Week 10 Notes Econ 322
Week 10 Notes Econ 322 Econ 322
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This 2 page Class Notes was uploaded by Tulsi on Thursday March 24, 2016. The Class Notes belongs to Econ 322 at University of South Carolina taught by Hauk in Spring 2016. Since its upload, it has received 12 views. For similar materials see Intermediate Macroeconomics in Economcs at University of South Carolina.
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Date Created: 03/24/16
Week 10 Exam 2: Ch 6, 13, 14, 8 Tuesday, March 22, 203:16 PM Economic Stabilization Policy 1) Should macroeconomic policy be active or passive? Ignorance, Rational Expectations, and the "Lucas Critique" by Robert Lucas -economic expectations are important economic variables -good economic forecasts have to take into account how changes in policy will change expectations -economic forecasting is hard to do well 2) Should macroeconomic policy be conducted by discretion or by rule? Policy by rule-if policy makers announce in advance how macroeconomic policy will respond to particular situations Policy by discretion-if policy makers are free to determine how macroeconomic policy will respond to particular situations at the time The case for Policy by Rule: 1) Distrust policymakers or the political process a. -incompetence b. Capture by special interest groups c. Re-election motive leads to political business cycle Time Inconsistency Problem -monetary policy: central bank might benefit in the long-run from having policy discretion taken away Monetary Policy Rules -Money supply growth rule by Milton Friedman -money supply increase at a constant low rate every year (2%) MV = PY Y increases about 2% a year Nominal GDP Target -nominal GDP = P*Y -%change in nominal GDP = %change in price level (inflation) + %change in real GDP -%∆nominal GDP = P/∆ + Y/Y∆ -to increase inflation, increase the money supply -to decrease inflation, decrease the money supply Inflation Target -keep inflation below 2% -keep inflation expectations low (stable) -handle demand shocks well (keep Aggregate Demand stable) -does not handle supply shocks well (could cause a big recession) Central Bank Independence -how independent is the central bank? -to what extent can it influence the economy? New Section 4 Page 1 END OF EXAM 2 MATERIAL Consumption Y = C + I + G C = c0+ c(Y-T) Keynes Model MPC = C∆ ∆ = c 0<c<1 (marginal propensity to consume) APC (average propensity to consume) = C/Y = c /Y + c 0 If Y increases, APC increases If Y decreases, APC decreases Secular Stagnation Hypothesis If Y increases a lot, APC will fall a lot C2 Y2 + (1+r) Y1 Intertemporal Consumption Function -people live for 2 periods Slope = Indifference curve -people can save and borrow across periods -(1+r) Y2 -Income in period 1 is Y1, income in period 2 is Y2 Intertemporal budget constraint -Maximize utility across both periods subject to a budget constraint -divide consumption across 2 periods C1 Y1 Y1 + Y2/(1+r) (1+r)PV = FV PV = FV/(1+r) Borrow = .5/(1+r) New Section 4 Page 2
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