Principles of Macroeconomics
Fall 2016, @D-MTEC, Prof. Sturm
Fall 2016, @D-MTEC, Prof. Sturm
Set of flashcards Details
| Flashcards | 51 |
|---|---|
| Language | English |
| Category | Macro-Economics |
| Level | University |
| Created / Updated | 08.01.2017 / 09.01.2024 |
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In an open economy, what are the effects of an import quota?
Because foreigners need Swiss Francs to buy Swiss net exports, there is an
increased demand for Swiss Francs in the market for foreign-currency.
This leads to an appreciation of the real exchange rate.
There is no change in the interest rate because nothing happens in the loanable
funds market.
There will be no change in net exports.
There is no change in net foreign investment even though an import quota
reduces imports.
An appreciation of the Swiss Franc in the foreign exchange market encourages
imports and discourages exports.
This offsets the initial increase in net exports due to the import quota.
In an open economy, what are the effects of capital flight?
- If investors become concerned about the safety of their investments, capital can quickly leave an economy.
- Interest rates increase and the domestic currency depreciates.
What is Okun's law?
Okun’s law states that in order to keep the unemployment rate steady, real GDP needs to grow at or close to its potential.
What are Causes of Changes in the Business Cycle?
1. Household spending decisions.
2. Firms’ decision making.
3. External sources.
4. Government policy
5. Confidence and expectations
What is the Keynesian cross and how does it look like?
In the Keynesian cross diagram, the 45o line connects all points where total spending would be equal to national income.
Short-run equilibrium occurs where the expenditure function E = C + I + G + NX crosses the 45° line and refers to a point where actual spending is equal to planned spending.
There are Autonomous expenditure, which are not dependent on income/output
Formula for the spending multiplier? Why is the multiplier important?
The marginal propensity to consume (MPC) is the fraction of extra income that a household consumes rather than saves.
Multiplier = 1/(1 - MPC) = 1/MPS (where MPS is the marginal propensity to save)
If the MPC is 3/4, then the multiplier will be:
xMultiplier = 1/(1 - 3/4) = 4
The multiplier is important because it shows how the economy can amplify the impact of changes in spending.
What is The Liquidity Trap?
- When the nominal interest rate is equal to zero, and once people have enough money for transaction purposes, they become indifferent between holding money and holding bonds.
- The demand for money becomes horizontal. This implies that, when the nominal interest rate is equal to zero, further increases in the money supply have no effect on the nominal interest rate.
What did Keynes mean by an inflationary gap?
The inflationary gap is the difference between full employment output and actual expenditure
when actual expenditure is greater than full employment output.
What is the relationship between the production possibilities frontier and the deflationary gap?
When there is a deflationary gap the economy is not operating at full employment (there is spare capacity in the economy: underused resources, unemployment). This is equivalent to an economy operating inside its production possibility frontier.
What is the Philips Curve?
Inflation rate againts unemployment
How does the long-run Philips Curve look like?
It is vertical (inflation rate againts unemployment). =>
unemployment remains at its natural rate in the long run.
