Makro chap 10-15

What is the law of motion of public debt?

Public debt changes based on the primary budget deficit, interest payments, and economic growth.

What influence do fiscal policies have on the economy?

Expansionary fiscal policies can stimulate demand but may increase debt; contractionary policies reduce debt but may lower demand.

What are automatic stabilizers?

Mechanisms like taxes and unemployment benefits that adjust automatically to smooth economic fluctuations.

What is Ricardian equivalence?

The idea that consumers anticipate future taxes from government borrowing and adjust their savings, offsetting fiscal policy effects.

What determines exchange rates in the long run?

Exchange rates are influenced by relative price levels, productivity, and interest rates.

What is the Uncovered Interest Parity (UIP)?

UIP states that expected exchange rate changes equal the interest rate differential between two countries.

What causes current account imbalances?

Imbalances arise from differences in savings and investment across countries.

How does a fixed exchange rate regime differ from a floating regime?

Fixed regimes peg currency values, requiring central bank intervention, while floating regimes allow market forces to determine rates.

How do monetary policies affect open economies?

They influence exchange rates, which affect trade balances and capital flows.

What is the Mundell-Fleming model?

It extends IS-LM to open economies, showing how policies work under fixed and floating exchange rates.

How do fiscal policies interact with exchange rates?

Fiscal expansion can lead to currency appreciation in floating regimes, reducing net exports.

What is the J-curve effect?

After a currency depreciation, trade balances worsen initially before improving as exports rise.

What drives growth in open economies?

Factors include trade openness, capital flows, and technology transfer.

What is the role of trade balances in growth?

Persistent deficits may hinder growth by increasing foreign debt, while surpluses can finance investment.

How do capital flows affect growth?

They provide funding for investment but may lead to volatility and dependency.

What triggers exchange rate crises?

Crises occur when fixed regimes are unsustainable due to large deficits or speculative attacks.

What are the advantages of monetary unions?

They reduce transaction costs, eliminate exchange rate uncertainty, and deepen economic integration.

What are the disadvantages of monetary unions?

Loss of independent monetary policy and risks of asymmetric shocks.

Why are expectations important in macroeconomics?

Expectations influence consumption, investment, and wage-setting, affecting overall economic outcomes.

What is the rational expectations hypothesis?

It assumes agents use all available information to form expectations, making systematic policy errors less effective.

How do expectations affect policy effectiveness?

Anticipated policies have reduced effects as agents adjust behavior in advance.

What is the role of credibility in policy?

Credibility ensures agents trust policies, stabilizing expectations and outcomes.