Makro chap 10-15

Chapter 10: Stabilization Policy and Public Debt

1. What is the law of motion of public debt?

   • Public debt changes based on the primary budget deficit, interest payments, and economic growth: Where is the debt-to-GDP ratio, is the primary deficit, is the interest rate, and is the growth rate of the economy.

2. How do fiscal policies influence the economy?

   • Expansionary fiscal policies can stimulate demand but may increase debt. Contractionary policies reduce debt but may lower demand.

3. What are automatic stabilizers?

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

4. What is Ricardian equivalence?

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

Chapter 11: Open Economy and Exchange Rates

1. What determines exchange rates in the long run?

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

2. What is the Uncovered Interest Parity (UIP)?

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

3. What causes current account imbalances?

   • Imbalances arise from differences in savings and investment across countries.

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

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

Chapter 12: Monetary and Fiscal Policy in an Open Economy

1. How do monetary policies affect open economies?

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

2. What is the Mundell-Fleming model?

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

3. How do fiscal policies interact with exchange rates?

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

4. What is the J-curve effect?

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

Chapter 13: Growth in Open Economies

1. What drives growth in open economies?

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

2. What is the role of trade balances in growth?

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

3. How do capital flows affect growth?

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

Chapter 14: Exchange Rate Crises and Monetary Unions

1. What triggers exchange rate crises?

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

2. What are the advantages of monetary unions?

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

3. What are the disadvantages of monetary unions?

   • Loss of independent monetary policy and risks of asymmetric shocks.

Chapter 15: The Role of Expectations in Macroeconomics

1. Why are expectations important in macroeconomics?

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

2. What is the rational expectations hypothesis?

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

3. How do expectations affect policy effectiveness?

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

4. What is the role of credibility in policy?

   • Credibility ensures agents trust policies, stabilizing expectations and outcomes.