Macro Midterm #2

How to find depreciation rate

it is 1 divided by years to depreciate

How to put in solow format?

keep a turn K to little k and add alpha.

How to find baby k and baby y

baby k is K/L baby y is Y/L

How to find steady state

1. steady state where sy=dk or s/d=k/y. add in s and d. 

2. turn the y into the solow format

3. get all ks to a side and all #s to other

4. find k

5. find y (plug in)

6. Contextualize (if savings & i greater than d economy causes k to grow until i=depreciation) if savings and i less than d economy causes k to fall until i=depreciation)

How to FInd Golden Rule Steady State

1. take dk of dy (function of y)

2. get the k and teh #s on one side

3. find k

4. plug into sy=dk solving for s

Golden rule condition

mpk (or dk or dy) equals cursive d or depreciation rate so its where the mpk (slope of the production function) is eaul to the slope of the break even line (d or d+n+g)

Equation for steady state levels for capital per effective worker

sy=dk—→ sy=(d+n+g)k

How to deal w exponents

raise both sides to reciprocal of exponent

savings and investment

i=sy

consumption equation

c=y-i

solow model how to find steady state growth rate

at steady state k is always 0, steady state grwoth rate of k/l is g since e grows by g. steady state grwowth rate of y/l is g

steady state growth rate

when divided by el growth rate is going to always be g since e = g since its on a per effective labor basis, when we talk about total capital it is n plus g (Y=ytimes l times e)

Formula for payments to labor

w*L=(1-alpha)Y, Get Y/L you have real wage grows at rate g since y/l grows at g ( y times the exponent on EL). 

What is the capital share of gdp

MPK times K or what total income paid to capital owners

Golden rule steady state MPK=(d+n+g) meaning if uneven

if mp > that means the golden rule mpo is lower than current steady statek meaning economy innvesting too little and should increase capital stock to decrease MPK (saving more consuming less) if MPK< it means golden rule MPK is higher than the current steady state meaning economy is investing too much, decrease capital stock to increase MPK, consuling more saving less.

equation of exchange

mv=py

Economy operating at potential

if y is below ystar, economy in recession, if y above ystar economy in inflationary gap. 

find short run and long run p and y

plug in and find y in short run, adjust to the long run y to find the real amount of p to see how prices adjust over time

what happens when fed engages in expansionary monetary policy to price and output

in the short run output will increase and price will remain unchanged byt in teh long run, prices increase and output returns to the full employment level (monetary expansion moves ad)

what happens when war breaks out in oil producing areas in middle east ot price and output

IN short run output decreases while price level increases in long run the recession prices derease and. y returns full imployment

What happens wehn all minimum wage laws repealed to P and Y

in short run the output increases while price level decreases adn in the lnog run price will increase and return to full employment

How to find #s for ISLM in econoy woth equations

1. remember y=c+i+g and from there go ahead and plug into find the usually m and t

2. then find these levels to find private public national savings (Private = y-t-c; public= t-g; national (y-t-c) + (t-g))

What is tight fiscal policy

Government decreases spending or increases taxes to shift is curve left and lower AD

What is loose fiscal policy

government increases spending or cuts taxes shifts is curve right raises aggregate demand

Tight money policy

central bank decreases money supplu (mdown) and shifts lm curve left and raises interest rates

Loose easy money policy

central bank increases money supply (mgoes up) shifts lm curve right and lowers Interest rates

When does investment increases

when interest rates are low so tight fiscal and loose money policy

classical self correction & pigou effect

driven by real money balances and the pigou effect. snice prices fall during a receassion, the LM will shift right because real money balances will increase causing interest rate to fall and stimulating investment spending or movement along the IS and bring economy back to Y full accourding to pigou the fall in prices will reinvigorate consumer spending and move IS back to full employment levels.

1. in the great depression real money balances didnt change and showed didnt happen since counsumtpion fell.

Solow format Graph

we have y on y axis and k on x axis and rewrite y=c+i to get the function f=f(k) with one large curve, depr line (dk) turns into BE line w growth and tech and then the i=sy line which is investment function of y or s(f of k) that intercects depr to find steady state.

Solow format go back to normal of k><

If capital per worker (k) is below the steady state, investment exceeds depreciation, causing capital per worker to increase over time.
Conversely, if k is above the steady state, depreciation exceeds investment, leading to a decline in capital per worker over time.

capital accumulation forcumal

change in k=i-dk if polisive or negative change in k not in steady state 

if you save more…

overall consumption grows

pop growth

n is pop cjange annually tech growth is g add these to do in order to do this, with together its effective labor g is the growth here…improvements in growth via tech acc solo.

Policies to promote growth

1. incentivize more savings so put i$ in

2. want to imporive gdp thru labor so higher quality or more quantity human capital so more edu

3. breakthru in tech

4. remove barriers to property rights nad institutions. 

biz cycle & recession sitch

when below trend recession when above inflationary boom but a recession is more than 2 consequirtive quarters of negative economic growth. 

okuns law

change in gdp = n+g -2 (change in unemployment rate) find change in unemployment rate by doing actual rate minus naturla rate.

aggregate demand curve and shifts

movement along w change in price but you move it in two ways to incentivise spending

1. ad right is thru gov spend andimal spirits stock market rise (monetary policy done by M V is everything else like fiscal policy.

keynes remedies

keynes shifts ad back to where it was by cutting interest rates increasing gov purchases via cut taxes so expaiosnary monetary and fiscal pressures. Prices are sticky,

The spending multiplier

change in consumption over change in income is the MPC and multiplieris 1/1-b SO y=1/1-b times autonomous spending or a+i+g+nx

spending multipler w taxes and transfer

b/1-b reflecting the major leakages of m and t

y with major leakages

y=(1/1-b+bt+m) (a+i+g+x-m) where M=m+mY

keynesian cross diagram

ae on y y on x find intercept where y and ae underneath add ad with p and y to show p change relation!

What causes IS to shift

AD movement is change in P ad shift is same p and change in Autonomous spending. IS movement along is change in r and shift is everything else!

Money market

R and m with mx going down and m over ms on top verticle line and it relates/deroves to LM with r and w=y to show demand of money. MS up LM right MS down lm left

ISLM graph

r and y with lm (m/p) up and IS down

shifting ISLM

A change in fiscal policy, which involves government spending and taxation, shifts the IS curve because it directly affects aggregate demand and output in the goods market.
In contrast, monetary policy, which involves changes in the money supply or interest rates controlled by the central bank, shifts the LM curve by influencing liquidity and equilibrium in the money market.

spending hypothesis

depression caused by deficiency in aggregate demand w keynes paradox of thrift savings is good leads to investment leads to increase in capital essential for economic growth but too much savings reduces damnd and casues economic surplus with sticky prices

money hypothesis friedman

great depression started out but fed reserve sawe ms shrinking and the fed reduce mb to make it shrinsk  the fed didnt offset it mv=py etc etc. fisher effect says this expectition to go down effects i. 

Pigou way out of recession

Pigou believed that deflation could be self-correcting, because the increase in real money balances would restore demand and move the economy back toward full employment.not just lower p but actually rightwards shift of lm but IS shifts you back because of this effect if prices drop consumers save and ad and spending will shift is to the right lmk shifts to the right is classic self corection neighet happend in depression. 

debt deflation theory

Debt-deflation creates a self-reinforcing spiral that can turn a recession into a depression, because falling prices increase real debt burdens, reducing demand and output further

Mundell flemming change

international, ISLM the y axis changes to an er rather than r and we have a verticle lm

WHy do countries fix exchange rate

To stabilize their currency, reduce exchange rate uncertainty, and promote trade and investment with other countries. It also helps control inflation by tying domestic policy to a more stable or stronger currency

What do countreis gain from comon curenciy

It gains elimination of exchange rate risk, lower transaction costs, greater price transparency, and tighter economic integration with partner countries — boosting trade, investment, and stability.

Mundell flemming trilemma

In an open economy, a country cannot simultaneously have all three of the following:

1. A fixed exchange rate

2. Free capital movement (no capital controls)

3. Independent monetary policy

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The logic

• If capital can move freely, investors will move money to wherever interest rates are higher.

• If a country also tries to fix its exchange rate, it must adjust its monetary policy (interest rates, money supply) to keep that rate stable.

• Therefore, it loses control over its own monetary policy — it must follow the interest rate of the anchor currency.

phillops cirve

The Phillips Curve shows the inverse relationship between inflation and unemployment in the short run.

• When unemployment is low, firms must compete for workers → wages rise → prices rise → higher inflation.

• When unemployment is high, wage growth slows → lower inflation.

Key idea:
There’s a short-run tradeoff between inflation and unemployment — policymakers can reduce one only by increasing the other.

In the long run, however, the Phillips Curve is vertical (no tradeoff) because expectations adjust: unemployment returns to its natural rate, regardless of inflation.

sticky price model

The Sticky Price Model (or Imperfect Information Model) helps explain why the short-run Phillips Curve exists.

• “Sticky prices” mean not all firms can change prices instantly when demand or money supply changes.

• When aggregate demand rises, some prices stay fixed, so firms with flexible prices increase output to meet higher demand.

• As output increases, unemployment falls, creating the short-run tradeoff between inflation and unemployment.

Summary:
Because some prices (and wages) adjust slowly, changes in demand affect real output and employment in the short run — but once prices fully adjust, the economy returns to its potential output and the tradeoff disappears.