거시 튜토리얼 정리 Tut8
‘The AS-AD model’ and ‘Inflation and Unemployment: The Phillips Curve Framework
1. In 1973 the Organization of Petroleum Exporting Countries (OPEC) raised the price of a barrel of oil by 400% and some Arab members placed an oil embargo on countries (i.e.
the United States) which supported Israel in the ‘Yom Kippur’ war against Egypt and Syria. Show in the AS-AD model the impact of this event on a developed oil-importing country and consider the best policy response to stabilise the economy at a long run equilibrium position
2. Explain why a high rate of inflation can persist well after the economic conditions which caused it do no longer exist.
The persistence of inflation basically requires a ‘wage-price’ spiral to continuously induce higher production costs and price level.
인플레이션의 지속성은 본질적으로 '임금-물가' 나선에 의해 계속해서 생산 비용과 가격 수준을 높이는 것이 필요합니 다.
- role of price expectations and ‘real’ income targeting
- conflict over the distribution of income following a supply shock - whereby the inflationary process persists as a result of incompatible claims by social groups over (net) ‘real’ aggregate income.
공급 충격 이후 사회적 그룹 간에 (순) '실질' 총소득에 대한 상반된 주장으로 인해 인플레이션 과정이 계속됨.
3. What role does money play in the inflationary process? What is meant by the ‘neutrality of money’?
• On the basis of the quantity theory of money the monetarists argued that all inflation, whatever the original cause, is always a monetary problem in the sense that by controlling M (i.e. Mt) the inflation can be brought to an end by stopping its monetary accommodation.
• 통화량 이론에 따르면, 통화론자들은 원래 원인이 무엇이든 인플레이션은 항상 통화 문제라고 주장.
즉, Mt를 통제함으로써 통화 수용을 중단하여 인플레이션을 종결시킬 수 있다는 것
4. What is the rationale for the trade-off between inflation and unemployment in the simple Phillips Curve?
Why did it come under criticism by many economists in the 1970s?
• The rationale for the trade-off between inflation and unemployment in the simple Phillips Curve lies in the inverse relationship observed historically between the rate of inflation and the rate of unemployment.
• (1) it did not account for inflationary expectations by agents
• (2) it did not provide a precise definition of excess demand conditions which induced the acceleration of inflation.
5. Consider an expectations-augmented Phillips Curve of the following form:
πt = a [(un / ut) - 1] + b πet
where b = 1 and adaptive expectations:
πte = πt-1.
(a) What are the requirements for a constant rate of inflation over time?
Zero excess demand/supply: ut = un, πt constant
(b) What will be the behaviour of inflation when ut <un and what is the economic meaning of this behaviour?
Excess demand: ut < un → πt > πet, πt accelerates
(c) What will be the behaviour of inflation when ut < un and what is the economic meaning of this behaviour?
Excess Supply: ut > un → πt < πet, πt decelerates
Tut 9
1. By reference to the Phillips Curve framework, explain the notion of hysteresis.
Hysteresis is the notion that a disinflation policy conducted by a central bank leads to a permanently higher rate of unemployment (i.e. higher NAIRU).
중앙은행이 시행하는 디스인플레이션 정책이 영구적으로 더 높은 실업률(즉, 높은 NAIRU)로 이어진다는 개념
Essentially based on the proposition that inflationary expectations are ‘sticky’ downward because of wage rigidities and imperfections in the labour market.
디스인플레이션 정책이 실시되면 인플레이션 기대가 즉시 하락하지 않고 고정되어 있어, 실업률이 영구적으로 상승하게 되는 것이라고 제안합니다. 이러한 상황에서는 높은 NAIRU가 유지되어 경제가 영구적으로 더 높은 실업률 수준에서 운영되는 것으로 이해됩니다.
2. Let us suppose the Reserve Bank of Australia implements a disinflation policy to reduce the inflation rate from 8% to a target of 3% over a period of four years. In the first year of the policy the unemployment rate reaches 9%, in the second year the unemployment rate declines to 8%, in the third year it is 7% and, then, in the fourth year, when the inflation target is reached, the unemployment rate is 5%. Supposing the natural rate of unemployment is estimated to be 5.5% over this period, how would you measure the social cost of this disinflation policy?
Point-year of excess unemployment
• Year 1: (9% – 5.5%) x 1 = 3.5 point-years of excess unemployment
• Year 2: (8% − 5.5%) x 1 = 2.5 point-years
• Year 3: (7% − 5.5%) x 1 = 1.5 point-years
• Year 4: (5% − 5.5%) x 1 = -0.5 point-years (since actual unemployment is below the natural rate, this would typically not be considered a cost)
• Total point-years of excess unemployment over four years would be the sum of each year’s excess unemployment: 3.5 + 2.5 + 1.5 − 0.5 = 7 point-years
Sacrifice ratio
• (ut – un)/(πt – πt-1)
• Total reduction in inflation over four years is from 8% to 3% -> 5% reduction
• 7/5 = excess unemployment of 1.4 percentage points for 4 years
3. Suppose based on the past twenty years of data the estimating equation for Okun’s Law is ut – ut-1 = –0.4 (gt – g*), where g*, the normal (or benchmark) growth rate of output, is equal to 3%. If the current rate of unemployment is 9% what is the minimum growth rate of output needed over five years to reduce the unemployment rate to 5%?
Average level:
𝑢𝑡+5= 𝑢𝑡− 5 ∗ 0.4[𝑔 − 𝑔 ∗]
5%=9%-5*0.4(g-3%) g=5%
4. Suppose the current inflation rate is a constant 7% and the central bank implements a disinflation policy to reduce it to its target rate of 3%. To achieve this objective the central bank, by increasing its cash rate, raise the nominal interest rate from its current 9% to 14%. In the long run, at which the central bank achieves its inflation target, what will be the nominal rate of interest, the real rate of interest and the inflation rate?
5. Explain the Fisher hypothesis?
the fisher hypothesis shows the relationship between nominal IR, real IR and inflation expectations, as per r = i - inflation expectations. r is constant over the long run, meaning nominal IR and inflation expectations must move together. And I would say this equation shows how monetary policy can impact r by changing the nominal IR.
Discussion Question: What determines the natural rate of unemployment (or NAIRU)?
What kind of policies do you think would reduce the natural rate of unemployment (or NAIRU)?
Tut10
1. Explain the meaning of the aggregate production function. What are constant returns to scale in relation to the aggregate production function?
Y = A F (K, N)
(1) the growth of the factor inputs, capital (K) and labour (N).
(2) the growth in output relative to the growth in factor inputs, A, due mainly to technological progress.
• It is a supply-led approach because for a given technology, A, the growth rate of output is primarily determined by the growth rate in the supply of the factor inputs, K and N.
• Because in the Swan-Solow growth model a given technology determines the capital-labour (K/N) ratio, the growth rate is ultimately determined by the population growth rate (i.e. N), denoted as n.
constant returns to scale : Y = A F(K, N) = A Kα N β
2. What is steady-state growth in the Swan-Solow growth model and how is it reached? What determines the steady-state growth rate in this model?
sA f (K/N) = (n +d)K/N
The left-hand-side of equation (19) expresses a saving (or investment) per person function derived from the production function of Y/N. Hence, according to this function for a given s (and A) investment (saving) per person is a decreasing function of Y/N. By contrast, the right-hand-side function of the requirement for the accumulation of capital per person is linear. If equality of equation (19) is not met then the rate of capital accumulation per person is either accelerating when sA f (K/N) > (n +d)K/N or decelerating when sA f (K/N) < (n +d)K/N.
3. Explain how an increase in the saving rate affects steady-state growth in the Swan- Solow model?
• An increase (decrease) in the saving rate will cause an increase (decrease) in the growth rate of output (and output per person) in the transition from one steady state (E0) to the next (E1).
However, it does not affect the steady-state growth rate itself, determined by n.
• Instead, an increase (decrease) in the saving rate will induce a permanent increase (decrease) in the steady-state output per person, Y/N*, thereby contributing to a higher (lower) living standard.
This occurs by increasing (decreasing) steady-state capital per person, K/Y*.
• Based on this viewpoint it is often proposed (e.g. IMF) that to raise a nations growth rate and lift its living standards the government should adopt policies to encourage a higher saving rate.
4. In the Swan-Solow model what is the ‘golden’ saving rate and what is the significance of the actual saving rate exceeding it?
• The saving rate which maximises consumption per person, C/Ng, is called the golden savings rate, sg. From zero a rising s will increase C/N up to sg beyond which C/N will decline to zero, when s =
1 such that all output will consist of investment goods. To summarise:
• s: 0 → sg, C/N: 0 → C/Ng
• s: sg → 1, C/N: C/Ng → 0
5. Explain the effect on steady-state equilibrium and growth in the Swan-Solow model of the following:
a. a reduction in the depreciation rate, d ; b. a reduction in the population growth rate, n
An increase in the population growth rate reduces average living standards though steady-state output growth, y, is higher.
an increase in n results in a steepening of the replacement cost curve only.
6. What role does technological progress play in the Swan-Solow growth theory? What are the limitations of the Swan-Solow model in explaining growth?
• The simplest was to represent technological progress is to treat it as if it augments the number of workers or the labour-power of workers. It can be represented in the aggregate production function, as follows:
Y = F (K, AN)
where AN is ‘effective labour units’ (or efficiency units) and A is the (labour-augmented measured) technological factor.
• The growth in effective labour units is approximately a + n, equal to the steady-state growth rate, where a represents the technological factor. Example: Suppose n is 1% and a is 2%, then steady- state output and capital both grow at about 3% consistent with gy = gk, which ensures K/AN* and Y/AN* are fixed. There is a 2% growth in average living standards (i.e. Y/N).
• Conflict #1: Income per capita varies too much across countries not explained by variations in the saving rate, s, and n and d.
– The theory implies that a country that is 10 times richer than a poor country must have vastly greater amounts of capital per worker (like 10,000 times the amount of K/N!)
• Conflict #2: Poor countries do not have a higher rate of return on capital.
• Conflict #3: Convergence has not been uniform. Swan-Solow model predicts convergence from (i)
greater flow of capital to poorer nations with higher rate of return; (ii) learning in use of modern techniques of production; and (iii) nations below their steady-state growth paths will grow faster until they reach steady-state (up along production functions). While there is notable convergence among the advanced nations there is evidence of a widening in income per capita between advanced and many undeveloped nations.
Discussion Questions: What is meant by ‘convergence’ in the economic development of countries in the world? What does the historical evidence suggest about the generality of such convergence? Consider and discuss the major factors that may explain the historical convergence of today’s advanced and emerging countries.
Tut 11 Economic Growth and Consumption
1. What is endogenous growth theory?
• endogenous growth models suppose in a variety of ways that the capital accumulation process endogenously generates technical progress and/or human capital formation that augments the growth rate.
내생성 성장 모델은 자본 축적 과정이 기술적 진보와/또는 인적 자본 형성을 내생성으로 생성하며 성장률을 증가시킨 다고 가정합니다.
2. What is the main factor determining ‘steady-state’ growth in the ‘A-K’ growth model?
gy = sA – λ … (28)
• Therefore in the AK model the growth rate, gy, (including that of output per worker) is an increasing function of the rate of net investment. By escaping the diminishing returns to capital
characteristic of the Swan-Solow model, saving behaviour has a lasting influence on steady-state growth. Hence,
government policies which increase the saving rate and, thereby, rate of investment, will permanently increase the growth rate of output per capita in the economy.
저축율을 증가시키고 따라서 투자율을 높이는 정부 정책은 경제의 노동자당 생산량 성장률을 영구적으로 높일 것입니다.
3. Let us suppose the saving rate is 12%, the depreciation rate is 8% and the capital-output ratio is 0.8.
What is the rate of capital accumulation (or steady state growth rate) in the ‘A-K’ growth model?
∆K/K = sA – λ gy = sA – λ 12%*0.8-8%=2.6%
4. What does the Lucas human capital growth model propose about the major causes of economic growth?
5. Explain the main features of the demand-led growth theory and how it differs from supply-side growth theory?
6. What is the Permanent Income Hypothesis (PIH) and its implications for policymaking?
Tut12 Investment and Open Economy Macroeconomics
1. Consider the following simple accelerator principle for the determination of net investment: It = v (Yet+1 – Yt)
where v is the capital-output ratio, Yet+1 is expected demand in period t+1 and Yt is actual output in period t.
a. Suppose v = 2, Yt = 150 and Yet+1 = 170. What will be the level of net investment in period t?
b. If firms generally become more optimistic about the future and expect higher demand, what will be the impact on investment?
c. What will be the effect on investment of technological progress?
2. Explain Jorgenson’s theory of investment by consideration of the effect of a reduction in the rate of interest on the level of investment expenditure. What are some of the policy implications of Jorgenson’s theory? What are its limitations?
3. Let us suppose the rate of interest of a medium-sized open economy with a flexible exchange rate is 5% and the foreign rate of interest of the dominant world economy is 7%. What does this imply about expectations in the foreign exchange market about the future movement of the exchange rate? What does open interest parity imply for the independence of monetary policy of our medium-sized open economy under a (i) flexible exchange rate regime and (ii) under a fixed exchange rate regime.
4. Consider an open economy like Australia with free capital mobility and a floating exchange rate. Using the Mundell-Fleming IS-LM model
a. Explain how a fiscal policy expansion can stimulate the economy and how it impacts on the balance of payments.
b. Explain how a restrictive monetary policy can induce a contraction in an open economy and how its affects the balance of payments.
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c. Explain how the adoption of a restrictive monetary policy by the United States Federal Reserve Bank will impact the Australian economy and its balance of payments.
5. Consider an open economy with free capital mobility and a fixed exchange rate. Using the Mundell-Fleming IS-LM model
c. Explain the effect on the economy of an expansionary fiscal policy.
d. Explain the effect on the economy of an increase in the foreign rate of interest of the dominant global economy.
6. Why does a flexible exchange rate regime provide greater independence for a country to conduct monetary policy than does a fixed exchange rate regime?