midterm 2 essay qs intem macro

How do hyperinflations start and end?

Hyperinflation (extremely fast/outta control price increase in economy) starts when large government deficits are financed by creating money. Rapid money growth raises inflation expectations, reduces demand for real money balances, and increases velocity, making inflation worse. It ends when the government reforms its finances, stops relying on money creation, and establishes credible monetary policy.

Why have global real interest rates fallen?

The Global Saving Glut (Economic situatuon where global supply of desired savings exceeds demand for domestic/international investments) increased the supply of global loanable funds, especially as emerging Asian economies such as China saved more. Increased saving shifts the supply of funds right, reducing equilibrium real interest rates and increasing investment, other things equal.

How does central bank credibility and communication stabilize inflation?

A credible central bank convinces people that it will control future money growth and inflation. Clear communication and forward guidance lower expected inflation, reduce incentives to spend money quickly, stabilize velocity and money demand, and help stabilize current inflation.

Why do efficiency wages increase firm profits?

Paying wages above equilibrium can improve worker nutrition and health, reduce turnover and hiring costs, attract higher-quality workers, and increase effort by making job loss more costly. These productivity gains and cost savings can outweigh the higher wages

Why does consumption not depend on the real interest rate in the course model?

Higher real interest rates encourage saving instead of current consumption through the substitution effect, but can also raise consumption for net savers through the income effect. These effects may offset, and the course emphasizes evidence that consumption depends much more strongly on disposable income than on real interest rates.

How do JOLTS measures behave during recessions?

During recessions, quits generally fall because workers are less confident about finding new jobs. Layoffs and discharges tend to rise, job finding falls, and unemployment increases. Total separations may change less clearly because quits and layoffs move in opposite directions.

How do fiscal changes in China, Europe, and the US affect global loanable funds?

Higher transfers in China raise consumption and reduce saving. Higher government purchases in Europe and larger US deficits also reduce global saving. The global saving supply curve shifts left, raising the equilibrium real interest rate and crowding out global investment, other things equal.