Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Download EC102 Economics B - Samira Barzin
Document related concepts
Economic growth wikipedia , lookup
Monetary policy wikipedia , lookup
Business cycle wikipedia , lookup
Ragnar Nurkse's balanced growth theory wikipedia , lookup
Non-monetary economy wikipedia , lookup
Great Recession in Russia wikipedia , lookup
Gross domestic product wikipedia , lookup
Money supply wikipedia , lookup
2000s commodities boom wikipedia , lookup
Transcript
EC102EconomicsB Class6 Week7/LT 22.02.2016 SamiraBarzin [email protected] samirabarzin.jimdo.com OfficeHoursEC102:Mon10:30–11.30 (32L1.30) EC102 Class6:Q1 SamiraBarzin IftheeconomyisnotiniPallyinarecession,followinga monetaryexpansionweexpecttosee a) Firstanincreaseinpricesandthenanexpansionin theeconomy b) Firstanexpansionintheeconomyandthenan increaseinprices c) Asimultaneousincreaseinpricesandexpansionin theeconomy d) AnincreaseinpricesfollowedbyacontracPonin theeconomyduetoinflaPon EC102 Class6:Q1 SamiraBarzin MonetaryExpansion:Moneyé&interestrateê ->households:consumpPoné&savingsê ->aggregatedemandé (forhouseholdsthatarenetlenders(i.e.theysave)reduced interestratesreducetheopportunitycosttolendandhence householdswillsavelessandconsumermore;forhouseholds thatarenetborrower(i.e.theyneedtoborrowinorderto consume)thereduceinterestratereducesthecostof borrowingandhenceincreasesborrowingandsubsequently consumpPonforthesehouseholds EC102 Class6:Q1 SamiraBarzin MonetaryExpansion:Moneyé&interestrateê ->firms:investmentsé ->aggregatedemandé (forfirmsthatarenetlenders(i.e.theyinvestinfinancial markets)reducedinterestratesreducetheopportunitycost toinvestandhencefirmswillinvestlessinfinancialgoods;for firmsthatarenetborrower(i.e.theyneedtoborrowinorder tobeabletoinvest)thereduceinterestratereducesthecost ofborrowingandhenceincreasesborrowingand subsequentlyinvestmentsforthesefirms EC102 Class6:Q1 LRAS aggregate pricelevel P PLR inflaPon P output growth YSR ! EC102 Class6:Q1 SamiraBarzin Intheshortrun supplythepricelevel intheeconomyis fixed(sPckyprices), inthelongrunfirms canadjusttheirprices asaresponseto changesinaggregate demand.Anincrease inaggregatedemand shicstheADcurve SRAS upwardsandresults inashortrunoutput AD‘ increase(more AD outputduetomore demand).Inthelong runfirmsadjusttheir pricestothe increaseddemand OutputY andtheeconomywill experienceinflaPon. SamiraBarzin IftheeconomyisnotiniPallyinarecession,followinga monetaryexpansionweexpecttosee a) Firstanincreaseinpricesandthenanexpansionin theeconomy✖ b) Firstanexpansionintheeconomyandthenan increaseinprices✔ c) Asimultaneousincreaseinpricesandexpansionin theeconomy✖ d) AnincreaseinpricesfollowedbyacontracPonin theeconomyduetoinflaPon✖ EC102 Class6:Q2 SamiraBarzin Thefollowingisanargumentagainstbelievingthat supplyshocksarethemainsourceoffluctuaPons: a) InvestmentismorevolaPlethanconsumpPon b) Unemploymentrisesinrecessions c) GDPgrowthisocennegaPve d) GPDgrowthisocenbelowitslong-runaverage EC102 Class6:Q2 SamiraBarzin Whataresupplyshocks? - Improvementsintechnology(TFP) - canneverbeanegaPvesupplyshockastechnologydoesnot getworse(therecanbePmeswithlessinnovaPonssotherecan besmallandbiggersupplyshocksthroughtechnology innovaPons) - drasPcchangesininputfactorprices - inputfactorscanbothbeposiPveoranegaPvesupplyshock, increasesininputpricesareanegaPvesupplyshockwhereas decreasesininputpricesareaposiPvesupplyshock EC102 Class6:Q2 SamiraBarzin a) InvestmentismorevolaPlethanconsumpPon✖ EC102 Class6:Q2 SamiraBarzin a) InvestmentismorevolaPlethanconsumpPon✖ SupplyshocksandInvestments - PosiPvesupplyshocksshouldincreaseinvestmentsand henceGDPgrowth(e.g.increasesinTFP) - NegaPvesupplyshocksshoulddecreaseinvestmentsand henceGDPgrowth(e.g.increasesininputpricesthat reduceprofits) - Investmentdecisionsaremadeasadirectresponseto inputchangesbythefirm(lessinputcostsresultinmore profitsandallowformoreinvestmentsc.p.),sosupply shocksthroughinputpricesand/orTFPaffectinvestment andhenceGDP EC102 Class6:Q2 SamiraBarzin SamiraBarzin b) Unemploymentrisesinrecessions✖ EC102 Class6:Q2 b) Unemploymentrisesinrecessions✖ Supplyshocksandunemployment NegaPvesupplyshockscanmeanthatfirmswillhave toletgoofpartsofthelabourpoolandhence increasingunemployment,subsequentlyreducing aggregatedemand(e.g.tradeembargos)and introducingarecessionintotheeconomy. EC102 Class6:Q2 SamiraBarzin c) GDPgrowthisocennegaPve✔ GDPgrowthandsupplyshocksthroughTFP -TechnologygetsbekerwithnewinnovaPonsand henceTFPgrows.TFPcannotdeclinesothatTFP cannotleadtonegaPveGDPgrowth. GDPgrowthandsupplyshocksthroughinputprice shocks -Supplyshocksallowtoexplainsomebutnotall changesinGDPgrowth(seegraph) EC102 Class6:Q2 SamiraBarzin c) GDPgrowthisocennegaPve✔ GDPgrowthandsupplyshocksthroughinputpriceshocks EC102 Class6:Q2 SamiraBarzin d) GDPgrowthisocenbelowitslong-runaverage✖ MildincreasesininputfactorpricescanreduceGDPgrowthbutmustnotmakeit negaPve,similarlyperiodswithslowtechnologygrowth. EC102 Class6:Q2 SamiraBarzin Thefollowingisanargumentagainstbelievingthat supplyshocksarethemainsourceoffluctuaPons: a) InvestmentismorevolaPlethanconsumpPon✖ b) Unemploymentrisesinrecessions✖ c) GDPgrowthisocennegaPve✔ d) GPDgrowthisocenbelowitslong-runaverage✖ EC102 Class6:Q3 SamiraBarzin WhichofthefollowingstatementsaboutinflaPon arecorrect? a) InflaPonmeasuresthechangeinthegeneral priceleveloveraperiodofPme b) InflaPonmeasurestheoveralllevelofprices c) InflaPoncausesrelaPvepricedistorPonssince firmshavedifferentmarketpower d) InflaPoncangeneratesomerealwageflexibility EC102 Class6:Q3 SamiraBarzin a) InflaPonmeasuresthechangeinthegeneral priceleveloveraperiodofPme✔ b) InflaPonmeasurestheoveralllevelofprices✖ InflaPonismeasuredanddefinedasthechangein pricesofaneconomy. EC102 Class6:Q3 SamiraBarzin c) InflaPoncausesrelaPvepricedistorPonssincefirmshave differentmarketpower✖ InflaPonandPriceDistorPons -PricesaresignalsoftherelaPvescarcityofagood,posiPve inflaPonsshouldmeanthatthegoodisrelaPvelymorescarce andhenceresultsinpricedistorPons. MarketPowerandPriceDistorPons - Firmswithmoremarketpowercanchargehigherprices andcausedistorPons.,independentlyofinflaPon InflaPonincreasesthepricesofaneconomy,marketpower alsoallowsfirmstoincreasepriceabovemarginalcosts, hencethesearetwoseparatereasonsforincreasesinprices. EC102 Class6:Q3 SamiraBarzin d) InflaPoncangeneratesomerealwageflexibility ✔ RealWage=Nominalwages/prices Therealwagemeasuresthepurchasingpowerof thenominalincome,e.g.howmanybananascan youreallybuyfromyourincome? NominalwagesareverysPcky,muchmoresothan otherprices.Henceifnominalwagesremain constant,butpriceschange,thenchangestothe realwagestemfrominflaPon. EC102 Class6:Q3 SamiraBarzin WhichofthefollowingstatementsaboutinflaPon arecorrect? a) InflaPonmeasuresthechangeinthegeneral priceleveloveraperiodofPme✔ b) InflaPonmeasurestheoveralllevelofprices✖ c) InflaPoncausesrelaPvepricedistorPonssince firmshavedifferentmarketpower✖ d) InflaPoncangeneratesomerealwageflexibility ✔ EC102 Class6:Q4 SamiraBarzin OnFeb4th2016,twelvePacificRimcountriessignedthe Trans-PacificPartnershipTPP,anagreementliberalizing tradeamongthesignatories.OneprovisionofTPPisthe removalofJapanesetariffsonagriculturalproducts,suchas frozenbeeffromtheUS.Currently,Japanimposesatariffon 38.5%onimportedfrozenbeeffromtheUS.IfJapan removesthetariff,weexpect: a) TheJapaneseCPIwoulddecrease b) TheJapaneseCPIwouldincrease c) TheJapaneseGDPdeflatorwoulddecrease d) TheJapaneseGDPdeflatorwouldincrease EC102 Class6:Q4 SamiraBarzin TariffreducPonofbeef->priceforimportedbeefê (sincethetariffisforallimportedagriculturalgoods:the priceofotherimportedagriculturalgoodsê) ->pricereducPonsreducetheinflaPonratedownwards ->Sincetheseareimportedgoods,whiletheydirectly affecttheCPI,theydonotinfluencetheGDPdeflator (sinceGDPfocusesongoodsandservicesdomesPcally produced). However,iftheimportedbeefbecomescheaperto Japaneseproducers,Japanesefarmerswillalsoreduce thepriceoftheirJapanesebeefinordertocompete withtheUSbeef,hencethisreducesthepriceleveland hencereducestheGDPdeflator. EC102 Class6:Q4 SamiraBarzin CPIandGDPdeflator - CPI=consumerpriceindex - constructabasketofhouseholdgoodsandevaluateits priceatdifferentPmes - ifthebasketbecomesmoreexpensivethereisinflaPon (themoreexpensivethebaskethasbecomethemore inflaPontherehasbeen) - onlyevaluateshousehold/consumergoods - canincludebothimportedanddomesPcallyproduced goods EC102 Class6:Q4 SamiraBarzin CPIandGDPdeflator - GDPdeflator - GDPdeflator=(NominalGDP/RealGDP)x100 - RealGDPmeasuresthequanPPesproducedinthe pricesofagivenbaseyear,nominalGDPmeasures thosesamequanPPesinthecurrentprices,sothatthe GDPisthesame,butthepricelevelisdifferent - IfNominalGDP>RealGDP,therehasbeeninflaPon,if NominalGDP<RealGDP,therehasbeendeflaPon - includesallgoodsandservicesproducedinan economy(notimports) EC102 Class6:Q4 SamiraBarzin EC102 Class6:Q4 SamiraBarzin OnFeb4th2016,twelvePacificRimcountriessignedthe Trans-PacificPartnershipTPP,anagreementliberalizing tradeamongthesignatories.OneprovisionofTPPisthe removalofJapanesetariffsonagriculturalproducts,suchas frozenbeeffromtheUS.Currently,Japanimposesatariffon 38.5%onimportedfrozenbeeffromtheUS.IfJapan removesthetariff,weexpect: a) TheJapaneseCPIwoulddecrease✔ b) TheJapaneseCPIwouldincrease✖ c) TheJapaneseGDPdeflatorwoulddecrease✔ d) TheJapaneseGDPdeflatorwouldincrease✖ EC102 Class6:Q5 SamiraBarzin Financialcontractswhichincludeaperiodic adjustmenttotheinterestpaidbasedontheinflaPon ratearecalled“indexed”,or“inflaPon-linked”.If inflaPonturnsouttobehigherthanexpected: a) creditorswithanunindexedcontractareworseoff b) creditorswithanindexedcontractareworseoff c) debtorswithanunindexedcontractarebekeroff d) debtorswithanindexedcontractarebekeroff EC102 Class6:Q5 SamiraBarzin Indexedvs.Unindexedcontracts unindexedcontracts:denotedinnominalcurrencies (e.g.yougiveme£5today,andIpayyou£5in2years) indexedcontracts:denotedinrealcurrencies (e.g.yougiveme£5today,andIpayyou£5x (1+inflaPon)in2years)sothatthe£5Iborrowed allowmetobuyasmuchasthe£5Irepay) EC102 Class6:Q5 SamiraBarzin Indexedvs.UnindexedcontractsandInflaPon HigherinflaPonmeansthatthemoneyislosingmore value(largerreducPonsinthepurchasingpowerof money) unindexedcontracts:thenominalreturnis“worth”less thanexpected(henceallowsyoupurchaselesswithit) indexedcontracts:thenominalreturnisequaltothereal returnandthe“worth”isunaffected(henceallowsyouto purchasejustasmuchwithit) EC102 Class6:Q5 SamiraBarzin Debtorvs.Creditor Debtor:owesadebt/theborrower Creditor:isowedadebt/thelender withhigherinflaPon:thereturnis“worth”lessthan expected,henceinrealtermsthereturnpaidislower, i.e.thedebtorrepaysmoney“worthless”thanthat (s)hehadiniPallybeengivenbythecreditor EC102 Class6:Q5 SamiraBarzin Financialcontractswhichincludeaperiodic adjustmenttotheinterestpaidbasedontheinflaPon ratearecalled“indexed”,or“inflaPon-linked”.If inflaPonturnsouttobehigherthanexpected: a) creditorswithanunindexedcontractareworseoff ✔ b) creditorswithanindexedcontractareworseoff✖ c) debtorswithanunindexedcontractarebekeroff ✔ d) debtorswithanindexedcontractarebekeroff✖ EC102 Class6:Essay SamiraBarzin a) FacedwithanegaPvedemandshock,thecentral bankneedstostrikeabalancebetweendoing“too much”anddoing“toolikle”.Explain WithanegaPvedemandshock,shouldtheCentralbank favouranexpansionaryorcontracPonarymonetary policy? ->expansionarymonetarypolicy (increasemoneysupplyandreduceinterestrates) EC102 Class6:Essay toolikle LRAS aggregate pricelevel P P deflaPon output growth ! SamiraBarzin Thecentralbank employsa cauPonary expansionary monetarypolicy,i.e. itincreasesthe moneysupplyalikle andreducesthe SRAS interestratesalikle. Outputincreasesin theshortrun,but AD‘ outputremains AD belowitslong-run level.Long-runprice adjustmentsresult indeflaPon. OutputY EC102 Class6:Essay toomuch P output growth ! EC102 SamiraBarzin Thecentralbank employsadrasPc expansionary monetarypolicy,i.e. itincreasesthe moneysupplyalot inflaPon andreducesthe interestratesalot. SRAS Outputincreases substanPallyinthe AD‘ shortrunandis pushedaboveits AD long-runlevel.Longrunprice adjustmentsresult ininflaPon. OutputY LRAS aggregate pricelevel P Class6:Essay SamiraBarzin b) Whenwillamonetaryexpansionnotresultin inflaPon? EC102 Class6:Essay P output growth ! EC102 SamiraBarzin Thecentralbank employsan expansionary monetarypolicythat increasesthemoney supplyandreduces theinterestratesjust asmuchasisneeded topushoutputback toitslong-runlevel SRAS (hencethepricelevel alsoremainsatthe AD‘ sameconstantlevel). Sincethecentralbank cannotaccuratelyand AD indetailpredictthe reacPonofthe economytothe monetarypolicythis OutputY isrealisPcallydifficult toachieve. LRAS aggregate pricelevel P Class6:Essay SamiraBarzin c) DescribethetwomainmeasuresofinflaPon ->checkQ4MCQ EC102 Class6:Essay SamiraBarzin d) InflaPoninterfereswiththemarketallocaPonmechanism.Explain withinflaPonpricesdonotlongersignal - relaPvescarcity&resourceallocaPon - pricesrepresentrelaPvelyscarcity,thismustnotmeanabsolutescarcitybutitcansimply meanthatthereexistsmoredemandthansupplyforagood(thegoodisscarcerelaPvetoits suppliedquanPty),hencethepriceincreases - highpricesrepresentthatthereexistsahighdemandhenceresources(rawmaterials,inputs, labour)shouldbeallocatedtothosesectorswithhighprices - withinflaPonhighpricescannolongerbeinterpretedassignalsofrelaPvescarcity,soif resourcesareallocatedtosectorswithhighprices,resourcesmaybemisallocatedasthe higherpriceswerejustduetoinflaPonandnotduetorelaPvescarcity - relaPvepriceraPosduetodifferentsPckinessofprices - firmschangetheirpricesatdifferentPmesduetothesPckinessofprices - withinflaPondifferentpriceswillchangeatdifferentPmessothattherelaPvepriceraPo betweendifferentgoodswillbechangedduetoinflaPon;ifyouchoosebetweentwogoods andthepriceofonegoodissPckyandhenceremainsrelaPvelyconstantintheshortrun whereasthepriceoftheothergoodisflexibleandincreasesduetoinflaPon,consumers wouldswitchtotherelaPvelycheapergoodandthedemandforthegoodswouldbealtered (thisalsoholdsforfirmswhochosetheirinputsbasedontheirrelaPveprices) (alsocheckQ3c)MCQ)
