MGEB05 Sample Final Review

A comprehensive set of 150 flashcards created based on lecture notes to assist students in reviewing key concepts and preparing for exams.

When autonomous consumption increases in a long-run classical closed economy, causing the saving curve to shift left, what is the final outcome for Y, r, I, and S?

Y no change, r ↑, I ↓, S ↓.

Which model applies to autonomous consumption changes in a long-run classical closed economy?

Long-run classical model / loanable funds model.

What is the core identity involved when consumption increases?

S = Y − C − G.

What is the number one trap that students fall into regarding Y in this model?

Saying Y increases when it does not.

If autonomous consumption increased, what fiscal policy is recommended to return the interest rate to its initial level, and what is the final outcome for r, I, and Y?

Contractionary fiscal policy to restore S, resulting in r back to initial, I back to initial, and Y unchanged.

Why is fiscal policy preferred over monetary policy in this context?

To adjust national saving S to control r due to classical loanable funds logic.

What happens to the saving curve after contractionary fiscal policy is applied?

The S curve increases back to its initial position.

With constant velocity, is money growth always one-to-one with inflation?

Uncertain—depends on output growth (A and K).

What does it mean if the answer to the quantity theory question is 'Uncertain'?

Output growth is unknown as it depends on A (technology) and K (capital).

What critical assumption does the quantity theory test?

Whether output growth is fixed or endogenous.

What is the core equation relating inflation and money growth?

\pi = \mu − gY.

What does a constant labour growth imply about output growth?

Constant labour growth does not guarantee constant output growth.

What common wrong answer do students often select regarding the relationship between labour growth and output growth?

They may incorrectly assume it is true, believing \pi = \mu is always valid.

What is the most common mistake regarding the employment and unemployment relationship?

Assuming employment increases necessarily means unemployment decreases by the same amount.

How is the labour force defined?

Labour force = Employed + Unemployed.

What is the formula for calculating the unemployment rate?

Unemployed ÷ Labour force.

What mistake do students often make regarding the denominator in the unemployment rate?

Using total population instead of the labour force.

How can employment increase while unemployment decreases less?

Some workers were previously not in the labour force.

What happens when there is an increase in labour demand in the primary sector?

Employment increases with fixed real wage, output also increases.

What is the effect on the secondary sector when there is no shock?

Employment, real wage, and output remain unchanged.

What is the recommended policy to correct a trade deficit in a small open economy, and what mechanism does it utilize?

Contractionary fiscal policy, which raises national saving.

What is the exchange rate outcome after contractionary fiscal policy in a small open economy?

Currency depreciates.

What is the essential identity governing national saving in a small open economy?

S = Y − C − G.

When there is an increase in autonomous consumption, what happens to the IS curve?

The IS curve shifts right.

Under money supply targeting, what does the central bank do?

Nothing, equilibrium is unchanged after the IS shift.

Under interest rate targeting, what happens to the money supply?

Money Supply increases.

What effect does interest-rate targeting have on the LM curve?

The LM curve shifts down.

What is the final result under interest-rate targeting after an increase in autonomous consumption?

Y increases further, and r returns to initial.

What is tested when comparing short-run and long-run outcomes in AS–AD?

AS–AD dynamics.

What effect does a short-run shock have on Y and unemployment?

Y increases, unemployment decreases.

What adjustment mechanism occurs in the long run following a shock?

Price (P) increases, leading to an upward shift in SRAS.

What is the correct policy response in the case of a price shock?

Contractionary fiscal policy.

How effective is fiscal policy in the Mundell-Fleming model under flexible versus fixed exchange rates?

Ineffective under flexible exchange rates, effective under fixed exchange rates.

What is a common mistake made in the Mundell-Fleming model?

Assuming that r does not equal rW (world interest rate).

In the Mundell-Fleming model, what is the effect on domestic output when foreign government spending contracts, and how does this occur?

Domestic output (Y) decreases due to a spillover effect via the exchange rate.

How does a decrease in foreign G affect appreciation of DC?

DC appreciates in both real and nominal terms.

What happens to LM when money demand increases?

LM shifts left.

What is the effect on output when money demand increases?

Output decreases.

What is the exchange rate outcome when money demand increases?

DC appreciates in real and nominal terms.

How does a removal of tariffs abroad affect domestic saving?

Saving increases in the short run.

What happens to long-run national saving after a foreign tariff removal?

No change.

What is the examiner's intent when testing fiscal policy in fixed versus flexible exchange rates?

To assess understanding of the effectiveness of policy under different regimes.

What happens when autonomous consumption decreases in a small open economy?

Output remains unchanged under flexible exchange rate.

Why does output fall under a fixed exchange rate when autonomous consumption decreases?

Under fixed ER, money supply contracts to maintain the peg, reducing Y.

Q20: What is the effect on the nominal exchange rate (e) in the short run and long run when foreign tariffs are removed?

No change.

Q20: What is the effect on the real exchange rate (ε) in part (a) vs. part (b) when foreign tariffs are removed?

(a) No change; (b) real appreciation of the domestic currency.

What are the long-run effects on output under flexible versus fixed exchange rate regimes?

In the long run, Y returns to YFE (full employment output) regardless of the exchange rate regime.

How do you describe the policy targeting choice regarding fiscal measures in the exam?

The government can choose any one of the proposals.

What does not change in long-run fiscal recommendations in a small open economy?

Values of Y, I, r, P, and unemployment rate.

What occurs to net foreign investment when national saving increases?

Net foreign investment increases.

What dynamics are evaluated when debating interest rate versus money supply targeting?

Comparison of Y and r outcomes under money supply versus interest-rate targeting.

What equation illustrates the core IS form in IS–LM?

Y = A − br.

What equation illustrates the core LM form in IS–LM?

Y = M_S/P + cr.

In the AS-AD model, after a permanent increase in the money supply (MS), what are the short-run and long-run effects on Output (Y) and Price Level (P)?

Short-run: Y ↑, P no change. Long-run: Y returns to YFE, P ↑.

What is the long-run outcome following an expansionary shock?

Y returns to YFE, with P and r increasing.

What is assessed in the large SR vs LR tables in IS–LM?

The neutrality of money.

What is the short-run effect of a decrease in money supply?

Output decreases while interest rates increase.

What does ‘MS only affects nominal variables’ signify?

True in the long run.

In Mundell–Fleming, what characterizes the exchange rate regime?

It can either be flexible or fixed.

What is the formula for the real exchange rate (ε) in terms of the nominal exchange rate (e), domestic price level (P), and foreign price level (P^*)?

\epsilon = e \cdot (P^*/P).

What is the critical common mistake regarding statements about payments systems?

Declaring the statement as correct when it is wrong.