If the economy is on the LM curve but not on the IS curve, then we know that:
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The money market and bond markets are in equilibrium, but not the goods
market.
Inflation/CPI Equation
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Infaltion t= (CPI t+1 - CPI t)
/CPI t
In the short run unemployment may fall below the natural rate of unemployment if:
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Nominal wages have risen less than inflation
If inflation rate in period t is given as 0.02 and consumer price index in period t + 1 is
100 then CPI in period t is given by:
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Inflation is given by:
πt =CPI t+1− CPI t
/CPI t
, putting the values we get:
0.02 = 100−CPI t
/CPI t
=⇒ 0.02 = 100 - 1
/ CPI t
=⇒ CPI t = 98.04
According to the interest rate effect, an increase in the price level should:
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, Raise interest rates and decrease spending on GDP; the aggregate demand
curve should be downward sloping
Other things being equal, the Neoclassical model of investment predicts that net
investment will increase when the:
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Marginal product of capital falls or depreciation rate falls
As marginal product falls, it leads to an increase in capital stock, hence the
investment increase. Suppose δ is the rate of depreciation then capital
stock in period t is given by:
P F' (K) = Pk(r + δ)
A fall is δ will also reduce F ' (K) hence increasing K, which leads to higher
investment.
When the economy is on the long-run Phillips Curve, we know that:
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- We are at full employment.
- The unemployment rate is at its natural rate.
- Any rate of inflation could be consistent with the current rate of
unemployment.
If the marginal propensity to consume is 0.9, the basic Keynesian multiplier is:
10 - Keynesian multiplier is given by:
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If the marginal propensity to consume is 0.9, the basic Keynesian multiplier
is:
10 - Keynesian multiplier is given by:
m = 1 /( 1 − c )
here c = 0.9, hence m = 1/0.1 =⇒ m = 10
Friedman's theory of consumption focuses on:
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Permanent income:
The name of the Hypothesis is Permanent income hypothesis
In Keynesian theory of investment, suppose an asset costs $1000 and it is expected to
yield $600 at the end of year 1 and $600 at the end of the second year (and zero
thereafter), then r* (rate of return associated with marginal project) will be:
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13%
If the Keynesian consumption function is given by C = 150 + 0.85Y , andY increases by 1
unit, then savings;
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The money market and bond markets are in equilibrium, but not the goods
market.
Inflation/CPI Equation
,Give this one a try later!
Infaltion t= (CPI t+1 - CPI t)
/CPI t
In the short run unemployment may fall below the natural rate of unemployment if:
Give this one a try later!
Nominal wages have risen less than inflation
If inflation rate in period t is given as 0.02 and consumer price index in period t + 1 is
100 then CPI in period t is given by:
Give this one a try later!
Inflation is given by:
πt =CPI t+1− CPI t
/CPI t
, putting the values we get:
0.02 = 100−CPI t
/CPI t
=⇒ 0.02 = 100 - 1
/ CPI t
=⇒ CPI t = 98.04
According to the interest rate effect, an increase in the price level should:
Give this one a try later!
, Raise interest rates and decrease spending on GDP; the aggregate demand
curve should be downward sloping
Other things being equal, the Neoclassical model of investment predicts that net
investment will increase when the:
Give this one a try later!
Marginal product of capital falls or depreciation rate falls
As marginal product falls, it leads to an increase in capital stock, hence the
investment increase. Suppose δ is the rate of depreciation then capital
stock in period t is given by:
P F' (K) = Pk(r + δ)
A fall is δ will also reduce F ' (K) hence increasing K, which leads to higher
investment.
When the economy is on the long-run Phillips Curve, we know that:
Give this one a try later!
- We are at full employment.
- The unemployment rate is at its natural rate.
- Any rate of inflation could be consistent with the current rate of
unemployment.
If the marginal propensity to consume is 0.9, the basic Keynesian multiplier is:
10 - Keynesian multiplier is given by:
, Give this one a try later!
If the marginal propensity to consume is 0.9, the basic Keynesian multiplier
is:
10 - Keynesian multiplier is given by:
m = 1 /( 1 − c )
here c = 0.9, hence m = 1/0.1 =⇒ m = 10
Friedman's theory of consumption focuses on:
Give this one a try later!
Permanent income:
The name of the Hypothesis is Permanent income hypothesis
In Keynesian theory of investment, suppose an asset costs $1000 and it is expected to
yield $600 at the end of year 1 and $600 at the end of the second year (and zero
thereafter), then r* (rate of return associated with marginal project) will be:
Give this one a try later!
13%
If the Keynesian consumption function is given by C = 150 + 0.85Y , andY increases by 1
unit, then savings;
Give this one a try later!
