ECON_finals(midterm content)

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  1. what is the paradox of saving

    as people attempt to save more, the result is both a decline in output and unchanged saving IN THE SHORT RUN

  2. mechanism behind paradox of saving-I=S perspective

    • s=-c0+MPS(disposable income)
    • when consumer wants to save more, c0 ↓
    • 1)-c0 ↑, s ↑
    • 2)C↓, Z ↓, by eqm, Y↓, S↓

  3. mechanism behind paradox of saving-Y=Z perspective

    • I=S+T-G
    • consumer's decision to save more cannot affect I, G, T
    • S does not change

  4. how to calculate eqm output and demand

    • Y, Yd, C, multiplier, autonomous spending
    • output: mutliplier
    • demand: C+I+G

  5. why is tax called automatic stabilizer when tax depend on Y?

    • multiplier=(1-c1+c1t1)
    • autonomous spending↑, Y↑, T↑, lessen the ↑in Y
    • economy responds less to changes in autonomous spending than in the case where T is independent of Y

  6. suppose t depends on Y, if autonomous spending ↓, why is balanced budget requirement destabilizing?

    • Y↓ and T↓
    • to balance budget, ↓G
    • Y further ↓

  7. suppose I=b0+b1Y, if b0 ↑, what is the ↑ in investment?

    (b0↑)+ b1*Y↑

  8. equilibrium condition in the financial market(LM relation) and explain

    MS=$Y L(i)

  9. shifting variables of demand for money


  10. monetary policy instruments for the central bank to change the money supply

    • interest rate(federal funds rate, discount rate)
    • required reserve ratio
    • open market operations

  11. investment depends on

    • Y, +
    • I , -

  12. why is ZZ flatter than 45deg line?

    • increase in the output will not lead to an one-for-one increase in demand
    • (by a factor of MPC)

  13. shifting variables of IS curve

    ZZ(demand for goods)

  14. is monetary expansion more investment friendly than fiscal expansion?

    • Yes
    • fiscal expansion:Y&I increase
    • monetary expansion: Y increase and i decrease

  15. changes in autonomous spending has what effect on I


  16. if investment is independent of interest rate

    • IS curve is a vertical line
    • fixed ouput

  17. Decrease in money demand has equivalent effect as

    Increase in money supply

  18. factors that shift money demand

    • Use of atm: left
    • Worry about bank failure: right
    • decrease in price level: right

  19. If Y is a variable in C and I

    Z is an increasing function of Y

  20. direct effect(of output on demand) of the multiplier

    • captured by c1+b1
    • horizontal shift of the IS curve

  21. indirect effect of the multiplier

    captured by b2d1/d2

  22. what is crowding out and its implication

    • increase in output due to shift in IS curve-eqm output
    • effect of fiscal policy on interest rate limits the ability of fiscal policy to influence output

  23. larger multiplier mean the sensitivity of consumption and investment to output is


  24. Implication of balanced budget change

    follow the direction of G because the effect of G is always greater than that of T

  25. investment is very sensitive to interest rate

    • a flatter IS slope
    • a less effective fiscal policy(small multiplier)

  26. increasing M in higher MPC countries leads to...
    since flatter IS

    larger increase in output and smaller decrease in i
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ECON_finals(midterm content)
ECON_finals(midterm content)
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