Term
| 3 Things to why business cycles are important to study |
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Definition
| 1. B-cycles are experiemnts. 2.) B-cycles are roadmap to economic thought. 3.) B-cycles are costly. |
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Term
| NBER Definition of a recession |
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Definition
| 2 or more consecutive quarters of declining GDP |
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Term
| 3 Problems with NBER's definition |
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Definition
| 1. data lags. 2. using quarters: GDP could be negative for multiple months, but have a really strong last month. 3.) Being below trend. NBER ignores trend. |
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Term
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Definition
| 1. Business cycles are not business cycles because they are irregularly spaced and sized and stds are large. 2>0 B-cycles are not symmetrical. 3.) Components of GDP exhibit much different behavior than GDP itself. 4.) B-cycles involve B changes in labor market. 5.) B-cycles have not changed dramatically over time. 6.) The great depression and WW2 dwarf all other cycles. |
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Term
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Definition
| Positive correlation between deviations from trend in a variable with deviations from trend of GDP |
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Term
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Definition
| Peaks before GDP peaks, troughs before GDP troughs. |
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Term
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Definition
| Peaks after GDP peaks, Troughs... |
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Term
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Definition
| Peaks at the same time as GDP |
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Term
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Definition
| a measurements of capital into production |
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Term
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Definition
| 1.) Investment, money supply, stock prices, consumer confidence. 2.) Counter: Unemployment (leads at peaks), capacity utilization |
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Term
| Example of Lagging indicators |
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Definition
| Procyc: Durables, inflation, real wages (caused by change in labor demand, and sticky wages), interest rates. Counter: Net Exports, unemployment (at trough), capacity utilization (at trough). |
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Term
| 4 Big Things from Pec Article |
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Definition
1.) Employers prefer to hold their profits rather than employ more workers.
2.) People have the mind mentality that they are set for life
3.) Middle aged men were hurt the most from the recession
4.) Hysterisis: temporary shock can have permanent effects. |
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Term
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Definition
| The belief that sunspot activity coincides with recessions. |
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Term
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Definition
| The amount farmers plant in the spring is based on what the price is based on what the price was last fall. This means that prices and quantities eventually cycle toward equilibrium. |
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Term
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Definition
| As the population rises, capital to labor ratio falls, which leads to unemployment, which leads to death, which will eventually lead to an increase in capital to labor ratio, which makes population rise. |
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Term
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Definition
| Country with Surplus: Gold inflows, increase in wealth, higher demand for imports, eventually, trade deficit, gold outflows, foreign demand for exports |
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Term
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Definition
| Mitchell(1927): Profit margins are strongly procyclical in imperfectly competitive markets because costs fall during expansions b/c: 1.) Firms reduce inventories and 2.) Input cartels tend to fall apart |
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Term
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Definition
#1
#2 Focuses on over investment
#3 Accelerator model: higher investment, if you invest more it is going to compound. |
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Term
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Definition
| Long term trend itself was cyclical. These waves are created by big ideas in technology. Growth will eventually slow. |
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Term
| The 3 assumptions classical model |
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Definition
1.) perfect competition. 2.) Representative agents: everyone is the same
3.) Real variables matter, not nominal... no money illusion and perfect information |
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Term
| What determines output in C.M.? |
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Definition
1.)Change in Tech
2.) Change in Capital:
3.) Change in Labor supply: ex incre in immigarion |
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Term
| What does demand determine in the C.M.? |
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Definition
| It isn't impacting output, just the price level. |
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Term
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Definition
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Term
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Definition
| Supply creates its own demand. THis shows us that the classical model is about supply. |
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Term
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Definition
| Nominal variables only change other nom variables and not real. |
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Term
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Definition
1.) First true macro model
2.) General equilibrium
3.) Distinction between individual and aggregate behavior
4.) Keynes thought empirical was biased and useless |
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Term
| 2 Postulates of Classical Labor Markets |
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Definition
1.) W/P=MPL-on Ld curve
2.)MVwage=-MVlabor-on Ls curve
***In this model, there is only voluntary unemployment |
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Term
| 3 huge ass problems with Keynes General Theory |
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Definition
1.) Employment fluctuates a lot more than Ls and Ld- Keynes doesn't see that this can be very volatile.
2.) Keynes only believes in Voluntary Unemployment.
3.) Invol Unemp.: people willing to work for the current wage, but can't find a job. Keynes assumes wages can't adjust quickly. When Ld |
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Term
| 3 Reasons to why nominal wages are sticky |
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Definition
1.) "Money illusion" workers worry about nominal wages relative to other people's wages
2.) Increase in P--> decre w/p--> people leave market. It is costly to leave and enter the market. |
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Term
| If wages are sticky, what does that mean about labor? |
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Definition
| incre w/p-->decre Ld (invol unemp.)--> decre in Y |
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Term
| Multiple Equilibrium in Keyens means 2 things |
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Definition
Depending on position of AD:
1.) Rejects Say's-AD determines Y: supply creates its own demand
2.) Rejects money neutrality |
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Term
| 2 things why Id is so volatile |
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Definition
| 1.) Any change in Cd, Gd,NXd will influence Id because it will impact inventories. ***unplanned investment-make good, but can't sell them. |
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Term
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Definition
| We don't know what we don't know. Information is limited. |
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Term
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Definition
| Know the distribution of a random variable |
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Term
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Definition
| Leads to extreme over reations |
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Term
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Definition
| Beauty contest- you pick a stock based on other people's expectations. |
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Term
| As long as expectations are low... is S<,=,or> than I |
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Definition
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Term
| What happens to I and S as countries get bigger? |
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Definition
| I becomes a larger fraction of output and consumption as a fraction decreases. This relates to the underconsumption model. |
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Term
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Definition
| Expectations fall so people save more. |
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Term
| Do we get Paradox of thrift in the classical model? |
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Definition
| No, b/c S=I, but this is not the case in the Keynesian model b/c I is a function of expectations. |
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Term
| When expectations decrease, what happens to Id? |
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Definition
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Term
| Explain the multiplier effect with Id |
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Definition
| decre Id---> decre Y--> Id decre more and consump decre more-->decre Y |
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Term
| 3 things: How do recessions end |
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Definition
1.) Expectations recover
2.) Wages and prices adjust
3.) Gvt policy |
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Term
| Draw out a decrease in expectations on the AD/AS curve |
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Definition
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Term
| IS/LM Model (5 differences from Keynes) |
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Definition
1.) Prices are fixed, not just sticky
2.) Focused on fluctuations in Consumpt model, not just I
3.) Down Played the role of the financial systems
4.) Model of equilibrium
5.)Stat. Uncertainty |
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Term
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Definition
| If there is a positive demand, there must be a negative demand, so that demand equals zero. Therefore, if we know that two mkts=0, the third must equal zero, so we can clear the bond market out of analysis of the IS/LM model. |
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Term
| Why is there a negative relationship between i and Y in the IS curve. Draw this out and explain. |
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Definition
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Term
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Definition
1.) Increase in expectations--> Increase IS by incre in I and or decre in S
2.) Change in taxes-incre in T decre IS by change is S
3.) Change in Gov spending. Incre G leads to a incre in savings |
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Term
| Liquidity preference theory |
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Definition
| people prefer to hold liquid assets |
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Term
| draw out the Money market graph. |
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Definition
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Term
| From the money market graph, draw the LM curve. Which way is it sloping and why? |
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Definition
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Term
| How does IS/LM relate to AD? Show an Increase in P |
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Definition
| Ms curve shift to the left. LM shifts to the left, increasing i. an increase in I leads to a decrease in Y |
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Term
| Draw out the phillips curve with unemployment |
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Definition
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Term
| What where the shocks that caused the great depression? |
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Definition
1.) Main shock:
-decrease in expectations: decrease in I and C
2.) Decre in Ms that decre LM
-decre in stock market |
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Term
| What was the solution to the great depression? |
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Definition
| Increase in G, decre in T which both increase IS and incre AD. Also an Increase in Ms that incre LM which incre AD. |
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Term
| What does a decrease in P do to Y and U |
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Definition
| decrease Y and increases U (phillips curve) |
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Term
| What 6 things does it mean to be a Keyensian? |
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Definition
1. AD id volatile
2. changes in AD impact Y and U more than P in S.R.
3. MKT failure in goods and labor mkt... sticky Pand W
4. Very slow adjustment process back to potential output.
5. Stabilization policu can reduce the volatility of Y and U
6. Worried more about U than inflation!!!!! |
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Term
| What do Keyensians and Keynes believe about financial mkts |
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Definition
| Keyens thought that the market created b-cycles, whereas Keynesians beleived that b-cycles were symptoms of b-cycles. |
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Term
| What does keyenes think about what investors do? |
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Definition
| Beauty contest and herding |
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Term
| What did Keynes think about Central bankers? |
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Definition
| 1. they are idiots and that they are working on a liquidity trap. |
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Term
| What do Keyensians think about central bankers? |
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Definition
| MP is important...Phillips curve, bitch! |
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Term
| What principles does the Monetarist follow? |
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Definition
| Classical principles: money neutrality holds in the long run, prices and wage are perfectly flexible and changes in AD are driven by changes in Ms. |
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Term
| State the QTY Theory in Percentage terms. what variables are constant |
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Definition
| %chang M+%chV=%chP+%chY... we assume V is constant |
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Term
| what does a constant V mean for the QTY theory |
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Definition
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Term
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Definition
| Money neutrality may not hold in the SR, but it will in the LR. |
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Term
| Draw a SRAS/LRAS/AD curve with a increase in MS. What does the incre in Ms go. |
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Definition
| First, the AD curve shifts right, then people increase their expectations about price, so then the SRAS shifts left to go back into equilibrium iwth the LRAS. |
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Term
| 2 Things that MP can't do |
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Definition
1. Peg nominal interest rate: i=r+expected inflation
2.) Peg employment |
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Term
| In the LR is employment a real or nominal variable. can the central bank control this? |
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Definition
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Term
| What 4 things can change the natural rate of unemployment? |
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Definition
1.) technology
2.) government policy
3.) demographics
4.) Hysterisis. |
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Term
| Draw out the LRPC. What does expected price level have to do with this? How does this shift the PC in the SR? |
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Definition
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Term
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Definition
1.) Price/inflation stability
2.) MP can prevent change in Ms from being a source of business cycles
3.) Offset major shocks |
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Term
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Definition
1. Fed should be guided only by things that it can control, not by things that it can't. ***Targeting prices is difficult b/c the Fed can't control prices.
2.) Fed should avoid sharp swings in policy. ***Target should be stated and known. |
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Term
| Is money growth procyclical and leading indicator? |
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Definition
| Yes. Money is much more volatile than Y |
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Term
| 5 COntributions of Monetarists |
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Definition
1.) Focused on MP
2.) Reinforced classical principles: money neutrality and NR hypothesis
3. Focus on ST/LT behavior of interest rates: i=r+expect inflation.
4.) Focus on expectations/ information
5.) Rules vs discretion in policy making
i.) Lags in policy
ii.) Ignorance |
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Term
| 4 Principles of the Rational Expectations Model |
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Definition
1.) People form expectations on all cost effective and avaliable information
2.) Marginal Analysis applied to expectations
3.) Forward looking
4.) People will not make systematic or predictable errors. ---Stat uncertainty. |
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Term
| Three principles of Lucas Critique |
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Definition
1.) Lots of workers and producers-perfect competition
2.) Produce homogenous good/output |
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Term
| What is the problem with Lucas |
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Definition
| Can only observe the price of the good they sell, can't observe price level. Imperfect info. |
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Term
| Provide an Example of the Problem with Lucas |
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Definition
When I see the price of my good rise, I will think one of two things:
1.) Incre demand for own good or
2.) incre in aggre price level |
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Term
| What is the Lucas Supply equation? |
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Definition
Yt-Ynr=alpha(Pt-Expected P)+Ut
where Ut=supply shock |
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Term
| According to the Lucas equation, what does a high alpha mean? |
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Definition
| The country has a low inflation history |
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Term
| What two things does the alpha in the Lucas equation depend on? |
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Definition
1.) Variance of demand of own good high, then alpha is high. Producers want to change output.
2.) Variance of demand of own good low |
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Term
| What is the key to the lucas equation? |
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Definition
| People catch on immediately and change expected prices. This allows for a simultaneous shift in the AS/AD curves and prevents a recession. |
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Term
| Using the Lucas equation as a guide, illustrrate what happens when there is a decrease in AD. |
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Definition
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Term
| Two important implications of RE model |
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Definition
1.) Policy irrelivance
2.) Lucas Critque |
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Term
| What is the Lucas Critique |
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Definition
| It is impossible to predict the outcome of any policy unless you know how expectations will change. This is why economic forecasting has fallen out of favor. |
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Term
| Do RE hold? What is an example of empirical evidence? |
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Definition
| Brazil had two years of high inflation and rthen had a year of very low inflation, but unemployment remained constant. |
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Term
| What kind of theories do Real business cycle mopdels use? |
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Definition
| They use growth models, like the Solow model. |
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Term
| List 5 things that are productivity/technology shocks (Ut) |
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Definition
1.) Change of input prices
2.) Natural disasters
3.) Technology changes itself
4.) Demographics change
5.) Public Policy |
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Term
| (RBC)What does a change in Ut look like on the AS/AD graph? |
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Definition
| It shifts the long run AS curve |
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Term
| 4 Implications of business cycles |
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Definition
1.)Business cycles are efficient
-stabilization policy ineffective and costly under all circumstances
-lassez fair-minimal gvt
-gov policy should serve to increase AS by increasing productivity.
2.) Unemployment is voluntary
3.) Real Wages are procyclical-strong.
4.) Money is always neutral:n MP key- aim for low inflation |
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Term
| What are the steps for a RBC simulation exercise: |
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Definition
1.) Formulate the model
2.) Calibrate the parameters of the model (exogenous variables) so that the mopdel matches what we know about the LR behavior of the economy.
3.) Calculate "productivity shocks" based on U.S. data
4.) Include those shocks in model and see how model behaves.
3.) |
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Term
| Derive the Solow residual model |
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Definition
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Term
| What is the big problem with the RBC model |
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Definition
| Labor hoarding raises the real question about whether or not the solow residual really captures true production shocks. |
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Term
| Empirical evidence on RBCs |
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Definition
1.) Are real wages procyclical... It is midely procyclical over long run
2.) Case studies of specific recessions
Smoot Hawley Tariffs--- False.
3.) Is money neutral? No... |
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Term
| What are the 2 contributions of RBC? |
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Definition
1.) It explains how some models help show changes of A→changes in Y.
2.) RBC models are consistent with theory |
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