Summary The economy

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Summary - The economy

  • 1.1 13.1

  • explain the business cycle
    Alternating periods of faster and slower (or even negative) growth rates. The economy goes from boom to recession and back to boom.
  • what are the four types of models?
    large scale macro-economic models: main workforce at central banks
    small scale economic models :WS-Ps
    Empirical work: philips curce  
    agent based: consistent, not flexible, hard to expplain
  • with low unemployment firms have less bargaining power
  • with higher production, consumers have less bargaining power
  • high price, less demand, less output, increase unemployment
  • 1.2 13.2

  • describe okuns law
    The empirical regularity that changes in the rate of growth of GDP are negatively correlated with the rate of unemployment.
  • describe the okun coeffiecient
    The change in the unemployment rate in percentage points predicted to be associated with a 1% change in the growth rate of GDP
  • summarize the relationship between output, unemployment, and wellbeing like this:
    a fall in output growth leads to a rise in the unemployment rate that leads to a fall in well being
  • 1.3 13.3

  • describe three ways of measuring GDP
    • Spending: The total spent by households, firms, the government, and residents of other countries on the home economy’s products.
    • Production: The total produced by the industries that operate in the home economy. Production is measured by the value addedvalue added For a production process this is the value of output minus the value of all inputs (called intermediate goods). The capital goods and labour used in production are not intermediate goods. The value added is equal to profits before taxes plus wages. by each industry: this means that the cost of goods and services used as inputs to production is subtracted from the value of output. These inputs will be measured in the value added of other industries, which prevents double-counting when measuring production in the economy as a whole.
    • Income: The sum of all the incomes received, comprising wages, profits, the incomes of the self-employed, and taxes received by the government.
  • The relationship between spending, production, and incomes in the economy as a whole can be represented as a circular flow:
    the national accounts measurement of GDP can be taken at the spending stage, the production stage, or the income stage. If accurate measurement were possible, the total of expenditure, output, and incomes in a year would be the same so the point at which the measurement is taken would not matter.
  • 1.4 13.4

  • give the components of the GDP
  • define the trade balance
    Value of exports minus the value of imports
  • 2.1 Summary

  • How is it called when the policy rates are close to zero?
     This is referred to as the zero lower bound on interest rates or as the liquidity trap
  • give the seven findings of the IS/MP-AS/AD model
    First, when the economy experiences larger balance-sheet problems or is in a liquidity trap, the negative impact of lower aggregate demand on total output is larger than under normal conditions.

      Second, when balance-sheet problems are very severe or when the zero lower bound remains binding, the economy does not automatically revert to its long-run macro-economic equilibrium, but may slide down into a (debt-)deflation spiral with economic stagnation

    Third, when balance-sheet problems are severe and the zero lower bound is binding, countercyclical fiscal policy is more desirable than under normal conditions.   

    Fourth, monetary policy loses its power when the interest rate reaches the zero lower bound.   

    Fifth, there is a ‘timidity paradox’: expansionary fiscal or monetary policy needs to be sufficiently aggressive to be effective when balance-sheet problems are severe and the economy is in a liquidity trap.  

    Sixth, larger wage and price flexibility exacerbates short-term economic problems when balance-sheet problems are severe and the zero lower bound is binding  
    Seventh, similar reasoning applies to structural reforms
  • describe the ‘timidity paradox’
     expansionary fiscal or monetary policy needs to be sufficiently aggressive to be effective when balance-sheet problems are severe and the economy is in a liquidity trap.
  • describe the flexibility paradox
    ‘flexibility paradox’: larger declines in prices amplify debt–deflation dynamics and raise real interest rates (which the central bank is no longer able to reduce using monetary policy).
  • describe the paradox of toil
    structural reforms may damage the economy in the short run. Larger aggregate supply causes the output gap to increase. When aggregate demand does not sufficiently increase – because households and firms will be richer in the future – net deflationary pressures will increase, causing stronger (debt-)deflation dynamics
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