# Tag Info

6

Gali's Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework, provides an advanced undergraduate / first-year graduate student introduction to these models, and I'd recommend it for self studies. According to chapter 1, available online, which offers an overview of the New Keynesian Model, the key elements are: ...

5

Material capital is any durable good that is used as a factor of production and, by virtue of being durable, it is gradually consumed in production over a maximum possible duration of a length that is determined by (i) how much a unit of capital is used and (ii) the depreciation rate of a unit of capital. Capital forms by labor and savings (which is in ...

4

In what follows, I'm going to be very hand wavy - take with a grain of salt. If you think about it, a demand shock is like a scenario of multiple equilibria (given the fixed levels of wages and prices): If everyone is employed, everyone has a lot of income, can spend that on goods, and the demand for goods implies a large demand for labor, making everyone ...

4

The increase in interest rates make borrowing more expensive and therefore businesses and people will borrow less. Therefore, investment and consumption decrease. Through the multiplier effects, this will cause a reduction in real GDP. This will also increase the unemployment rate. Therefore, people who sell these goods and services will reduce their prices. ...

4

In the classical model, aggregate supply curve is vertical (price level on the y axis), meaning that output is fixed, constrained by technology and inputs. Prices are flexible. So that if the demand curve changes, the effect will be entirely on price level and not on output. In the keynesian model, aggregate supply curve is horizontal at some price level. ...

3

In the standard LM Model money supply is a vertical line and money demand is a decreasing function (in the interest rate - money framework). An increase in the money supply curve shifts the supply curve to the right which ceteris paribus decreases the intersect with the demand curve which leads to a lower interest rate.

3

Yes, the big success of Keynesianism was uncovering that there is an incentive to invest in a demand-led recession, from the perspective of the whole economy, because of the multiplier. Just as you say. However, there is no incentive to invest for individual profit-maximising firms, for exactly the reason dismalscience gives: the investment stimulates ...

3

Aggregate supply is a relationship of price level and output. It is a function, or a curve, or a table. It is not a single value. If we know a particular price level, then we can determine the level of output that would correspond with that. The GDP for 2006 is determined by plugging in the price level of 2006 to the AS curve for 2006, and seeing what output ...

3

I will try to answer this question although it is rather hard using only one paragraph, if not impossible. A paragraph explaining what New-Keynesian Economics is: Models explaining price and wage stickiness using rational expectations and utility maximizing behaviour. See Gordon, R.J, 1990 for more details. For a defining equation the New-Keynesian ...

2

There is a huge discussion about structural Macroeconomics models - especially on their theoretical and practical relevance - with IS-LM being on the forefront of the battle some 40+ years ago. Many people simply reject LM existence. Advanced level textbooks ignore this approach for two decades. However it ironically dominates introductory courses. Here is ...

2

The division comes from the entities guiding these sets of policies. The austerity program falls under fiscal policy, which is controlled by Parliament. Quantitative easing falls under monetary policy, which is controlled by the Bank of England. The policies enacted by these two entities are not necessarily coordinated, and can sometimes work opposite each ...

2

For most people consumption does not equal income. Many consume less (they save) and others consume more (they take on debt) than they earn. In an economy with financial markets and heterogeneous consumers, discounted lifetime income should equal discounted lifetime consumption, but there is no reason why consumption should equal income at every point in ...

2

If you enjoy ethical and philosophical aspects, you should look into international aid and intervention. Check out "Adaptive Preferences and Women's Empowerment" by Khader and work by Nussbaum in regards to social justice. These are some great texts coming off of reading Hayek. If you aren't familiar with the concept of adaptive preferences, it is the idea ...

2

Your question includes a flawed assumption: why would you assume that you'd recapture any significant portion of the additional output? Let's say that the multiplier is .05, so that for your billion dollar investment (let's say the you build a new factory), others in the city increase their total spending by \$50 million. What fraction of that \$50 million ...

2

There are two different way to present the IS-LM model, one with a vertical money supply line, and one with a horizontal interest rate line. Consider the second one, as it represents better what central banks actually do nowadays. If the r goes up, this means the central bank has increased its benchmark interest rate (it can mean a host of other things, but ...

2

From a Marxist perspective, capital is a social relation. Essentially, it is money that begets more money. As such, it only becomes more or less synonim with "means of production" once it takes over production, ie, once society becomes capitalist. In a feudal society, tools and land are not capital, albeit being means of production. The money of money ...

1

The issue is more complex than your friend suggest and he is not completely right but at the same time there is a kernel of truth to what he is claiming. There are differences in the effect of savings short and medium and long run. However, to fully explain this I will have to use some math to ground the reasoning and make everything consistent. Consider ...

1

The fiscal multiplier in (iv) would arise from $$Y = C+I+G$$ $$Y = a + c(Y-T)-d\alpha Y +G+I.$$ This can be rearranged as $$Y(1-c+d\alpha)=a-cT+G+I,$$ and, therefore, the fiscal multiplier would be $$\frac{1}{1-c+d\alpha}.$$ In order for this to equal $1$, you just need $d\alpha=c.$ Note that setting $d\alpha=c$ in your "multiplier" does not yield ...

1

Explaining the shape of the horizontal range In the very short run, the AS curve is perfectly price-elastic (i.e. on the diagram, it is a horizontal line). It is also referred to as the Keynesian range. In this time period, firms respond to a rise in demand for their product without considering the effects of the rising demand, such as higher prices. This ...

1

The distinction is between "nominal" and "real" recessions and booms. Real business cycle theory was developed to point out the fact that variations in employment and hours could occur even in an economy where markets were working competitively and there were no pricing frictions. In the RBC world, recessions and booms are driven by "real" factors: ...

1

'Universal basic income' has largely been in the public dialogue, to counter the negative consequences of automation - or some other reasons for mass unemployment. In such a context, it is proposed as a last resort if there is an extreme decline in Labour demand. It can however, be used as an alternative to basic unemployment benefits, or to simply combat ...

1

First, we should remember that the government did not particularly spend any money on the air strike, except for incidental stuff like fuel costs. It already owned those missiles, which were part of a previous government spending program. Unlike profit-motive organizations that try to be streamlined, the government buys many things it never uses and doesn'...

1

Your method is correct. This however does not have to be the case in general. Your have a budget surplus simply because your government spending does not rise too much relative to your tax revenue collection. Consider the following with MPC = 0.3, t = 0.2 and Y = 1000 and dt = 0.5: If you increase spending too much, you will end up with a budget deficit. ...

1

I cannot see any way to have negative autonomous consumption. I believe autonomous consumption's extreme is zero if there's a kind of superheroes who don't need water, electricity and food to live and they save everything they earn. But in a case like this, there's no reason for having aggregate supply at all as nobody will buy the goods in first place.

1

It is normal that the slope of the LM is related to the elasticity of money demand. If in an economy, the elasticity of money demand is so high, for little changes in the interest rate will make fluctuate the demand so much. If you think about the extreme case, you will understand much easily. Suppose that the elasticity of money is near to infinity, (...

1

Hall (2005) mentions Barro's paper twice, but the first one in p. 51 is in the introduction and in order to alert the reader on what to expect. The essential dialogue between the two papers is in p. 56, where, Hall, after presenting his model and its workings, writes: "The earlier work implied inefficient outcomes, especially the loss of a job under ...

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The fiscal policies to fight the great recession in the United States were not administered in a way that would allow us to assess this a natural experiment. However, there have been many situations in the past where there was such a natural-experiment setting, and that allows us to approximate the effect of these fiscal policies. For example, if a dollar of ...

1

I came across this post by Krugman and I think for those interested in learning about these different theories that the below quote helps when thinking about supply shocks and Keynesian economics: OK, stop right there. That’s an adverse supply shock, and no Keynesian claims that demand-side policies can cure the economy from the effects of such shocks....

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