Short run

Explain what is best response to a supply shock? Why

'Ignore first round but stand ready to take any action against second round' (expectations affected) Because anything is bad

Monetary policy rule: - give one - what is it telling us - how is AD derived?

- R-r = m(π - π*) - that the central bank responds to inflation etc - by using this and IS curve

Micro foundations: - link to consumption? - can a multiplier enter, how? - does timing of tax matter? What is this called, define?

- consumption smoothing - permanent income/life cycle hypothesis - yes, xbar before the Y tilda term in consumption, we make it a function of y tilda first - no, Richardian equivilance - what matters is the net present value of income

MP vs MPalt: - draw diagram - what is it sayin about central bankers - what does the coefficent of output tell us? What does it depend on? What is optimal? - is inflation fixed? What type of model?

- they aren't stupid - don't just let it develop - Hawkish vs doveish - depends on preferences - more emphasis on inflation - yes for the lines - Keynesian

What 4 points does Michael make in tutorial 1

1. MP vs MPalt 2. Fiscal vs monetary policy affect the components of GDP 3. ZLB 4. LM curve

3 premises of short run model? For the third, explain the intuition Explain the structure of the short run model? How can we move between unemployment and economic growth?

1. The economy is constantly hit by shocks 2. Monetary and fiscal policy affect output 3. There is a dynamic trade off between inflation and output - a higher output leads to higher inflation because - costs rise, demand side conditions create scarcity Okun's law

What 3 arguments does Michael make?

1. Upwards sloping MP curve with TP makes sense 2. QE is a solution if hit zlb 3. Best response to supply shocks is to wait

Desribe an aS shock to inflation? Diagram?

As shifts up, Mp rule tells us to cut y by raising rates —> induced recession Because of sticky inflation and adaptive expectations, transition dynamics to steady state

Describe disinflation through reducing inflation target? Diagram? What was needed?

Basic stuff ad shifts in then supply curve transition dynamics We needed to induce a recession in order to convince firms to lower prices

Micro foundations: - why does sticky inflation happen? - what are the three tools of CB? - how do open market operations occur?

Because: pizza parlour: imperfect info and costs, contracts, ideas of fairness/money illusion, bargaining costs Reserve requirements, fed funds rate, discount rate Buy bonds to increase money supply

Explain QE

Demand bonds, realise price (lt maturity), yield falls, nom IR falls

What argument does ZLB support? Draw diagram? Write function? Counterargument? What really settles the debate?

Fiscal/alternative MP Max (i,0) Neither discretionary note monetary policy solve the issue Of course prices will adjust Expectations

Explain IS-LM? What's better than this?

Fix money supply Fix price then supply whatever

Explain main argument surrounding inflation expectations? Draw a diagram? How does it work? What does it come down to? Depends on? How practically?

If we have rational expectations, if we can control expectation we can minimise the costs of maintaining low stable inflation Rational instead of adaptive - if expect π* then we can shift much quicker Comes down to the willingness of CB to engineer recessions to keep stable inflation - less likely to raise prices Depends on credibility and transparency - MP rules, targets

Explain monetary vs fiscal?

In national income identity, they affect different components - I vs G

I-S curve: - what does it do in summary? - derive it? - what does it do in long run? - what happens if exogenously determined y changes? - draw it? - explain intuitions?

Links actual output and the real interest rate. Rises in interest rates cause real output to fall - see notes - R=MPK=r and a=0 so Y Tilda = 0 - no effect - output through investment Chanel (firms and consumers)

AS curve: - what is it?

Phillips curve

What is the difference between the short run and long run models? Why do we have the short run? What is its denfinition? Define y Gilda?

Potential output/inflation, current ouput/inflation Because the economy is hit by shocks which deviate it from potential The period of time over which these deviations occur

Monetary policy curve: - what is the story it tells? - what equation does it require? - what assumption is it making - how does this link to the classical dichotomy? - how long does MP take to have an effect? - what determines investment decisions?

That the nominal interest rate determines the real interest rate - fisher equation R = i + π - sticky inflation - inflation is fixed in the short run i.e. the classical dichotomy is not holding - 6-18months - ex ante inflation: R = i + πe

The Phillips Curve: - what does it describe? - explain the general equation and intuitions? What do we then assume? What about shocks? - what are the two types of inflation? Draw it? What is its relationship to the QT of money?

The effect of short run output on inflation - π=πe + vY(tilda) + o. That price setting behaviour by firms depends on two things - their expectations of price changes, and demand side conditions for their products. WE THEN MAKE THE ASSUMPTION OF ADAPTIVE EXPECTATIONS - cost push (shifts) and demand pull (movements up) They say different things but describe different time periods

Explain a positive demand shock - does it unravel?

Yes - see notes