Flashcards in Principles of Economics - Macro Deck (205)
What is the accounting identity?
Injections equal leakages or that AE = Y
Examples of injections and leakages
Government expenditure and taxation taken by government
Investment and savings
Imports and exports
How do accountants and economists differ?
Whilst accounts put failed investment into an inventory to keep AE = Y, economists want a behavioural statement on why this occurs and how equilibrium returns after changes are made
How does MPC and MPS change based on income level?
Lower income leads to a higher MPC and lower MPS but for macroeconomics, an average is taken
How does the propensity to import change as Y increases?
Imports increase as Y increases
What is the largest possible value for the multiplier and what is realistic?
5, but 1.5-2 is more realistic
As c, t and imports increase, how does the flatness of the AE line change?
As c increases, the line becomes steeper, whilst if t and imports increase, the line becomes flatter
Who found the Keynesian cross?
Why is closed economy analysis acceptable for the EU and US?
Imports and exports make such a small sector of output so as to be reliably ignored
How is investment as affected by income found?
I = aY^e (t+1) where future demand will affect investment
Why is Io used as a formula for investment?
Keynes' interest in the importance of the uncertainty of future demand, e, makes it impossible to endogenize
How is investment decided compared to interest rates?
Where the rate of return of investment is higher than the interest rate, an investment is made, therefore
I = Io - bi
How are interest rate changes shown on an AE - Y graph?
In the change in the y-intercept, where di = 0, with higher interest rates having lower intercept lines
What cases are there of linked interest rates?
Interest rate of central bank (CB) must be lower than lending rate of commercial bank which will be higher than the rate of return of bonds
What are the three motives for hoarding cash?
Transaction motive (cash as medium of exchange), precautionary motive (keeping options open) and speculative motive (dependent on interest rates)
What is the equation for the transaction and precautionary motive?
Ld = kY which often covers both motives, as they both increase as income does
What is the equation for the Ld in full?
Ld = kY - hi = M
What is an expansionary open market operation?
Where the CB buys bonds, injecting money into the supply from the monetary base
What is the opposite of an expansionary open market operation?
A contractory open market operation where CB bonds are sold to commercial banks, with the funds from these absorbed back into the monetary base and out of the monetary flow
How do open market operations change the interest rates?
Expansionary ones, where money supply is increased, will cause a decrease in interest rates as the bonds bought buy the CB will become more expensive with the same maturity in place, decreasing the rate of return; this follows the equation M = kY - hi
What affect does an expansionary open market operation have on the LM curve?
As interest rates drop, in order to keep M = kY - hi, output must decrease so LM curve shift left. In cases of higher interest rates when the monetary flow is decreased, there is an expansion in output so the graph shifts right
What have the previous shifts been predicated on?
M being exogenous and with the CB in control directly
What are the three parts to the money supply?
Mo - banknotes and coins circulating in the economy
M1 - monetary base + Mo + deposits
M2 - wider measures
Why would a bank not lend all that it receives in income?
In voluntary or involuntary reserves
Which two ways do firms raise money?
Through bank loans and issuing bonds
What is the secondary monetary policy LM curve?
M = Mo + a( i + io) - a flatter curve
How do shocks to the IS curve change the economy in fixed and variable interest rates?
In flexible interest rates, shifts in the IM curves will create a new crossing point at a different interest rate. In fixed exchange rates, where the IS curve shifts, the LM curve will also shift due to central bank intervention so the interest rate remains at the same level
What is the variation in output?
The difference between Ya and Yb which are the different outputs due to shocks in the economy shifting IS and LM curves
What is lm on an interest-output graph?
The interest rate when it is fixed by a central bank, a horizontal line on the graph