Macro
Are individuals more likely to invest in bonds at high interest rates or low interest rates? Explain.
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According to the paradox of thrift, what effect would an increase in savings have in an economy already at macroeconomic equilibrium? Explain using narrative and graphically.
If every family increased its saving, the result could be less income for the economy as a whole. In fact, increased saving could actually lower savings for all households. (increased saving could cause the economy to be worse off) Higher savings causes equilibrium income to fall. It is unsafe to generalize what is safe in micro level in the macro level
In the Keynesian cross, what role does the 45-degree line play in determining equilibrium output?
The 45 degree line represents where output = income
Derive the equilibrium condition for the money market in the case where individuals may hold money in the form of currency as well as checkable deposits. Be sure to include in your discussion a reference to the money multiplier.
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Explain, using equations and narrative, why the stimulus from a rise in G of $100 billion is greater than a reduction in T of the same amount.
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Early in his term, Clinton indicated he wanted to reduce the budget deficit. The Fed supported this policy by enacting accommodating monetary policy. Use the IS-LM framework to describe the effects of Clinton's and the Fed's policies, describing the effect on equilibrium level of output and interest rates.
Suppose the government is running a budget deficit and decides to reduce it by decreasing its spending from G to G' while leaving taxes unchanged. (fiscal contraction). Decrease in government spending shifts IS curve to the left
Show the effect on the equilibrium level of output and the interest rate, resulting from an increase in government expenditures, using the IS-LM framework.
https://www.khanacademy.org/economics-finance-domain/macroeconomics/income-and-expenditure-topic/is-lm-model-tutorial/v/government-spending-and-the-is-lm-model IS curve is going to shift to the right LM curve does not change
Explain graphically and in narrative, using the IS-LM framework, the effects of German reunification which led the West German government to increase spending to provide a social safety net for laid off workers and the Bundesbank to tighten the money supply to fight inflation.
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How would a change in marginal propensity to consume (c1) change the slope of the zz function?
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In the case of a rise in G, how do the results obtained from an IS-LM analysis differ from those obtained with the simply Keynesian cross model, and why do the results differ?
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What factors cause a movement along the IS curve and the LM curve? What factors cause these curves to shift?
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What is stabilization policy? Be specific. Explain how fiscal and monetary policy can be used to stabilize an economy.
A macroeconomic strategy enacted by governments and central banks to keep economic growth stable, along with price levels and unemployment. Ongoing stabilization policy includes monitoring the business cycle and adjusting benchmark interest rates to control aggregate demand in the economy. The goal is to avoid erratic changes in total output, as measured by Gross Domestic Product (GDP) and large changes in inflation; stabilization of these factors generally leads to moderate changes in the employment rate as well. Stabilization policies are also used to help an economy recover from a specific economic crisis or shock, such as sovereign debt defaults or a stock market crash. In these instances stabilization policies may come from governments directly through overt legislation, securities reforms, or from international banking groups, such as the World Bank.
Explain how unemployment benefits work as automatic stabilizers during an economic downturn. Make sure you explain the meaning of the term "automatic stabilizer."
Automatic Stabilizer: Economic policies and programs that are designed to offset fluctuations in a nation's economic activity without intervention by the government or policymakers. UI benefits allow the unemployed to maintain more of their previous consumption than they would otherwise be able to. When the unemployed cut back on spending, the business owners that serve them lose. By cushioning the fall in these families' incomes, unemployment insurance not only helps the families that receive it, but also prevents further production cuts and layoffs. Unemployment insurance directly helps the jobless, and it averts joblessness. This study shows that in this recession unemployment insurance to the unemployed kept unemployment from rising to over 11%.
What are some of the shortcomings of GDP as a measure of economic well-being?
First of all, GDP (I will stick to this base measure, but I mean its derivatives as well, if not else indicated) is computed at market prices - which means that it ignores externalities, particularly (but not only) environmental ones. http://zielonygrzyb.wordpress.com/2012/07/31/limitations-of-gdp-as-welfare-indicator/
Using detailed examples, illustrate how monetary policy can be used to affect the level of investment. In your answer, explain why a change in interest rates affects I.
Monetary policy refers to the strategies employed by a nation's central bank with regard to the amount of money circulating in the economy, and what that money is worth. Monetary policy can be restrictive (tight), accommodative (loose) or neutral (somewhere in between). When the economy is growing too fast and inflation is moving significantly higher, the central bank may take steps to cool the economy by raising short-term interest rates, which constitutes restrictive or tight monetary policy. Conversely, when the economy is sluggish, the central bank will adopt an accommodative policy by lowering short-term interest rates to stimulate growth and get the economy back on track. Lower interest rates mean consumers may be willing to spend more money as the cost to finance a purchase is relatively inexpensive. When the Federal Reserve decides to raise interest rates, its goal is usually to slow down an overheating economy.
What is the effect of a change in the Fed's reserve ratio requirement? Show this using the money multiplier.
Reserve requirements are one of the three monetary policy tools the Federal Reserve uses to implement monetary policy. A change in the reserve requirement ratio affects bank credit and the money stock. Reserve requirements are the percentage of deposits that depository institutions must hold in reserve and not lend out. Increasing the (reserve requirement) ratios reduces the volume of deposits that can be supported by a given level of reserves and, in the absence of other actions, reduces the money stock and raises the cost of credit. Decreasing the ratios leaves depositories initially with excess reserves, which can induce an expansion of bank credit and deposit levels and a decline in interest rates. A low reserve requirement is expansionary monetary policy, since it allows more money in the banking system. A high reserve requirement is contractionary, since it allows less liquidity, and slows down economic activity. The size of the multiplier effect depends on the percentage of deposits that banks are required to hold as reserves
Explain the relationship between the price of bonds and the yield (interest rate) on bonds. Provide a numerical example (choose your own data) to illustrate your response.
The higher the price of a bond, the lower the interest rate.. i=$100-$Pb/$Pb If the interest rate is positive, the price of the bond is less than the final payment. The higher the interest rate, the lower the price today.
Describe in narrative and mathematically the effect on the level of output of a change in autonomous expenditures. Include in your answer a description of the role played by the multiplier.
The marginal propensity to consume (MPC) is equal to ΔC / ΔY, where ΔC is change in consumption, and ΔY is change in income. If consumption increases by eighty cents for each additional dollar of income, then MPC is equal to 0.8 / 1 = 0.8. As a result of the multiplier effect, small changes in investment or government spending can create much larger changes in total output. A positive aspect of the multiplier effect is that macroeconomic policy can effect substantial improvements with relatively small amounts of autonomous expenditures. A negative aspect is that a small decline in business investment can trigger a larger decline in business activity and, thereby, create instability.
What mechanisms do central banks use to change the money supply? Be able to explain how these work and how they affect aggregate expenditures
These actions are referred to as monetary policy. They can modify reserve requirements, which is the amount of funds banks must hold against deposits in bank accounts. By lowering the reserve requirements, banks are able loan more money, which increases the overall supply of money in the economy. Conversely, by raising the banks' reserve requirements, the Fed is able to decrease the size of the money supply. The Fed can also alter the money supply by changing short-term interest rates. Lower rates increase the money supply and boost economic activity; however, decreases in interest rates fuel inflation, so the Fed must be careful not to lower interest rates too much for too long. Finally, the Fed can affect the money supply by conducting open market operations, which affects the federal funds rate. In open operations, the Fed buys and sells government securities in the open market. If the Fed wants to increase the money supply, it buys government bonds. This supplies the securities dealers who sell the bonds with cash, increasing the overall money supply. Monetary policy affects aggregate expenditures directly by providing the four sectors with spendable money and indirectly through interest-rate-induced changes in consumption expenditures and investment expenditures. The four categories of aggregate expenditures, corresponding with the four basic macroeconomic sectors are: consumption expenditures (household sector), investment expenditures (business sector), government purchases (government sector), and net exports (foreign sector).
When the LM curve is flat, indicative of the liquidity trap, which is more effective—fiscal or monetary policy? Explain in narrative and graphically.
When the interest rate is equal to zero, the economy falls in to a liquidity trap: The central bank can increase liquidity-that is,increase the money supply, but this liquidity falls into a trap: The additional money is willingly held by people at an unchanged interest rate, namely zero. If, at this zero interest rate, the demands for goods is still too low, then there is nothing further conventional monetary policy can do to increase output. Liquidity trap: When monetary policy becomes ineffective because, despite zero / very low interest rates, people want to hold cash rather than spend or buy illiquid assets. Keynesians argue that a liquidity trap means fiscal policy becomes very important for getting an economy out of a recession. Since interest rates are zero but aggregate demand is still falling, governments need to intervene to 'crowd in' resources left idle. The argument is that the rise in private sector saving needs to be offset by a rise in public borrowing. Thus government intervention can make use of the rise in private saving and inject spending into the economy. This government spending increases aggregate demand and leads to higher economic growth