GMM

Question 1

What are the four propositions of macroeconomics?

Answer 1

1. output follows rising trend determined by supply side factors
2. short run fluctuations caused by demand factors
3. economies don’t return to equilibrium quickly on their own
4. fiscal & monetary policy can theoretically stabilize fluctuations

Question 2

What are three causes of unemployment?

Answer 2

1. frictional (searching)
2. structural (reallocating)
3. institutional (minimum wage)

Question 3

Why is the AD curve downward sloping?

Answer 3

1. wealth effect
2. interest effect
3. liquidity
4. foreign demand

Question 4

What are some examples of automatic fiscal stabilizers?

Answer 4

employment insurance
welfare
progressive taxation
tax on profits not revenues

Question 5

Why might fiscal policy not work?

Answer 5

1. crowding out, via
   - exchange rates
   - substitution (G replaces C, I)
   - interest rates (G requires debt –> higher interest rates)
2. time lages
3. ricardian equivalence (saving in anticipation of future taxes)
4. time horizon
5. political interests

Question 6

What are the four methods of transmission for a central bank to impact AD though the interest rate?

Answer 6

1. commercial rates
2. asset prices
3. exchange rates
4. expectations

Question 7

What is quantitative easing?

Answer 7

• when zero lower bound is reached
• gov buys assets (bonds) to lower long-term interest rates
• only effective if banks increase lending and consumption increases

Question 8

What are the downsides of a monetary union?

Answer 8

• exchange rates cushion demand shocks
• exchange mitigates leakages
• countries have different business cycles

Question 9

What is the impossible trinity?

Answer 9

1. freely traded currency
2. independent monetary policy
3. fixed exchange rates