ecn midterm
IS-LM model
A model of aggregate demand that shows what determines aggregate income for a given price level by analyzing the interaction between the goods market and the money market
Labor unions
An organization formed by workers to strive for better wages and working conditions
Keynesian multiplier
Autonomous consumption or investment causes a more than proportional increase in income and employment. The total effect of the autonomous consumption on income. 1/(1-MPC)
German Great Depression
It led to a decline in the standard of living, a rise in political extremism, and the eventual rise of the Nazi Party.
The General Theory
Written by Keynes as a response to the great depression. This represents Keynes main work that the school of thought is based off of.
Phillips curve
a curve that shows the short-run trade-off between inflation and unemployment
Fiscal policy
attempts to manage the economy by controlling taxing and spending.
Monetary policy
attempts to manage the economy by controlling the money supply and thus interest rates.
2008 crisis effect on US
caused millions of Americans to lose their jobs and homes. The crisis also damaged the US economy and financial system, and it took several years for the US to recover.
Coordination problems
if number of parties is very large, coordinating them may be costly, difficult, or impossible
Explain the Keynesian Cross
income-expenditure equilibrium as the point where the planned aggregate spending line crosses the 45-degree line. Increasing government spending can have an exponential increase in GDP after that the government will make the money that was spent initially back in taxes "simplified version of Keynes General theory"
Podcast- Gold Standard RIP
introduction to the gold standard and its legacy. The value of a country's currency was pegged to the value of gold. This meant that the government would exchange gold for currency at a fixed rate.
Animal spirits
psychological factors that lead to changes in the mood of consumers or businesses, thereby affecting consumption, investment, and GDP
Solow Model
Traditional growth theory with focus on capital. Because 1. increase output per worker and 2. Wealthy have more capital goods and investment and growth are correlated.
Explain two advantages and two disadvantages of the Gold Standard according to the Wikipedia article?
Two advantages of the Gold standard were a. limited currency fluctuations because of the rigidity that was placed on currency because of the backing by gold b. there was a global exchange rate for currencies that could be used across the world and couldn't be manipulated. Two disadvantages of the gold standard were a. the governments ability to manipulate the money supply was limited so they couldn't help ease recessions (some say this caused the Great Depression but all agree the way it was handled had an impact on the depression) and b. countries with the ability to mine gold had a large advantage over countries that didn't have access to the production of gold.
Great Depression Origins
US 1929 large sell-off and bank runs
Great Recession
severe economic downturn that lasted from late 2007 through mid-2009
market failures
situations in which the market does not lead to a desired result
Investment
spending on capital for future return
Black Death
A deadly plague that swept through Europe between 1347 and 1351
New-Keynesians
A group of dynamic general equilibrium models that assume slow-to-adjust prices and wages.
Great Depression causes
1)United State's stock market crash of 1929. 2)Big drop in the world's economy. 3)Overproduction of goods from World War I. 4)Decrease in the need for raw materials from non industrialized nations
Causes of the Great Recession
Banks and other financial institutions used leverage to amplify their profits, but this made them more vulnerable to losses. Deregulation of the financial industry allowed banks and other financial institutions to take on more risk. When the housing bubble burst, many borrowers defaulted on their subprime mortgages.
New-Classical
Believe in Real Business Cycle Theory; Argue that governments shouldn't try to fight business cycles; Emphasize the effect of external shocks and technology on aggregate demand
Gold Standard origins
British introduced the gold standard to their colonies making it spread across the world
Short-term fluctuations
Changes in business and economic activity that occur within the year.
money neutrality
Changes in money supply does not affect real variables like GDP. They only change prices.
Monetary sector
Contains money and financial instruments
Podcast- 'History Is A Battle Between Creditors And Debtors'
Creditors want to be repaid, and they want to earn interest on their loans. Debtors want to borrow money at the lowest possible interest rate, and they want to be able to repay their loans on their own terms. This conflict of interests can have a number of economic consequences, such as credit crunches, recessions, and financial instability.
Keynesian models
Economic models with slowly adjusting (sticky) prices which need government intervention to alleviate some of the problems caused by sticky prices
Keynes
English economist who advocated the use of government monetary and fiscal policy to maintain full employment without inflation (1883-1946)
Spare capacity
For a whole economy, this exists when long run aggregate supply is greater than aggregate demand and so there is a negative output gap.
Austrian economists
Free-market is best, Governments negative Mathematical models ignore consumer preference
GDP
Gross Domestic Product- the total market value of all final goods and services produced annually in an economy
Milton Friedman
He was a famous American economist. He strongly promoted the idea of free trade and condemned government regulation and socialism.
Turning point in Great Depression
Increase in Governement spending, world war 2, leaving gold standard.
Involuntary unemployment
Individuals who want a job can't find a job for the price they need or want
Explain the Keynesian unemployment diagram
Keynes says that wages are sticky and the classics say the are flexible... The top graph determines an equilibrium wage based on the supply and labor. the point on the top graph creates the Aggregate supply on the bottom graph which compares aggregate demand and supply to find the production as a function of labor.... Crisis sends the bottom graph from e0 to e1 which shift the demand to AD1. This is where the differentiation comes-> Classics believe that the prices and wages will go down proportionally meaning the real wage stays in equilibrium and same production. Keynes says that because of sticky wages-> when price goes down wages are rigid which creates an increase in real wages and the difference in Ls and Lp is unemployment. So, the government should step in to limit unemployment.Thus the critical point the rigidity or stickiness of wages in the economy.
Conclusion of Keynes paper
Keynesian economics has made a comeback in the UK and the USA. Mainstream economists now believe that a fiscal stimulus is an effective way to promote recovery during a severe recession. Randall Wray employs this argument to support Modern Monetary Theory (MMT) by showing how deficits can self-correct due to private-sector wealth and income effects
MV = PY
M = Money supply, V = velocity of money, P = price level, and Y = real production. If the velocity is constant, and given the Y depends on factors of production M and P are positively correlated. An increase in the money supply will lead to inflation
Unemployment
Measures the number of people who are able to work, but do not have a job during a period of time.
Paul Samuelson
One of the most prominent economists of the 20th century. Founder of the "neoclassical synthesis" combining classical and Keynesian ideas
International transactions
Organizational activities and exchanges that involve the crossing of national boundaries
Economics Models
Representations of situations, often used to show economic trends.
Podcast- Inside GD
Roth Wade Diary- skeptical of New Deal and leaving gold standard, changed how he looked at finance after because of experience in GD
Lucas critique
The argument that traditional policy analysis does not adequately take into account the impact of policy changes on people's expectations.
Effective Demand
The desire for a good or service backed by an ability to pay
Explain the regulation in 2008
The financial industry was largely unregulated in the years leading up to the 2008 crisis, allowing banks and other financial institutions to take on excessive risk.
"Rules of the Game"
The way that countries went about implementing the gold standard
Demand side factors
These factors cause an increase in demand that exceeds the current level of goods and services
James Tobin
This Yale economist's formulation of Keynes' liquidity preference theory is similar to Milton Friedman's modern restatement of the quantity theory as a theory of money demand.
Imperfect competition
a market structure that does not meet the conditions of perfect competition
Stagflation
a period of slow economic growth and high unemployment (stagnation) while prices rise (inflation)
Paradigms
a set of shared assumptions, concepts, and methods that economists use to understand and analyze the economy.
Quantity theory of money
a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate
Liquidity preferences
a theory that helps explain capital budgeting and, when applied to international operations, means that investors are willing to take less return in order to be able to shift the resources to alternative uses
classical models
economic models that assume wages and prices adjust freely to changes in demand and supply
Keynesianism on RBC
emphasis demand side fluctuations. He believed that agents were often irrational and that they made mistakes. He also believed that markets were not always efficient.
real business cycle school (RBC)
emphasizes the role of real shocks, such as technological change and productivity shocks, in driving economic fluctuations.
Market Rigidities
factors that prevent markets from functioning perfectly. They can make it difficult or impossible for prices to adjust to changes in supply and demand.
Stabilization policies
government policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps
Endogenous-growth
growth driven by factors inside the economy
Smoot-Hawley Tariff Act
legislation passed in 1930 that established very high tariffs on foreign goods. Its objective was to reduce imports and stimulate the domestic economy, but it resulted only in retaliatory tariffs by other nations that made the Great Depression worse
example of mps and mic
me. This means that if incomeincreases by US$ 1 and consumption increases by US$ .80, this means that MPC =0.8 and MPS (marginal propensity to save) = 0.2.
flexible prices
product prices that freely move upward or downward when product demand or supply changes (classical)
Money illusion
occurs when people interpret nominal changes in wages or prices as real changes
Dissaving
occurs when people withdraw funds from their previously accumulated savings
Technology shock
positive, sudden or unexpected increase in a supply
Explain the graph of classical model
start in quad 2 (top right) where a demand shock moves AD0 to AD1 which increases prices from P0 to P1. This increases Wages from W0/P) to W0/P1 which creates a higher demand from labor than the supply of labor in the bottom left. Classical say this moves immediately back to equilibrium but Keynes would say that because of price rigidities the government is needed to step in to increase wages and reduce demand
Modern macroeconomics
studies the behavior of the economy as a whole. It examines topics such as economic growth, inflation, unemployment, and business cycles.
Say's law
supply creates its own demand. This means that the production of goods and services creates the income that people need to purchase those goods and services.
Time inconsistency
tendency to systematically misjudge at the present time what you will want to do at some future time
Money wage (nominal wage) rigidities
that is why theaggregates supply is partially upward sloping (it is not totally vertical). When there isa reduction in the aggregate demand prices go down but money wages stay the same
Economic growth
the ability of the economy to increase the production of goods and services
Aggregate demand
the amount of goods and services in the economy that will be purchased at all possible price levels
Income effect
the change in consumption resulting from a change in real income
Great Depression
the economic crisis beginning with the stock market crash in 1929 and continuing through the 1930s
Rules rather than discretion
the idea that economic policymakers should follow pre-set rules, rather than making decisions on a case-by-case basis.
Neoclassical synthesis
the idea that markets can be slow to adjust in the short run due to sticky prices and sticky wages but revert to long-run classical principles which could be aided by appropriate use of fiscal and monetary policies
Marginal Propensity to Consume (MPC)
the increase in consumer spending when disposable income rises by $1
Marginal propensity to save (MPS)
the increase in household savings when disposable income rises by $1
The Golden Age, 1950-1973
the main reasons was liberalization and international trade. low unemployment and inflation
money wages (nominal wages)
the number of dollars a worker earns
Convergence
the process by which poorer countries tend to grow faster than richer countries (diminishing returns)
Precautionary and speculative motives
the response to uncertainty in the market
Wynne Godley- Paper
the stock-flow argument that showcases Wynne Godley's perspective on government debt. They use a closed economy model where output depends solely on aggregate demand and government finances its budget deficit by issuing bonds to the private sector.
Labor markets
the supply pool from which employers attract employees
Rational expectations
the theory that people optimally use all the information they have, including information about government policies, when forecasting the future
Hysteresis
the theory that the natural rate of unemployment depends in part on the recent history of unemployment, high unemployment rates increase the natural rate of unemployment
Real wage
wage adjusted for inflation
Perfect information
when buyers and sellers know everything about all of the products within their market
Substitution effect
when consumers react to an increase in a good's price by consuming less of that good and more of other goods