Class notes
Summary Macro Economics II
- Course
- Institution
Summary of macroeconomics II Includes answers to the assignments included mini summary of the chapters included brief summary items
[Show more]
1 review
By: woutervanderharst • 7 year ago
Seller
FollowFarzanah
Reviews received
Content preview
Chapter 1: Effects of changes in Government spending in a static neoclassical modelFeatures of model (Markets allocate resources in a Pareto effiecient way)
• Households maximize utility
• Firms maximize profits
• Prices adjust to clear markets
Pareto efficiency
-markets work well in such model
-First welfare theorem: allocation Pareto efficient ⇒ no market failures
Fiscal stimulus
• Government spending often considered tool to fight recessions
• Idea:
Recession associated with marketfailure
Government spending helps to counteract this market failure
Why useful to consider model without market failures
1 Markets may work well most of the time
Policy makers may want to know what increasing spending does when markets work well
2 Provides benchmark for looking at empirical evidence:
• Model may be consistent with empirical evidence
• If we see discrepancies: nature of discrepancies may give us indication what market failures to
introduce
Main insights from model in this chapter
1.Government spending reduces resources of private sector
More spending ⇒ higher taxes ⇒ less resources for households
two reasons:
1. Total output F(Nt)= Ct + Gt
Thus G ↑ → crowding out C → C↓ due to the wealth effect
2. If government likes to spend more, T ↑→ C↓
2.Households
1 Consume things they buy
2 Time spent not working for pay
lower income ⇒ household reduces both
• More spending reduces resources available to private sector ⇒ private consumption
drops & employment increases
• Output increases less than the increase in government spending
• Income ↑→ C↑→ l↓
Microfounded Models
Two-part specification:
Physical environment
1 The set of commodities which are produced and consumed
2 The set of households, and the preferences of each household over commodities
3 The technologies available to transform commodities into other commodities
4 The initial endowment of the economy with commodities
, Role
• Describe what is physically possible
• Says nothing about how allocation of resources is decided
Resource allocation mechanisms
Possibilities
• Central planner
• Of primary interest for us: combination markets & government
Market economy
• GE theory: firms & households take prices as given
• Decisions decentralized, made by households & firms • Assume optimization: households
utility, firms profits • Need to specify ownership of endowments
Advantages of Microfounded Models
1 Better chance to predict effects of policy change well
2 Can examine effects of of policy change on utility of households, can even try to determine
optimal policy
Modeling of behavior using microeconomic theory
• Model objectives & constraints
• Assume households & firms do best they can (optimization)
Lucas critique
• Firms/households may change behavior when policy changes
• This may invalidate behavioral rules inferred from past behavior
Sterke correlatie tussen inflatie en outputfluctuaties die gemeten wordt wanneer men een
Phillips-curve schat. Verschil interpretatie correlatie. In het Lucas-model veroorzaakt een (niet-
geanticipeerde) verandering in het algemene prijsniveau een trendafwijking van de output, in de
Phillips-curve veroorzaakt een trendafwijking van de output een prijsverandering.
Het Lucas-model toont dat onverwachte monetaire schokken de output in de korte termijn
kunnen beïnvloeden.
Keynesianen verwerpen de idee dat prijzen en lonen flexibel genoeg zijn om de markten
onmiddellijk te ruimen, zij veronderstellen daarentegen dat nominale prijzen en lonen zich traag
aanpassen.
Simple Lucas critique example: Fort Knox
Model based on past behavior
• Fort Knox has never been robbed
• May specify model in which criminals do not rob Fort Knox
Contemplated policy change
• Remove security to save money
• Good idea based on model of past behavior
Microfounded model
• May predict: criminals don’t rob Fort Knox if & only if it has security • Eliminating security bad
idea
• Lucas critique: must be circumspect with policy predictions
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller Farzanah. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $5.83. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
50990 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 15 years now