and lend to each other in overnight (one-day) market using reserves

reserve accounts

all banks hav an account with the central bank (the fed borrows from banks, in a sense)

discount rate

the rate that the fed leds to troubled banks

IOR < FFR < discount rate

relationship between the interest on reserves, fed funds rate, and discount rate

input demand expenctations

what are the causes of price changes? (PC)

• ______ cost changes

• higher or lower ______ than suitable level

  • price _________

expected inflation = yesterday’s inflation

pi^e_t = pi^e_t-1 means

Ytilde R_t downward IS Ytilde_t deltapi_t upward

For the Phillips curve TOP graph, put __ on the x-axis, __ on the y-axis, and draw the [downward/upward] linear graph. This is called the ________ curve

For the Phillips curve BOTTOM graph, put __ on the x-axis, __ on the y-axis, and draw the [downward/upward] linear graph.

IS cruve

inverse relationship between output gaps and interest rates

Phillips cruve

Inflation is a function of expectations, deviations from potential (aka output gap), how flexible prices are, and input shocks.

Monetary policy

The Fed controls the nominal rate, the real rate changes through the fischer equation

divine coincidence

central bank can keep Ytilde_t and pi_t constant after an aggregate demand shock