INVESTMENT PLANNING COSTS AND THE EFFECTS OF FISCAL AND MONETARY POLICY. Susanto Basu and Miles S. Kimball. University of Michigan and NBER

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "INVESTMENT PLANNING COSTS AND THE EFFECTS OF FISCAL AND MONETARY POLICY. Susanto Basu and Miles S. Kimball. University of Michigan and NBER"

Transcription

1 INVESTMENT PLANNING COSTS AND THE EFFECTS OF FISCAL AND MONETARY POLICY Susanto Basu and Miles S. Kimball University of Michigan and NBER

2 MAIN RESULTS. Show that a model with capital accumulation and sticky prices but no investment frictions has counterintuitive properties. Real interest rates rise with monetary expansion (Tobin, 955; King, 993) Increases in government purchases lower output and real interest rates in the short run Complements earlier work with J. Fernald on contractionary technology improvements 2. Suggest a friction that might help address both problems: Investment planning costs 3. Show that planning costs make the model more plausible Short-run fiscal policy expansionary (restores Keynesian Cross logic) Real interest rate effect from monetary expansions Propagation of shocks matches data better 4. Q-theory-style capital adjustment costs generally not a substitute for planning costs

3 WHY EXPENDITURE INERTIA? Supposing we just want to match evidence that money shocks have delayed effect on output Then we could think of mechanisms to create inertia in each element of private expenditure: Y = C + I + G ( + NX) OR More parsimoniously, could build inertia into production (e.g., make L costly to adjust, output precommitments) Y (, ) = F K L

4 But evidence says that G shocks have immediate output effect [Ramey-Shapiro (998), Blanchard-Perotti (22), Mountford-Uhlig (22), Perotti (24)] Then we need the inertia in expenditure, not production Investment inertia is consistent with micro evidence (Edge, 2; Lamont, 999) Complements consumption inertia; e.g., habit formation Macro effects akin to time to plan (Christiano and Todd, 996), not time to build need to slow down ordering the new investment goods

5 BUILDING BLOCKS OF THE MODEL Baseline: Basic RBC model, Calvo pricing. Capital accumulation; no investment frictions King-Plosser-Rebelo (988) utility Assume EIS (σ) less than (Basu-Kimball, 22). Implies C and N (labor) complements Real rigidities from: labor attachment, intermediate goods, concave demand curve Monopolists rent K and use attached N i to produce varieties Yi Y ZK N i α α i = i F Z is technology. F is the fixed cost. The local degree of returns to scale is Y + F Γ= Y

6 Distortionary taxation of capital and labour income: Bars indicate after-tax prices A = R A+ ( R δ ) K +Θ+ WN C + T Government balances budget period by period: ( ) G+ T = τ R δ K +Θ + τ WN K tax L For comparison with literature, marginal dg financed via lump-sum taxes, -dt Money introduced via exogenously-appended LM curve (With change of parameters, can accommodate contemporaneous Taylor rule)

7 BASIC STICKY-PRICE MODEL: NO ADJUSTMENT COSTS Cost minimization by monopolists implies RK WN α = α Without adjustment costs, the real interest rate is α WN R = ( τ K ) δ α K where W is the pre-tax real wage Call the linearization of this equation the KE curve (Tobin/Sargent) Note: WN increasing in Y, so real interest rate positively linked with output!

8 The KE-MP Diagram R MP KE R y y

9 An Expansionary Money Shock in the Basic Model R MP MP R KE R y y y

10 Linearized KE curve, with household FOC substituted ( ) ( R δ)( τk τk) ( ) η α η + + R R = ( τk) R y ( + η ) z σλ + ( τl τl) + k Γ( α) τl Γ( α). Short-run y and R fall if. Technology, z, improves, 2. Government purchases rise (higher λ), or 3. Distortionary labour tax rate, τ L, falls! y and R fall with higher capital income taxation

11 Intuition: Another way of writing the capital market equilibrium condition: Y + F R = ( τ K ) α δ µ (). K where µ is the ex-post markup Positive real shocks usually reduce ( ),. MC Y, but with P a state variable, markup and hence distortion is higher

12 The Effect of a Positive Real Supply Shock Given a Constant Money Growth Rule R MP MP R KE KE R y y y

13 The Effect of a Positive Real Supply Shock Given a Taylor Rule and Sluggish Inflation R MP MP R KE KE R y y y

14 ADDING PLANNING COSTS Capital Rental Firms ( S ) t d Max e Rτ τ τ = RK K dt S t= Φ K subject to K = I δ K I = S γ I K, I given S is investment project starts, KΦ(S/K) is the planning adjustment cost function, and γ is the rate at which investment projects are completed. Φ is increasing and convex This Calvo-like formulation has the advantage that there is good micro data on /γ (Edge, 2). The results are much more sensitive to choice of γ than to convexity of Φ Very small planning costs can generate significant delays with projects lasting about a year, a 6-month delay requires costs such that a % increase in project starts raises overall investment costs by.96%

15 An Expansionary Money Shock with Output Inertia R MP MP KE R R y = y y

16 FIGURE 2. AR() POSITIVE GOVERNMENT SHOCK OUTPUT EMPLOYMENT.5.5 RBC Model BASIC STICKY PRICE Model TIME TO PLAN Model ADJUSTMENT COSTS Model INVESTMENT CONSUMPTION

17 2 FIGURE 2. AR() POSITIVE GOVERNMENT SHOCK (cont'd) BEFORE TAX RENTAL RATE AFTER TAX RENTAL RATE RBC Model BASIC STICKY PRICE Model TIME TO PLAN Model ADJUSTMENT COSTS Model BEFORE TAX WAGE RATE AFTER TAX WAGE RATE

18 deviation from steady state, in % per year REAL INTEREST RATE RBC Model BASIC STICKY PRICE Model TIME TO PLAN Model ADJUSTMENT COSTS Model -.5 FIGURE 2. AR() POSITIVE GOVERNMENT SHOCK (cont'd) deviation from steady state, in % per year.5..5 INFLATION PRICE LEVEL -.2 deviation from steady state, in % per year NOMINAL INTEREST RATE -.5

19 -.2 CAPITAL STOCK FIGURE 2. AR() POSITIVE GOVERNMENT SHOCK (cont'd) RBC Model BASIC STICKY PRICE Model TIME TO PLAN Model ADJUSTMENT COSTS Model 2.5 LAMBDA MARGINAL Q PROJECT STARTS

20 .5 OUTPUT FIGURE 5. PERMANENT MONEY SHOCK RBC Model BASIC STICKY PRICE Model TIME TO PLAN Model ADJUSTMENT COSTS Model 2.5 EMPLOYMENT INVESTMENT.5 CONSUMPTION

21 4 3 2 BEFORE TAX RENTAL RATE FIGURE 5. POSITIVE PERMANENT MONEY SHOCK (cont'd) RBC Model BASIC STICKY PRICE Model TIME TO PLAN Model ADJUSTMENT COSTS Model 3 2 AFTER TAX RENTAL RATE BEFORE TAX WAGE RATE 2 AFTER TAX WAGE RATE

22 deviation from steady state, in % per year FIGURE 5. POSITIVE PERMANENT MONEY SHOCK (cont'd) REAL INTEREST RATE RBC Model BASIC STICKY PRICE Model TIME TO PLAN Model ADJUSTMENT COSTS Model -2 deviation from steady state, in % per year INFLATION PRICE LEVEL deviation from steady state, in % per year NOMINAL INTEREST RATE

23 .2 OUTPUT FIGURE 3. AR() LABOR TAX INCREASE.5 EMPLOYMENT RBC Model BASIC STICKY PRICE Model TIME TO PLAN Model ADJUSTMENT COSTS Model INVESTMENT CONSUMPTION

24 .5 FIGURE 3. AR() LABOR TAX INCREASE (cont'd) BEFORE TAX RENTAL RATE AFTER TAX RENTAL RATE RBC Model BASIC STICKY PRICE Model TIME TO PLAN Model ADJUSTMENT COSTS Model BEFORE TAX WAGE RATE.5 AFTER TAX WAGE RATE

25 deviation from steady state, in % per year FIGURE 3. AR() LABOR TAX INCREASE (cont'd) REAL INTEREST RATE INFLATION.2 RBC Model BASIC STICKY PRICE Model TIME TO PLAN Model. ADJUSTMENT COSTS Model -.3 deviation from steady state, in % per year PRICE LEVEL deviation from steady state, in % per year NOMINAL INTEREST RATE

26 . FIGURE 3. AR() LABOR TAX INCREASE (cont'd) CAPITAL STOCK.3 LAMBDA RBC Model BASIC STICKY PRICE Model TIME TO PLAN Model ADJUSTMENT COSTS Model MARGINAL Q 2 PROJECT STARTS

27 FIGURE 4. AR() CAPITAL TAX INCREASE OUTPUT EMPLOYMENT. RBC Model BASIC STICKY PRICE Model TIME TO PLAN Model.5 ADJUSTMENT COSTS Model INVESTMENT. CONSUMPTION

28 BEFORE TAX RENTAL RATE RBC Model BASIC STICKY PRICE Model TIME TO PLAN Model ADJUSTMENT COSTS Model FIGURE 4. AR() CAPITAL TAX INCREASE AFTER TAX RENTAL RATE BEFORE TAX WAGE RATE.5 AFTER TAX WAGE RATE

29 deviation from steady state, in % per year FIGURE 4. AR() CAPITAL TAX INCREASE (cont'd) REAL INTEREST RATE RBC Model BASIC STICKY PRICE Model TIME TO PLAN Model ADJUSTMENT COSTS Model -. deviation from steady state, in % per year 8 x -3 INFLATION PRICE LEVEL deviation from steady state, in % per year NOMINAL INTEREST RATE -.

30 FIGURE 4. AR() CAPITAL TAX INCREASE (cont'd) CAPITAL STOCK LAMBDA.5 RBC Model Basic STICKY PRICE Model TIME TO PLAN ADJUSTMENT COSTS MODEL MARGINAL Q PROJECT STARTS

ECON 5110 Class Notes Overview of New Keynesian Economics

ECON 5110 Class Notes Overview of New Keynesian Economics ECON 5110 Class Notes Overview of New Keynesian Economics 1 Introduction The primary distinction between Keynesian and classical macroeconomics is the flexibility of prices and wages. In classical models

More information

Ifo Institute for Economic Research at the University of Munich. 6. The New Keynesian Model

Ifo Institute for Economic Research at the University of Munich. 6. The New Keynesian Model 6. The New Keynesian Model 1 6.1 The Baseline Model 2 Basic Concepts of the New Keynesian Model Markets are imperfect: Price and wage adjustments: contract duration, adjustment costs, imperfect expectations

More information

Problem Set #4: Aggregate Supply and Aggregate Demand Econ 100B: Intermediate Macroeconomics

Problem Set #4: Aggregate Supply and Aggregate Demand Econ 100B: Intermediate Macroeconomics roblem Set #4: Aggregate Supply and Aggregate Demand Econ 100B: Intermediate Macroeconomics 1) Explain the differences between demand-pull inflation and cost-push inflation. Demand-pull inflation results

More information

Figure 1: IS-LM Intersection

Figure 1: IS-LM Intersection IS-LM Intersection In the short run, the economy moves to the intersection of the IS and LM curves (figure 1). Production adjusts to demand to put the economy on the IS curve. Bond prices and the interest

More information

BADM 527, Fall 2013. Midterm Exam 2. Multiple Choice: 3 points each. Answer the questions on the separate bubble sheet. NAME

BADM 527, Fall 2013. Midterm Exam 2. Multiple Choice: 3 points each. Answer the questions on the separate bubble sheet. NAME BADM 527, Fall 2013 Name: Midterm Exam 2 November 7, 2013 Multiple Choice: 3 points each. Answer the questions on the separate bubble sheet. NAME 1. According to classical theory, national income (Real

More information

Macroeconomic Analysis Econ 6022 Level I

Macroeconomic Analysis Econ 6022 Level I 1 / 66 Macroeconomic Analysis Econ 6022 Level I Lecture 8 Fall, 2011 2 / 66 Business Cycle Analysis: A Preview What explains business cycle fluctuations? Two major business cycle theories - Classical theory

More information

Solutions to Spring 2015 Week 13 Tutorial Questions (Ch9)

Solutions to Spring 2015 Week 13 Tutorial Questions (Ch9) Chapter 9: Q1: Macroeconomics P.324 Review Questions #6 Q2: Macroeconomics P.324 Review Questions #7 Q3: Macroeconomics P.324 Review Questions #8 Q4: Macroeconomics P.325 Numerical Problems #1 Q5: Macroeconomics

More information

New Keynesian model. Marcin Kolasa. Warsaw School of Economics Department of Quantitative Economics. Marcin Kolasa (WSE) NK model 1 / 36

New Keynesian model. Marcin Kolasa. Warsaw School of Economics Department of Quantitative Economics. Marcin Kolasa (WSE) NK model 1 / 36 New Keynesian model Marcin Kolasa Warsaw School of Economics Department of Quantitative Economics Marcin Kolasa (WSE) NK model 1 / 36 Flexible vs. sticky prices Central assumption in the (neo)classical

More information

Chapter 11 Keynesianism: The Macroeconomics of Wage and Price Rigidity

Chapter 11 Keynesianism: The Macroeconomics of Wage and Price Rigidity Chapter 11 Keynesianism: The Macroeconomics of Wage and Price Rigidity Multiple Choice Questions 1. Keynesians are skeptical of the classical theory that recessions are periods of increased mismatch between

More information

Suggested Answers for Mankiw Questions for Review & Problems

Suggested Answers for Mankiw Questions for Review & Problems Suggested Answers for Mankiw & Problems The answers here will not have graphs, I encourage to refer to the text for graphs. There is a some math, however I don t expect you to replicate these in your exam,

More information

Problem Set 4. We are asked to label each of the seven statements as true, false or uncertain and to justify our answers briefly.

Problem Set 4. We are asked to label each of the seven statements as true, false or uncertain and to justify our answers briefly. Problem Set 4 Question 2 We are asked to label each of the seven statements as true, false or uncertain and to justify our answers briefly. (a) The aggregate supply relation implies that an increase in

More information

VI. Real Business Cycles Models

VI. Real Business Cycles Models VI. Real Business Cycles Models Introduction Business cycle research studies the causes and consequences of the recurrent expansions and contractions in aggregate economic activity that occur in most industrialized

More information

Endogenous Growth Models

Endogenous Growth Models Endogenous Growth Models Lorenza Rossi Goethe University 2011-2012 Endogenous Growth Theory Neoclassical Exogenous Growth Models technological progress is the engine of growth technological improvements

More information

ECN 106 Macroeconomics 1. Lecture 6

ECN 106 Macroeconomics 1. Lecture 6 ECN 106 Macroeconomics 1 Lecture 6 Giulio Fella c Giulio Fella, 12 ECN 106 Macroeconomics 1 - Lecture 6 140/311 Roadmap for this lecture Policy implications of the long-run model Macroeconomic stylized

More information

In this chapter we learn the potential causes of fluctuations in national income. We focus on demand shocks other than supply shocks.

In this chapter we learn the potential causes of fluctuations in national income. We focus on demand shocks other than supply shocks. Chapter 11: Applying IS-LM Model In this chapter we learn the potential causes of fluctuations in national income. We focus on demand shocks other than supply shocks. We also learn how the IS-LM model

More information

Lecture 10: Aggregate Demand and Aggregate Supply I

Lecture 10: Aggregate Demand and Aggregate Supply I EC201 Intermediate Macroeconomics EC201 Intermediate Macroeconomics Lecture 10: Aggregate Demand and Aggregate Supply I Lecture Outline: - how to derive the aggregate demand from the IS-LM model; - a preliminary

More information

Econ 303: Intermediate Macroeconomics I Dr. Sauer Sample Questions for Exam #3

Econ 303: Intermediate Macroeconomics I Dr. Sauer Sample Questions for Exam #3 Econ 303: Intermediate Macroeconomics I Dr. Sauer Sample Questions for Exam #3 1. When firms experience unplanned inventory accumulation, they typically: A) build new plants. B) lay off workers and reduce

More information

Practiced Questions. Chapter 20

Practiced Questions. Chapter 20 Practiced Questions Chapter 20 1. The model of aggregate demand and aggregate supply a. is different from the model of supply and demand for a particular market, in that we cannot focus on the substitution

More information

The goods market clears when desired investment equals desired national saving real interest rate will change to bring about the equilibrium

The goods market clears when desired investment equals desired national saving real interest rate will change to bring about the equilibrium IS/LM Model (Ch 9) 1. The FE (Full employment)line: Equilibrium in the Labor Market 2. The IS (Investment Saving) Curve: Equilibrium in the Goods Market 3. The LM Curve: Asset Market Equilibrium 4. General

More information

CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY

CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY Learning goals of this chapter: What forces bring persistent and rapid expansion of real GDP? What causes inflation? Why do we have business cycles? How

More information

Exam #2 Review Questions (Answers) ECNS 303

Exam #2 Review Questions (Answers) ECNS 303 Exam #2 Review Questions (Answers) ECNS 303 Exam #2 will cover all the material we have covered since Exam #1. This includes the material we covered in Chapters 10, 11, 12, and 14. In addition to working

More information

QUESTION 1: SHORT VERSUS MEDIUM RUN. 30 points

QUESTION 1: SHORT VERSUS MEDIUM RUN. 30 points QUESTION 1: SHORT VERSUS MEDIUM RUN. 30 points Consider an economy that fits the AS-AD model. The labor market equilibrium is given by the AS curve. The equilibrium in the goods market is given by the

More information

Real Business Cycle Models

Real Business Cycle Models Real Business Cycle Models Lecture 2 Nicola Viegi April 2015 Basic RBC Model Claim: Stochastic General Equlibrium Model Is Enough to Explain The Business cycle Behaviour of the Economy Money is of little

More information

Chapter 13. Aggregate Demand and Aggregate Supply Analysis

Chapter 13. Aggregate Demand and Aggregate Supply Analysis Chapter 13. Aggregate Demand and Aggregate Supply Analysis Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON 203 502 Principles of Macroeconomics In the short run, real GDP and

More information

Problem Set 5. a) In what sense is money neutral? Why is monetary policy useful if money is neutral?

Problem Set 5. a) In what sense is money neutral? Why is monetary policy useful if money is neutral? 1 Problem Set 5 Question 2 a) In what sense is money neutral? Why is monetary policy useful if money is neutral? In Problem Set 4, Question 2-Part (e), we already analysed the effect of an expansionary

More information

Chapter 12: Aggregate Supply and Phillips Curve

Chapter 12: Aggregate Supply and Phillips Curve Chapter 12: Aggregate Supply and Phillips Curve In this chapter we explain the position and slope of the short run aggregate supply (SRAS) curve. SRAS curve can also be relabeled as Phillips curve. A basic

More information

Real Business Cycle Theory. Marco Di Pietro Advanced () Monetary Economics and Policy 1 / 35

Real Business Cycle Theory. Marco Di Pietro Advanced () Monetary Economics and Policy 1 / 35 Real Business Cycle Theory Marco Di Pietro Advanced () Monetary Economics and Policy 1 / 35 Introduction to DSGE models Dynamic Stochastic General Equilibrium (DSGE) models have become the main tool for

More information

The Basic New Keynesian Model

The Basic New Keynesian Model The Basic New Keynesian Model January 11 th 2012 Lecture notes by Drago Bergholt, Norwegian Business School Drago.Bergholt@bi.no I Contents 1. Introduction... 1 1.1 Prologue... 1 1.2 The New Keynesian

More information

Ch.5 Aggregate Supply and Demand

Ch.5 Aggregate Supply and Demand 1 Econ 302 Intermediate Macroeconomics Chul-Woo Kwon Ch.5 Aggregate Supply and Demand I. Introduction We studied an economy when the goods and services markets are simultaneously in equilibrium given prices.

More information

Aggregate Supply and Aggregate Demand

Aggregate Supply and Aggregate Demand Aggregate Supply and Aggregate Demand Econ 120: Global Macroeconomics 1 1.1 Goals Goals Specific Goals Be able to explain GDP fluctuations when the price level is also flexible. Explain how real GDP and

More information

Answers to Text Questions and Problems in Chapter 11

Answers to Text Questions and Problems in Chapter 11 Answers to Text Questions and Problems in Chapter 11 Answers to Review Questions 1. The aggregate demand curve relates aggregate demand (equal to short-run equilibrium output) to inflation. As inflation

More information

2009 CHAPTER 11 Self Study Questions

2009 CHAPTER 11 Self Study Questions CHAPTER 11 Self Study Questions 1) The aggregate supply/aggregate demand model is used to help understand all of the following except A) inflation. B) business cycle fluctuations. C) the aggregate value

More information

Macroeconomic Effects of Financial Shocks Online Appendix

Macroeconomic Effects of Financial Shocks Online Appendix Macroeconomic Effects of Financial Shocks Online Appendix By Urban Jermann and Vincenzo Quadrini Data sources Financial data is from the Flow of Funds Accounts of the Federal Reserve Board. We report the

More information

Keynesian Economics. madmen in authority are the slaves of some defunct economist. Dominant questions regarding Business Cycles. John Maynard Keynes

Keynesian Economics. madmen in authority are the slaves of some defunct economist. Dominant questions regarding Business Cycles. John Maynard Keynes Keynesian Economics madmen in authority are the slaves of some defunct economist. John Maynard Keynes Dominant questions regarding Business Cycles 1 1. Dominant questions regarding business cycles 2. Keynesian

More information

Keynes and IS-LM analysis. (Chapter 33 in Mankiw and Taylor)

Keynes and IS-LM analysis. (Chapter 33 in Mankiw and Taylor) Keynes and IS-LM analysis (Chapter 33 in Mankiw and Taylor) Short-run fluctuations The next four lectures will cover different aspects of macroeconomic policy, in particular, the role of fiscal and monetary

More information

MACROECONOMICS SECTION

MACROECONOMICS SECTION MACROECONOMICS SECTION GENERAL TIPS Be sure every graph is carefully labeled and explained. Every answer must include a section that contains a response to WHY the result holds. Good resources include

More information

New Keynesian Dynamics in a Low Interest Rate Environment.

New Keynesian Dynamics in a Low Interest Rate Environment. New Keynesian Dynamics in a Low Interest Rate Environment. R. Anton Braun University of Tokyo Lena Mareen Körber German Institute for Economic Research July 14, 2010 Abstract Recent research has found

More information

Chapter 9. The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis. 2008 Pearson Addison-Wesley. All rights reserved

Chapter 9. The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis. 2008 Pearson Addison-Wesley. All rights reserved Chapter 9 The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis Chapter Outline The FE Line: Equilibrium in the Labor Market The IS Curve: Equilibrium in the Goods Market The LM Curve:

More information

New Keynesian Economics: Sticky Prices Copyright 2014 Pearson Education, Inc.

New Keynesian Economics: Sticky Prices Copyright 2014 Pearson Education, Inc. Chapter 14 New Keynesian Economics: Sticky Prices Copyright Chapter 14 Topics Construction of the New Keynesian Sticky Price Model extending the Monetary Intertemporal Model. The Role of Government Policy

More information

Use the following to answer question 9: Exhibit: Keynesian Cross

Use the following to answer question 9: Exhibit: Keynesian Cross 1. Leading economic indicators are: A) the most popular economic statistics. B) data that are used to construct the consumer price index and the unemployment rate. C) variables that tend to fluctuate in

More information

2.If actual investment is greater than planned investment, inventories increase more than planned. TRUE.

2.If actual investment is greater than planned investment, inventories increase more than planned. TRUE. Macro final exam study guide True/False questions - Solutions Case, Fair, Oster Chapter 8 Aggregate Expenditure and Equilibrium Output 1.Firms react to unplanned inventory investment by reducing output.

More information

Environmental Policy and Macroeconomic Dynamics in a New Keynesian Model

Environmental Policy and Macroeconomic Dynamics in a New Keynesian Model Environmental Policy and Macroeconomic Dynamics in a New Keynesian Model Barbara Annicchiarico Fabio Di Dio October 213 Abstract This paper studies the dynamic behaviour of an economy under different environmental

More information

ECON 3312 Macroeconomics Exam 3 Fall 2014. Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

ECON 3312 Macroeconomics Exam 3 Fall 2014. Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. ECON 3312 Macroeconomics Exam 3 Fall 2014 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Everything else held constant, an increase in net

More information

2. a. The IS curve is found from the equation Y = Cd + P + G = (Y - 100) - 500r r+ 100, or 0.5Y = r, or Y = r.

2. a. The IS curve is found from the equation Y = Cd + P + G = (Y - 100) - 500r r+ 100, or 0.5Y = r, or Y = r. Chapter 11 Numerical Problems 1. The following table shows the real wage (w), the effort level (E), and the effort per unit of real wages (E / w). w E E/w 8 7 0.875 10 10 1.00 12 15 1.25 14 17 1.21 16

More information

Suggested Solutions to Assignment 7 (Optional)

Suggested Solutions to Assignment 7 (Optional) EC290 Intermediate Macro I Instructor: Sharif F. Khan Department of Economics Wilfrid Laurier University Winter 2011 Suggested Solutions to Assignment 7 (Optional) (This assignment is based on the materials

More information

Real Business Cycles. Federal Reserve Bank of Minneapolis Research Department Staff Report 370. February 2006. Ellen R. McGrattan

Real Business Cycles. Federal Reserve Bank of Minneapolis Research Department Staff Report 370. February 2006. Ellen R. McGrattan Federal Reserve Bank of Minneapolis Research Department Staff Report 370 February 2006 Real Business Cycles Ellen R. McGrattan Federal Reserve Bank of Minneapolis and University of Minnesota Abstract:

More information

Aggregate Demand & Aggregate Supply

Aggregate Demand & Aggregate Supply 24 Chapter 10 Demand & Supply 10 Demand & Supply A. Basic concepts AS-AD model demand AD = C + I + G + NX supply Long-run aggregate supply (LAS) Short-run aggregate supply (SAS) Equilibrium output & price

More information

What is a Realistic Value for Price Adjustment Costs in New Keynesian Models?

What is a Realistic Value for Price Adjustment Costs in New Keynesian Models? What is a Realistic Value for Price Adjustment Costs in New Keynesian Models? Benjamin D. Keen University of Oklahoma Yongsheng Wang Texas Tech University First draft: September 2004 This draft: May 2005

More information

The Macroeconomy in the Long Run The Classical Model

The Macroeconomy in the Long Run The Classical Model PP556 Macroeconomic Questions The Macroeconomy in the ong Run The Classical Model what determines the economy s total output/income how the prices of the factors of production are determined how total

More information

Problem Set 7 FE312 Fall 2014 Rahman. Some Answers

Problem Set 7 FE312 Fall 2014 Rahman. Some Answers Some Answers 1) a. During the Depression, the Federal Reserve enacted policies that reduced the money supply. Sketch a graph and on it indicate what this would do to the aggregate demand and aggregate

More information

Economics 407: Topics in Macroeconomics Problem Set #1: Answers These problems are due on Tuesday, January 28 th.

Economics 407: Topics in Macroeconomics Problem Set #1: Answers These problems are due on Tuesday, January 28 th. Economics 407: Topics in Macroeconomics Problem Set #1: Answers These problems are due on Tuesday, January 28 th. 1. Consider the following equations describing the supply-side of a macroeconomy: Y = 800L

More information

I d ( r; MPK f, τ) Y < C d +I d +G

I d ( r; MPK f, τ) Y < C d +I d +G 1. Use the IS-LM model to determine the effects of each of the following on the general equilibrium values of the real wage, employment, output, the real interest rate, consumption, investment, and the

More information

ECON 1010 Principles of Macroeconomics Final Exam

ECON 1010 Principles of Macroeconomics Final Exam ECON 1010 Principles of Macroeconomics Final Exam 1. Expansionary monetary policy: Section A: Multiple Choice Questions. (120 points; 3 pts each) a. increases the money supply, interest rates, consumption,

More information

Exchange Rate Movements and Economic Activity

Exchange Rate Movements and Economic Activity Exchange Rate Movements and Economic Activity Marion Kohler, Josef Manalo and Dilhan Perera* This article discusses estimates of the effect of movements in the real exchange rate on economic activity and

More information

Lecture 9: Keynesian Models

Lecture 9: Keynesian Models Lecture 9: Keynesian Models Professor Eric Sims University of Notre Dame Fall 2009 Sims (Notre Dame) Keynesian Fall 2009 1 / 23 Keynesian Models The de ning features of RBC models are: Markets clear Money

More information

The session previously discussed important variables such as inflation, unemployment and GDP. We also alluded to factors that cause economic growth

The session previously discussed important variables such as inflation, unemployment and GDP. We also alluded to factors that cause economic growth The session previously discussed important variables such as inflation, unemployment and GDP. We also alluded to factors that cause economic growth enabling us to produce more and more to achieve higher

More information

Figure 1: Shift of s d as G increases S d (G=110) r S d (G=100) S d = 0.5Y+0.5T r-G. I d : r. Figure 2: Shift of IS as G increases

Figure 1: Shift of s d as G increases S d (G=110) r S d (G=100) S d = 0.5Y+0.5T r-G. I d : r. Figure 2: Shift of IS as G increases Economics 154a, Spring 2005 Intermediate Macroeconomics Problem Set 8: Answer Key April 11, 2005 1. Do numerical problem #4 on p. 425 in Chapter 11 of the textbook: An economy is described by the following

More information

Introduction to The IS-LM Model

Introduction to The IS-LM Model Chapter 9 The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis Economics 282 University of Alberta Introduction to The IS-LM Model This name originates from its basic equilibrium conditions:

More information

Markups and Firm-Level Export Status: Appendix

Markups and Firm-Level Export Status: Appendix Markups and Firm-Level Export Status: Appendix De Loecker Jan - Warzynski Frederic Princeton University, NBER and CEPR - Aarhus School of Business Forthcoming American Economic Review Abstract This is

More information

1. a. Interest-bearing checking accounts make holding money more attractive. This increases the demand for money.

1. a. Interest-bearing checking accounts make holding money more attractive. This increases the demand for money. Macroeconomics ECON 2204 Prof. Murphy Problem Set 4 Answers Chapter 10 #1, 2, and 3 (on pages 308-309) 1. a. Interest-bearing checking accounts make holding money more attractive. This increases the demand

More information

Analytical Problems: Chapter 9

Analytical Problems: Chapter 9 Analytical Problems: Chapter 9 1. (a) The increase in desired investment shifts the IS curve up and to the right, as shown in Figure 9.21. The price level rises, shifting the LM curve up and to the left

More information

Ch.6 Aggregate Supply, Wages, Prices, and Unemployment

Ch.6 Aggregate Supply, Wages, Prices, and Unemployment 1 Econ 302 Intermediate Macroeconomics Chul-Woo Kwon Ch.6 Aggregate Supply, Wages, rices, and Unemployment I. Introduction A. The dynamic changes of and the price adjustment B. Link between the price change

More information

Lecture 14 More on Real Business Cycles. Noah Williams

Lecture 14 More on Real Business Cycles. Noah Williams Lecture 14 More on Real Business Cycles Noah Williams University of Wisconsin - Madison Economics 312 Optimality Conditions Euler equation under uncertainty: u C (C t, 1 N t) = βe t [u C (C t+1, 1 N t+1)

More information

For a closed economy, the national income identity is written as Y = F (K; L)

For a closed economy, the national income identity is written as Y = F (K; L) A CLOSED ECONOMY IN THE LONG (MEDIUM) RUN For a closed economy, the national income identity is written as Y = C(Y T ) + I(r) + G the left hand side of the equation is the total supply of goods and services

More information

This paper is not to be removed from the Examination Halls

This paper is not to be removed from the Examination Halls This paper is not to be removed from the Examination Halls UNIVERSITY OF LONDON EC2065 ZA BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the Social Sciences, the Diplomas

More information

Graduate Macroeconomics 2

Graduate Macroeconomics 2 Graduate Macroeconomics 2 Lecture 1 - Introduction to Real Business Cycles Zsófia L. Bárány Sciences Po 2014 January About the course I. 2-hour lecture every week, Tuesdays from 10:15-12:15 2 big topics

More information

Chapter 12 Aggregate Supply and Aggregate Demand

Chapter 12 Aggregate Supply and Aggregate Demand Chapter 12 Aggregate Supply and Aggregate Demand After reading Chapter 12, AGGREGATE SUPPLY AND AGGREGATE DEMAND, you should be able to: Use an Aggregate Demand and Aggregate Supply model to explain output,

More information

Chapter 22. Aggregate Demand and Supply Analysis

Chapter 22. Aggregate Demand and Supply Analysis Chapter 22 Aggregate Demand and Supply Analysis Aggregate Demand The relationship between the quantity of aggregate output demanded and the price level when all other variables are held constant Based

More information

Simple Analytics of the Government Expenditure Multiplier

Simple Analytics of the Government Expenditure Multiplier Simple Analytics of the Government Expenditure Multiplier Michael Woodford Columbia University June 13, 2010 Abstract This paper explains the key factors that determine the output multiplier of government

More information

Topic 7: The New-Keynesian Phillips Curve

Topic 7: The New-Keynesian Phillips Curve EC4010 Notes, 2005 (Karl Whelan) 1 Topic 7: The New-Keynesian Phillips Curve The Phillips curve has been a central topic in macroeconomis since the 1950s and its successes and failures have been a major

More information

The Macroeconomic Effects of Fiscal Consolidation in Dynamic General Equilibrium. Tim Schwarzmüller and Maik H. Wolters

The Macroeconomic Effects of Fiscal Consolidation in Dynamic General Equilibrium. Tim Schwarzmüller and Maik H. Wolters The Macroeconomic Effects of Fiscal Consolidation in Dynamic General Equilibrium Tim Schwarzmüller and Maik H. Wolters No. 963 November 24 Kiel Institute for the World Economy, Kiellinie 66, 245 Kiel,

More information

Macroeconomics VIII: Equilibrium of Aggregate Supply and Demand (it all comes together!)

Macroeconomics VIII: Equilibrium of Aggregate Supply and Demand (it all comes together!) Macroeconomics VIII: Equilibrium of Aggregate Supply and Demand (it all comes together!) John Bluedorn Nuffield College Hilary Term 2005 aggregate demand revisited Recall that aggregate demand (AD) comprises

More information

7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts

7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts Chapter 7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Key Concepts Aggregate Supply The aggregate production function shows that the quantity of real GDP (Y ) supplied depends on the quantity of labor (L ),

More information

Economics 202 (Section 05) Macroeconomic Theory 1. Syllabus Professor Sanjay Chugh Fall 2013

Economics 202 (Section 05) Macroeconomic Theory 1. Syllabus Professor Sanjay Chugh Fall 2013 Department of Economics Boston College Economics 202 (Section 05) Macroeconomic Theory Syllabus Professor Sanjay Chugh Meetings: Tuesdays and Thursdays, 1:30pm-2:45pm, Gasson Hall 209 Email address: sanjay.chugh@bc.edu

More information

Name: Final Exam Econ 219 Spring You can skip one multiple choice question. Indicate clearly which one

Name: Final Exam Econ 219 Spring You can skip one multiple choice question. Indicate clearly which one Name: Final Exam Econ 219 Spring 2005 This is a closed book exam. You are required to abide all the rules of the Student Conduct Code of the University of Connecticut. You can skip one multiple choice

More information

Noah Williams Economics 312. University of Wisconsin Spring 2013. Midterm Examination Solutions

Noah Williams Economics 312. University of Wisconsin Spring 2013. Midterm Examination Solutions Noah Williams Economics 31 Department of Economics Macroeconomics University of Wisconsin Spring 013 Midterm Examination Solutions Instructions: This is a 75 minute examination worth 100 total points.

More information

MA Advanced Macroeconomics: 7. The Real Business Cycle Model

MA Advanced Macroeconomics: 7. The Real Business Cycle Model MA Advanced Macroeconomics: 7. The Real Business Cycle Model Karl Whelan School of Economics, UCD Spring 2015 Karl Whelan (UCD) Real Business Cycles Spring 2015 1 / 38 Working Through A DSGE Model We have

More information

Introduction to Money

Introduction to Money Introduction to Money (3f)-P.1 How does money fit into modern macro models? - Money M = = nominal units issued by the government. Price level p. Purchasing power 1/p. - Consider discrete periods: Household

More information

SHORT-RUN FLUCTUATIONS. David Romer. University of California, Berkeley. First version: August 1999 This revision: January 2012

SHORT-RUN FLUCTUATIONS. David Romer. University of California, Berkeley. First version: August 1999 This revision: January 2012 SHORT-RUN FLUCTUATIONS David Romer University of California, Berkeley First version: August 1999 This revision: January 2012 Copyright 2012 by David Romer CONTENTS Preface vi I The IS-MP Model 1 I-1 Monetary

More information

The Aggregate Demand- Aggregate Supply (AD-AS) Model

The Aggregate Demand- Aggregate Supply (AD-AS) Model The AD-AS Model The Aggregate Demand- Aggregate Supply (AD-AS) Model Chapter 9 The AD-AS Model addresses two deficiencies of the AE Model: No explicit modeling of aggregate supply. Fixed price level. 2

More information

Chapter Outline. Chapter 11. Real-Wage Rigidity. Real-Wage Rigidity

Chapter Outline. Chapter 11. Real-Wage Rigidity. Real-Wage Rigidity Chapter 11 Keynesianism: The Macroeconomics of Wage and Price Rigidity Chapter Outline Real-Wage Rigidity Price Stickiness Monetary and Fiscal Policy in the Keynesian 2008 Pearson Addison-Wesley. All rights

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Based on our understanding of the Keynesian cross, we know with certainty that an equal

More information

Growth Theory and Convergence Endogenous growth

Growth Theory and Convergence Endogenous growth Growth Theory and Convergence Endogenous growth Joanna Tyrowicz University of Warsaw, Faculty of Economics 02-09/03/2011 Joanna Tyrowicz (WNE UW) L2. Endogenous growth 02-09/03/2011 1 / 26 Exogenous growth

More information

Real Business Cycle Models

Real Business Cycle Models Phd Macro, 2007 (Karl Whelan) 1 Real Business Cycle Models The Real Business Cycle (RBC) model introduced in a famous 1982 paper by Finn Kydland and Edward Prescott is the original DSGE model. 1 The early

More information

Econ 102 Aggregate Supply and Demand

Econ 102 Aggregate Supply and Demand Econ 102 ggregate Supply and Demand 1. s on previous homework assignments, turn in a news article together with your summary and explanation of why it is relevant to this week s topic, ggregate Supply

More information

Agenda. The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis, Part 2. The AD Curve. Aggregate Demand and Aggregate Supply

Agenda. The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis, Part 2. The AD Curve. Aggregate Demand and Aggregate Supply Agenda Aggregate Demand and Aggregate Supply The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis, art 2 13-1 13-2 Aggregate Demand and Aggregate Supply The AD-AS model is derived from

More information

Chapter 20. Short-Run Economic Fluctuations KEY FACTS ABOUT ECONOMIC FLUCTUATIONS

Chapter 20. Short-Run Economic Fluctuations KEY FACTS ABOUT ECONOMIC FLUCTUATIONS Chapter 2 urpose of Chapter 2: Develop a model that economists use to analyze the economy s short-run fluctuations - the model of demand and. Short-Run Economic Fluctuations Economic activity fluctuates

More information

e) Permanent changes in monetary and fiscal policies (assume now long run price flexibility)

e) Permanent changes in monetary and fiscal policies (assume now long run price flexibility) Topic I.4 concluded: Goods and Assets Markets in the Short Run a) Aggregate demand and equilibrium b) Money and asset markets equilibrium c) Short run equilibrium of Y and E d) Temporary monetary and fiscal

More information

Chapter 11. Keynesianism: The Macroeconomics of Wage and Price Rigidity. 2008 Pearson Addison-Wesley. All rights reserved

Chapter 11. Keynesianism: The Macroeconomics of Wage and Price Rigidity. 2008 Pearson Addison-Wesley. All rights reserved Chapter 11 Keynesianism: The Macroeconomics of Wage and Price Rigidity Chapter Outline Real-Wage Rigidity Price Stickiness Monetary and Fiscal Policy in the Keynesian Model The Keynesian Theory of Business

More information

Working Capital Requirement and the Unemployment Volatility Puzzle

Working Capital Requirement and the Unemployment Volatility Puzzle Working Capital Requirement and the Unemployment Volatility Puzzle Tsu-ting Tim Lin Gettysburg College July, 3 Abstract Shimer (5) argues that a search-and-matching model of the labor market in which wage

More information

Discussion #1: Chapter 4: The economy in the very long run: The Economics of Growth

Discussion #1: Chapter 4: The economy in the very long run: The Economics of Growth Discussion #1: Chapter 4: The economy in the very long run: The Economics of Growth 1. Technological advances increase output in the short run but have no impact on long-run growth in output per capita,

More information

SIMPLE GUIDELINES FOR INTEREST RATE POLICY*

SIMPLE GUIDELINES FOR INTEREST RATE POLICY* SIMPLE GUIDELINES FOR INTEREST RATE POLICY* José Maria Brandão de Brito** Pedro Teles*** 1. INTRODUCTION Those of us working at research departments in central banks are regularly questioned on the right

More information

Real Fluctuations at the Zero Lower Bound

Real Fluctuations at the Zero Lower Bound Real Fluctuations at the Zero Lower Bound Brent Bundick January 215 Abstract Does an economy constrained by the zero lower bound respond differently to real shocks? Under standard Taylor (1993)-type policy

More information

Chapter 3 AGGREGATE DEMAND AND

Chapter 3 AGGREGATE DEMAND AND Chapter 3 AGGREGATE DEMAND AND AGGREGATE G SULY Dr. Mohammed Alwosabi The aggregate demand and aggregate supply (-AS) model determines RGD and GD Deflator and helps us understand the performance of three

More information

Chapter 11: Extending the Sticky-Price Model: IS- LM, International Side, and AS-AD

Chapter 11: Extending the Sticky-Price Model: IS- LM, International Side, and AS-AD Chapter 11 1 Final Chapter 11: Extending the Sticky-Price Model: IS- LM, International Side, and AS-AD J. Bradford DeLong Questions What is money-market equilibrium? What is the LM Curve? What determines

More information

Questions. True/False and Explain

Questions. True/False and Explain 166 CHAPTER 11 (27) Questions True/False and Explain Aggregate Supply 11. At full employment, there is no unemployment. 12. Along the LAS curve, a rise in the price level and all resource prices increase

More information

Debt Maturity Management, Monetary and Fiscal Policy Interactions

Debt Maturity Management, Monetary and Fiscal Policy Interactions Debt Maturity Management, Monetary and Fiscal Policy Interactions Hao Jin April 22, 23 Abstract This paper examines the interactions of debt maturity management, monetary and fiscal policy in a DSGE model.

More information

CHAPTER 5 AGGREGATE SUPPLY AND DEMAND

CHAPTER 5 AGGREGATE SUPPLY AND DEMAND CHAPTER 5 AGGREGATE SUPPLY AND DEMAND Chapter Outline: The classical AS-curve The Keynesian AS-curve Frictional unemployment The AD-AS framework The effects of shifts in aggregate demand Supply-side economics

More information

Lecture 2 Dynamic Equilibrium Models : Finite Periods

Lecture 2 Dynamic Equilibrium Models : Finite Periods Lecture 2 Dynamic Equilibrium Models : Finite Periods 1. Introduction In macroeconomics, we study the behavior of economy-wide aggregates e.g. GDP, savings, investment, employment and so on - and their

More information

12.1 Introduction. 12.2 The MP Curve: Monetary Policy and the Interest Rates 1/24/2013. Monetary Policy and the Phillips Curve

12.1 Introduction. 12.2 The MP Curve: Monetary Policy and the Interest Rates 1/24/2013. Monetary Policy and the Phillips Curve Chapter 12 Monetary Policy and the Phillips Curve By Charles I. Jones Media Slides Created By Dave Brown Penn State University The short-run model summary: Through the MP curve the nominal interest rate

More information