{ "cells": [ { "cell_type": "code", "execution_count": 1, "metadata": {}, "outputs": [ { "data": { "application/javascript": [ "\n", "IPython.OutputArea.prototype._should_scroll = function(lines) {\n", " return false;}" ], "text/plain": [ "" ] }, "metadata": {}, "output_type": "display_data" } ], "source": [ "%%javascript\n", "\n", "IPython.OutputArea.prototype._should_scroll = function(lines) {\n", " return false;}" ] }, { "cell_type": "markdown", "metadata": { "slideshow": { "slide_type": "notes" } }, "source": [ "# Solving the Flexprice Model\n", "\n", "**We have just stormed through chapter 6—the building blocks of the business cycle model chapter**:\n", "\n", "* Read appendix 6a on how consumption is differently affected by permanent and transitory shifts in Y\n", "\n", " \n", "\n", "**Now we will move on to chapter 7: Equilibrium in the flexprice business cycle model**\n", "\n", "* We will take a little peak inside the national income identity\n", " * C + I + G + NX = AD: that’s aggregate demand—spending\n", " * How do we know that is equal to Y—useful output produced, and sold?\n", " * We understand that K, E, L, and labor market equilibrium pushes w/p to a level at which firms want to employ everyone.\n", " * But then what determines where it all goes?\n", "\n", " \n", "\n", "## Well, What If Not? What If Aggregate Demand AD > Y Production?\n", "\n", "* Businesses have inventories…\n", "* They run those inventories down…\n", "* They react by raising prices…\n", "* Unless something else happens to increase dollar spending, rising prices mean that the same spending flow of nominal dollars is a lower real aggregate demand for goods and services…\n", "* And so we have inflation—a general rise in the price level—and real aggregate demand falls to match Y = Y☆ as the same spending flow buys fewer goods…\n", "* This chain of logic won’t work when we get to sticky prices…\n", "\n", " \n", "\n", "## Well, What If Not? What If Aggregate Demand AD > Y Production?\n", "\n", "* Businesses have inventories…\n", "* They will find those inventories building up…\n", "* They will cut prices…\n", "* Unless something else happens to decrease dollar spending, falling prices mean that the same spending flow of nominal dollars is a higher real aggregate demand for goods and services…\n", "* And so we have deflation—a general rise in the price level—and real aggregate demand rises to match Y = Y☆ as the same spending flow buys more goods…\n", "* This chain of logic won’t work when we get to sticky prices…\n", "\n", " \n", "\n", "## Pause to Note: This AD = Y = Y* Is Not a Terribly Good Assumption\n", "\n", "* It is not even a terribly good assumption if one qualifies it by “after five years”\n", "* Asymmetry in changes\n", "* Falls below, not fluctuations around\n", "* But we use it as a benchmark\n", "* And it can apply to the real world:\n", " * After 10 years, with no big shocks\n", " * After 3 years, if somebody is making Y = Y☆ by successful demand management policy\n", " \n", "\"The\n", "\n", "## Calculating Flexprice Equilibrium\n", "\n", "**Three prices**: W/P, P, r\n", "\n", "* W/P to set $ Y = Y^*$: the \"labor market\"\n", "* P we will get to in chapter 8—the \"money market\"\n", "* r: the flow-of-funds through financial markets\n", "\n", " \n", "\n", "**Move to a different form of the national income identity**\n", "\n", "         \n", "$ Y = C + I + G + NX $\n", "\n", "         \n", "$ Y - C - T - NX = I + (G-T) $\n", "\n", "         \n", "$ (Y - C - T) - NX + (T-G) = I $\n", "\n", "         \n", "$ S_p + S_f + S_g = I $\n", "\n", "----\n", "\n", " \n", "\n", "## Now We Have Something We Can Work with!\n", "\n", "**We have not just an equation: we have a process**\n", "\n", "         \n", "$ S_p(Y, t) + S_f(\\epsilon, ...) + S_g = I(r) $\n", "\n", "* If $ S_p + S_f + S_g > I $...\n", " * People will be scrambling to buy the bonds and stocks issued by companies to finance their investment spending...\n", " * The prices of bonds and stocks will go up...\n", " * Which is the same thing as the interest rate r falling...\n", " * As r falls, I increases: it is more profitable to build building and install machines...\n", " * As r falls, ε—the exchange rate, the value of foreign goods/currency—rises...\n", " * As domestic goods appear cheaper, foreigners spend more of their dollars buying domestic exports...\n", " * And spend fewer adding to the savings pool...\n", " * Thus $ S_f $ goes down and $ I $ goes up...\n", " * Until r has fallen enough and ε has adjusted enough to bring $ S = I $ into balance...\n", " * And those movements in r and ε drive changes in exports and investment spending...\n", "\n", "----\n", "\n", " \n", "\n", "## Now We Have Something We Can Work with!\n", " \n", "* If $ S_p + S_f + S_g < I $, then...\n", " * Companies will be scrambling to sell the bonds and stocks they issued to finance their investment spending...\n", " * The prices of bonds and stocks will go down...\n", " * Which is the same thing as the interest rate r going up...\n", " * As r rises, I falls: it is no longer as profitable to build building and install machines...\n", " * As r rises, ε—the exchange rate, the value of foreign goods/currency—falls...\n", " * As domestic goods appear more expensive, foreigners spend less of their dollars buying domestic exports...\n", " * And spend more adding to the savings pool...\n", " * Thus $ S_f $ goes up and $ I $ goes down...\n", " * Until r has fallen enough and ε has adjusted enough to bring $ S = I $ into balance...\n", " * And those movements in r and ε drive changes in exports and investment spending...\n", "\n", "----\n", "\n", " " ] }, { "cell_type": "markdown", "metadata": { "slideshow": { "slide_type": "notes" } }, "source": [ "## Savings and Investment Functions\n", "\n", " \n", "\n", "**The private savings function**\n", "\n", "         \n", "$ Y - C - T = S_p $\n", "\n", "         \n", "$ Y - (c_o + c_y(1-t)Y) - T = S_p $\n", "\n", "         \n", "$ Y - (c_o + c_y(1-t)Y) - tY = S_p $\n", "\n", "         \n", "$ (1 - c_y - t + c_{y}t)Y - c_o = S_p $\n", "\n", " \n", "\n", "**Government savings**\n", "\n", "         \n", "$ S_g = T - G = tY - G $\n", "\n", " \n", "\n", "**Foreign Savings**\n", "\n", "         \n", "$ S_f = - NX = IM - GX $\n", "\n", "         \n", "$ S_f = im_{y}Y - x_fY^f - {x_{\\epsilon}}{\\epsilon} $\n", "\n", "         \n", "$ S_f = im_{y}Y - x_fY^f -$ \n", "             \n", "$ {x_{\\epsilon}}\\left({\\epsilon}_o + {\\epsilon}_r\\left(r^f - r\\right)\\right) $ \n", "\n", " \n", "\n", "**Investment**\n", "\n", "         \n", "$ I = I_o - {I_r}r $\n", "\n", "----\n", "\n", " \n", "\n", "## Solving using $\\Delta$s\n", "\n", "* Start at full employment\n", "* $ \\Delta $: deviations from full-employment\n", "* Hence: \n", "\n", "         \n", "$ {\\Delta}Y = 0 $\n", "\n", "         \n", "$ {\\Delta}C = {\\Delta}c_o + {c_y}(1-t){\\Delta}Y $ :: consumption\n", "\n", "         \n", "$ {\\Delta}I = {\\Delta}I_o - {I_r}{\\Delta}r $ :: investment \n", "\n", "         \n", "$ {\\Delta}G $ :: government \n", "\n", "         \n", "$ {\\Delta}NX = x_f{\\Delta}Y^f + {x_{\\epsilon}}{\\Delta}{\\epsilon} - im_y{\\Delta}Y $ :: international\n", "\n", "         \n", "$ {\\Delta}\\epsilon = {\\Delta}{\\epsilon}_o + {\\epsilon}_r\\left({\\Delta}r^f - {\\Delta}r\\right) $ :: exchange rate\n", "\n", "* Then trace changes through...\n", "\n", " \n", "\n", "----\n", "\n", " \n", "\n", "### An Increase in Government Purchases of ΔG...\n", "\n", "* Start at full employment\n", "* $ \\Delta $: deviations from full-employment\n", "* Hence: \n", "\n", "         \n", "$ {\\Delta}G = {\\Delta}G $ \n", "\n", "         \n", "$ {\\Delta}Y = 0 $\n", "\n", "         \n", "$ {\\Delta}S_p + {\\Delta}S_f + {\\Delta}S_g = {\\Delta}I $\n", "\n", "         \n", "$ {\\Delta}S_p + {\\Delta}S_f - {\\Delta}G = {\\Delta}I $\n", "\n", "         \n", "$ {\\Delta}S_p = (1 - c_y - t + c_{y}t){\\Delta}Y - {\\Delta}c_o = 0 $\n", "\n", "         \n", "$ 0 + {\\Delta}S_f - {\\Delta}G = {\\Delta}I $\n", "\n", "         \n", "$ {\\Delta}S_f = im_{y}{\\Delta}Y - x_f{\\Delta}Y^f - {x_{\\epsilon}}\\left({\\Delta}{\\epsilon}_o + {\\epsilon}_r\\left({\\Delta}r^f - {\\Delta}r\\right)\\right) $\n", "\n", "         \n", "$ {\\Delta}S_f = x_{\\epsilon}{\\epsilon}_r{\\Delta}r $\n", "\n", "         \n", "$ {\\Delta}I = {\\Delta}I_o - {I_r}{\\Delta}r $\n", "\n", "         \n", "$ 0 + x_{\\epsilon}{\\epsilon}_r{\\Delta}r - {\\Delta}G = -{I_r}{\\Delta}r $\n", "\n", "         \n", "$ -{\\Delta}G = -\\left({I_r} + x_{\\epsilon}{\\epsilon}_r\\right){\\Delta}r $\n", "\n", "         \n", "$ {\\Delta}r = \\frac{{\\Delta}G}{{I_r} + x_{\\epsilon}{\\epsilon}_r} $\n", "\n", "         \n", "$ {\\Delta}I = -I_{r}{\\Delta}r = \\frac{-I_{r}{\\Delta}G}{{I_r} + x_{\\epsilon}{\\epsilon}_r} $\n", "\n", "         \n", "$ {\\Delta}GX = {\\Delta}NX = -{x_{\\epsilon}}{\\epsilon}_r{\\Delta}r = \\frac{-{x_{\\epsilon}}{\\epsilon}_{r}{\\Delta}G}{{I_r} + x_{\\epsilon}{\\epsilon}_r} $\n", "\n", "         \n", "$ {\\Delta}I + {\\Delta}GX = -{\\Delta}G $\n", "\n", " \n", "\n", "----\n", "\n", " \n", "\n", "## A Decrease in Animal Spirits ${\\Delta}I_o $... \n", "\n", "* Start at full employment\n", "* $ \\Delta $: deviations from full-employment\n", "* Hence: \n", "\n", "         \n", "$ {\\Delta}I = {\\Delta}I_o - I_r{\\Delta}r $ :: investment\n", "\n", "         \n", "$ {\\Delta}Y = 0 $ :: full employment is maintained\n", "\n", "         \n", "$ {\\Delta}S_p + {\\Delta}S_f + {\\Delta}S_g = {\\Delta}I $ :: flow-of-funds\n", "\n", " \n", "\n", "         \n", "$ {\\Delta}S_g = t{\\Delta}Y - {\\Delta}G = 0 $ :: government savings \n", "\n", "         \n", "$ {\\Delta}S_p + {\\Delta}S_f + 0 = {\\Delta}I_o - I_r{\\Delta}r $ :: it's a zero...\n", "\n", "         \n", "$ {\\Delta}S_p = (1 - c_y - t + c_{y}t){\\Delta}Y - {\\Delta}c_o = 0 $ :: pvt dom svgs\n", "\n", "         \n", "$ 0 + {\\Delta}S_f + 0 = {\\Delta}I_o - I_r{\\Delta}r $ :: it's a zero\n", "\n", " \n", "\n", "         \n", "$ {\\Delta}S_f = im_{y}{\\Delta}Y - x_f{\\Delta}Y^f - x_{\\epsilon}{\\Delta}{\\epsilon}_o - {x_{\\epsilon}}{\\epsilon}_r\\left({\\Delta}r^f - {\\Delta}r\\right) $ :: foreigners \n", "\n", "         \n", "$ {\\Delta}S_f = 0 - 0 - 0 - x_{\\epsilon}{\\epsilon}_r\\left(0 - {\\Delta}r\\right) $ :: one term nonzero\n", "\n", "         \n", "$ x_{\\epsilon}{\\epsilon}_r{\\Delta}r = {\\Delta}I_o - I_r{\\Delta}r $ :: flow-of-funds\n", "\n", " \n", "\n", "         \n", "$ \\left(I_r + x_{\\epsilon}{\\epsilon}_r\\right){\\Delta}r = {\\Delta}I_o $\n", "\n", "         \n", "$ {\\Delta}r = \\frac{{\\Delta}I_o}{I_r + x_{\\epsilon}{\\epsilon}_r} $ :: Change in r\n", "\n", "         \n", "$ {\\Delta}I = \n", "{\\Delta}I_o - I_r{\\Delta}r = \n", "{\\Delta}I_o - \\frac{I_r{\\Delta}I_o}{I_r + x_{\\epsilon}{\\epsilon}_r} = \n", "\\frac{x_{\\epsilon}{\\epsilon}_r{\\Delta}I_o}{I_r + x_{\\epsilon}{\\epsilon}_r} $ :: Change in I\n", "\n", "         \n", "$ {\\Delta}GX = - {\\Delta}S_f - x_{\\epsilon}{\\epsilon}_r{\\Delta}r = -\\frac{x_{\\epsilon}{\\epsilon}_r{\\Delta}I_o}{I_r + x_{\\epsilon}{\\epsilon}_r} $ :: Change in GX\n", "\n", "         \n", "$ {\\Delta}S_p + {\\Delta}S_f - {\\Delta}G = {\\Delta}I $\n", "\n", "         \n", "$ {\\Delta}S_p = (1 - c_y - t + c_{y}t){\\Delta}Y - {\\Delta}c_o = 0 $\n", "\n", "         \n", "$ 0 + {\\Delta}S_f - {\\Delta}G = {\\Delta}I $\n", "\n", "         \n", "$ {\\Delta}S_f = im_{y}{\\Delta}Y - x_f{\\Delta}Y^f - {x_{\\epsilon}}\\left({\\Delta}{\\epsilon}_o + {\\epsilon}_r\\left({\\Delta}r^f - {\\Delta}r\\right)\\right) $\n", "\n", "         \n", "$ {\\Delta}S_f = x_{\\epsilon}{\\epsilon}_r{\\Delta}r $\n", "\n", "         \n", "$ {\\Delta}I = {\\Delta}I_o - {I_r}{\\Delta}r $\n", "\n", "         \n", "$ 0 + x_{\\epsilon}{\\epsilon}_r{\\Delta}r - {\\Delta}G = -{I_r}{\\Delta}r $\n", "\n", "         \n", "$ -{\\Delta}G = -\\left({I_r} + x_{\\epsilon}{\\epsilon}_r\\right){\\Delta}r $\n", "\n", "         \n", "$ {\\Delta}r = \\frac{{\\Delta}G}{{I_r} + x_{\\epsilon}{\\epsilon}_r} $\n", "\n", "         \n", "$ {\\Delta}I = -I_{r}{\\Delta}r = \\frac{-I_{r}{\\Delta}G}{{I_r} + x_{\\epsilon}{\\epsilon}_r} $\n", "\n", "         \n", "$ {\\Delta}GX = {\\Delta}NX = -{x_{\\epsilon}}{\\epsilon}_r{\\Delta}r = \\frac{-{x_{\\epsilon}}{\\epsilon}_{r}{\\Delta}G}{{I_r} + x_{\\epsilon}{\\epsilon}_r} $\n", "\n", "         \n", "$ {\\Delta}I + {\\Delta}GX = -{\\Delta}G $\n", "\n", " \n", "\n", "----\n", "\n", " \n", "\n", "## Implications\n", "\n", "* ΔIo is negative here…\n", " * So the interest rate r falls…\n", " * So investment spending I falls—but not by as much as the fall in ΔIo here…\n", "* Consumption C, government spending G, and national income Y are unaffected…\n", "* Imports IM are unaffected…\n", "* So something must go up when I goes down? What is that something?\n", "* GX:\n", " * A lower interest rate produced by less optimism about their investments by businesses here at home discourages the inflow of foreign saving…\n", " * And raises the value of foreign currency—the exchange rate…\n", " * Hence U.S. exports look more tempting to foreigners…\n", " *And so they grow when r falls\n", "\n", "----\n", "\n", " " ] }, { "cell_type": "markdown", "metadata": {}, "source": [ "## Implications\n", "\n", "* ΔIo is negative here…\n", " * So the interest rate r falls…\n", " * So investment spending I falls—but not by as much as the fall in ΔIo here…\n", "* Consumption C, government spending G, and national income Y are unaffected…\n", "* Imports IM are unaffected…\n", "* So something must go up when I goes down? What is that something?\n", "* GX:\n", " * A lower interest rate produced by less optimism about their investments by businesses here at home discourages the inflow of foreign saving…\n", " * And raises the value of foreign currency—the exchange rate…\n", " * Hence U.S. exports look more tempting to foreigners…\n", " *And so they grow when r falls\n", "\n", "----\n", "\n", " \n", "\n", "## Look at the U.S. Between 1999 and 2017…\n", "\n", "----\n", "\n", " \n", "\n", "## Look at the U.S. Between 1999 and 2005…\n", "----\n", "\n", " \n", "\n", "## Look at the U.S. Between 2005 and the Start of 2008…\n", "\n", "----\n", "\n", " \n", "\n", "## Look at the U.S. Between 2008 and 2010…\n", "\n", "----\n", "\n", " \n", "\n", "## Look at the U.S. Between 2010 and Today…\n", "\n", "----\n", "\n", " " ] }, { "cell_type": "markdown", "metadata": {}, "source": [ "# Flexprice Model Solution Strategy\n", "\n", "* Set up the flow-of-funds equation\n", "* Solve for the equilibrium real interest rate r (or Δr)\n", "* Plug the r (or Δr) back into the equations for the components of real GDP\n", "* Take advantage of the fact that in the flexprice model ΔY = 0\n", "\n", "----\n", "\n", " " ] }, { "cell_type": "markdown", "metadata": {}, "source": [ "# Calibration\n", "\n", "$ Y = Y^* = 20 $\n", "\n", "----\n", "\n", " " ] }, { "cell_type": "markdown", "metadata": {}, "source": [ "# Exercise: A Fall $ {\\Delta}I_0 $ in Investment Spending\n", "\n", "----\n", "\n", " " ] }, { "cell_type": "markdown", "metadata": {}, "source": [ "## Spending on Domestically-Produced Goods\n", "\n", "----\n", "\n", " " ] }, { "cell_type": "markdown", "metadata": {}, "source": [ "# The Course of the Business Cycle\n", "\n", "----\n", "\n", " " ] }, { "cell_type": "markdown", "metadata": {}, "source": [ "## National Income and Components\n", "\n", "**Real GDP**: \n", "\"Real\n", "\n", "**Real GDP per Worker**: \n", "\"Real \n", "\n", "**Investment as a Share of Potential GDP**: \n", "\"Investment\n", "\n", "**Consumption as a Share of Potential GDP**: \n", "\"Consumption\n", "\n", "**Gross Exports as a Share of Potential GDP**: \n", "\"Gross\n", "\n", "**Imports as a Share of Potential GDP**: \n", "\"Gross\n", "\n", "**Net Exports as a Share of Potential GDP**: \n", "\"Net\n", "\n", "----\n", "\n", " " ] }, { "cell_type": "markdown", "metadata": {}, "source": [ "## Monetary\n", "\n", "**Price Level**: \n", "\"Price\n", "\n", "**Inflation Rate**: \n", "\"Inflation\n", "\n", "----\n", "\n", " " ] }, { "cell_type": "markdown", "metadata": {}, "source": [ "## Interest and Exchange Rates\n", "\n", "**Nominal Short-Term Safe Rate**: \n", "\"Short\n", "\n", "**Long-Term Real Safe Rate**: \n", "\"Long\n", "\n", "**Long-Term Risky Real Rate**: \n", "\"Long\n", "\n", "**Real Exchange Rate** (Value of Foreign Goods/Currency): \n", "\"Real \n", "\n", "----\n", "\n", " " ] }, { "cell_type": "markdown", "metadata": {}, "source": [ "## The Output Gap\n", "\n", "\"The\n", "\n", "----\n", "\n", " " ] }, { "cell_type": "markdown", "metadata": {}, "source": [ "## The Medium Run Cometh\n", "\n", "----\n", "\n", " " ] }, { "cell_type": "markdown", "metadata": { "collapsed": true }, "source": [ "### Notes on Figures\n", "\n", "Real GDP\n", "\n", "* Real GDP: labor productivity times employment\n", "* The principal aspect of this graph is long-run growth: the American economy today is eight times the size of the economy of 1950\n", " * 2.5 times as many workers\n", " * 3.1 times output per worker\n", "* The secondary aspect is the business cycle\n", "* The tertiary aspect is speedup and slowdown in the growth trend\n", "\n", " \n", "\n", "Real GDP per Worker\n", "\n", "* Real GDP per worker (in 2009 dollars) was $45,000 per year in 1950 and is $115,000 today\n", "* Note the productivity growth speedup of the mid-1990s\n", "* And note the productivity growth collapse since 2000\n", "\n", " \n", "\n", "Investment Spending as a Share of Potential GDP\n", "\n", "* The major driver of the business cycle is fluctuating investment spending\n", "* This is investment spending as a share of potential GDP\n", "* In our simple macro model, I/Y☆ \n", "* These waves are the business cycles\n", "* Note the anemic investment recovery of 2009-present\n", "\n", " \n", "\n", "Personal Consumption Expenditures as a Share of Potential GDP\n", "\n", "* In the language of our simple macro model, this is C/Y☆\n", "* When Y is low relative to Y☆, C/☆ is low as well\n", "* C/Y☆ was low in the business cycle troughs of 2009, 1992, 1982, 1975, 1970, 1960, etc.\n", "* The medium-term rise in C/Y☆ as the U.S. becomes a save-and-invest-less country\n", "\n", " \n", "\n", "Gross Exports\n", "\n", "* Demand for U.S. exports has risen massively since 1950: from 5% to 13% of national income and product\n", "* When the value of foreign currency/bonds is high, exports boom\n", "* When the value of foreign currency/goods is low, exports are depressed\n", "\n", " \n", "\n", "Gross Imports\n", "\n", "* Imports have risen from 4% to 16% of national income and product since 1950\n", "* “Globalization” and “hyperglobalization”\n", " * The coming of the container ship\n", " * The tripling of world oil prices in the 1970s a big moment\n", " * As is the great expansion of world trade with the coming of the internet\n", " * Value chains\n", " * The China shock\n", "\n", " \n", "\n", "The Trade Balance\n", "\n", "* Net exports are a balancing item: you have to add them to C+I+G to get total spending on domestically-produced goods\n", "* The high interest rates of the 1980s that drove the value of foreign currency up led to a large negative swing in net exports\n", "* So did the optimism about America of the dot-com boom, and the so-called “strong dollar policy”\n", "* Most of all, however, the medium-term shift in the trade balance is due to the savings shortfall\n", " * Largely induced by large government deficits\n", "\n", " \n", "\n", "Short-Term Safe Nominal Interest Rate: Treasury Bills\n", "\n", "* The interest rate the Federal Reserve can nail: the short-term safe nominal interest rate\n", "* Note the regular cycles as the Federal Reserve tries to “lean against the wind”\n", "* Note the impact of the inflationary wave of the 1970s on the Treasury bill rate the Fed thought was appropriate\n", "* Note the extended time at the zero lower bound in the 2010s\n", "\n", " \n", "\n", "Long-Term Safe Real Interest Rate\n", "\n", "* Subtract the current inflation rate and add on the term premium—the difference between the 3-mo. T-bill and the 10-yr. T-bond rate—and get what current and expected future Federal Reserve policy have on incentives for investment\n", "* Note the:\n", " * Substantial tightening of the early 1970s\n", " * Loosening of the mid 1960s\n", " * Volcker disinflation of the early 1980s\n", " * The Greenspan preemption of the mid 1990s\n", " * The great easing of policy at the end of the 2000s\n", "\n", " \n", "\n", "Long-Term Risky Real Interest Rate\n", "\n", "* But the interest rate that actually matters for the determination of investment is the long-term real risky interest rate\n", "* The safe rate plus the risk premium assigned by financial markets\n", "* See the sharp tightenings coming from Federal Reserve policy and the financial system in:\n", " * the late 2000s, \n", " * the early 1980s, and\n", " * the early 1970s\n", "\n", " \n", "\n", "Real Exchange Rate\n", "\n", "* Dollar pegged to other currencies under the Bretton Woods system until the early 1970s\n", "* Since then, three major dollar cycles\n", "* Exports drop (and manufacturing hammered) when the value of foreign currency/goods falls\n", " * Reagan deficits\n", " * Internet/China\n", " * “Taper tantrum”\n", " * Trumpenomics\n", "\n", " \n", "\n", "Price Level\n", "\n", "* Headline and core\n", "* Cumulative and compounded 7.5-fold inflation since 1950\n", " * Consumer prices today 2.5 times what they were in 1984\n", " * Consumer prices in 1950 1/3 what they were in 1984\n", "* 2.5% per year\n", "\n", " \n", "\n", "Inflation Rate\n", "\n", "* Consumer Price Index\n", " * Not PCE…\n", "* “Headline” and “core”\n", " * Current core a better forecast of future headline than current headline is\n", "* Korean War \n", "* Mid-50s to late 60s\n", "* The 70s inflation\n", "* “Opportunistic” disinflation\n", "* The era of the zero lower bound" ] }, { "cell_type": "markdown", "metadata": {}, "source": [ "# 6 " ] }, { "cell_type": "markdown", "metadata": {}, "source": [ "#### GLOSSARY:\n", "\n", "**Balanced-growth path**: The path toward which total output per worker tends to converge, as the capital-output ratio converges to its equilibrium value.\n", "\n", "**Capital intensity**: The ratio of the capital stock to total potential output, K/Y, which describes the extent to which capital, as opposed to labor, is used to produce goods and services.\n", "\n", "**Divergence**: The tendency for a per capita measurement such as income or standard of living in various countries to become less equal over a period of time.\n", "\n", "**Demographic transition**: A period in history which sees first a rise and then a fall in birth rates and a sharp fall in death rates as material standards of living increase above \"subsistence\" levels.\n", "\n", "**Efficiency of labor**: The skills and education of the labor force, the ability of the labor force to handle modern technologies, and the efficiency with which the economy's businesses and markets function.\n", "\n", "**Industrial Revolution**: The transformation of the British economy between 1750 and 1850 when, due to technological advances, largely handmade production was replaced by machine-made production.\n", "\n", "**Long-run economic growth**: The process by which productivity, living standards, and output increase.\n", "\n", "**Malthusian age**:\n", "A period in which natural-resource scarcity limits any gains from increases in technology; a larger population becomes poor and malnourished, lowering their standard of living, and ultimately lowering population growth to near zero.\n", "\n", "**Patent laws and copyrights**: Laws designed to encourage invention and innovation by providing the right to exclude anyone else from using a discovery (patent) or intellectual property (copyright) for a period of years.\n", "\n", "**Productivity growth**: The rate at which the economy's full-employment productivity expands from year to year as technology advances, as human capital increases, and as investment increases the economy's physical capital stock.\n", "\n", "**Productivity growth slowdown**: The period from 1973 to about 1995 when the rate of productivity growth in the United States and other economies suddenly slowed, for still mysterious reasons.\n", "\n", "**Saving rate**: The share of total GDP that an economy saves, s, equal to the sum of household, government, and foreign saving divided by total output.\n", "\n", "----\n", "\n", " " ] }, { "cell_type": "markdown", "metadata": {}, "source": [ "## Setting up the Python/Jupyter environment" ] }, { "cell_type": "code", "execution_count": 2, "metadata": { "collapsed": true }, "outputs": [], "source": [ "# keep output cells from shifting to autoscroll: little scrolling\n", "# subwindows within the notebook are an annoyance...\n", "\n", "# set up the environment by reading in every library we might need: \n", "# os... graphics... data manipulation... time... math... statistics...\n", "\n", "import sys\n", "import os\n", "from urllib.request import urlretrieve\n", "\n", "import matplotlib as mpl\n", "import matplotlib.pyplot as plt\n", "from IPython.display import Image\n", "\n", "import pandas as pd\n", "from pandas import DataFrame, Series\n", "from datetime import datetime\n", "\n", "import scipy as sp\n", "import numpy as np\n", "import math\n", "import random\n", "\n", "import seaborn as sns\n", "import statsmodels\n", "import statsmodels.api as sm\n", "import statsmodels.formula.api as smf\n", "\n", "# report library versions...\n", "\n", "%matplotlib inline \n", "\n", "# put graphs into the notebook itself...\n", "\n", "# graphics setup: seaborn-whitegrid and figure size...\n", "\n", "plt.style.use('seaborn-whitegrid')\n", "\n", "figure_size = plt.rcParams[\"figure.figsize\"]\n", "figure_size[0] = 12\n", "figure_size[1] = 9\n", "plt.rcParams[\"figure.figsize\"] = figure_size" ] }, { "cell_type": "markdown", "metadata": {}, "source": [ "# Quiz 7\n", "\n", "**(A) If we want to account for the cross-country pattern of prosperity in the world today in income per capital and productivity, we need to be thinking primarily about**:\n", "\n", "1. Models in which ideas are hard to assimilate, in which rich countries have unfavorable price structures for growth, and in which diminishing returns to investment set in rapidly.\n", "2. Models in which ideas are easy to assimilate, in which rich countries have favorable price structures for growth, and in which diminishing returns to investment set in rapidly.\n", "3. Models in which ideas are hard to assimilate, in which rich countries have favorable price structures for growth, and in which diminishing returns to investment do not set in rapidly.\n", "4. Models in which ideas are easy to assimilate, in which rich countries have unfavorable price structures for growth, and in which diminishing returns to investment do not set in rapidly.\n", "5. None of the above/not enough information\n", "\n", " \n", "\n", "**(B) The Malthusian framework breaks the expectation that human ingenuity will always and rapidly lead to rising standards of living and productivity levels over time because**:\n", "\n", "1. the absence of a market economy leaves innovators with no incentive to boost productivity\n", "2. labor force growth falls with productivity and slower labor force growth creates natural resource scarcity that reduces the efficiency of labor.\n", "3. labor force growth increases with productivity and faster labor force growth creates natural resource scarcity that reduces the efficiency of labor.\n", "4. unfavorable climatic conditions—the little ice age—reduced agricultural productivity\n", "5. none of the above/not enough information\n", "\n", " \n", "\n", "**(C) A Solow growth model analysis based on improving incentives for investment raising the capital-output ratio is relevant at a time horizon**:\n", "\n", "1. of about a year or longer\n", "2. of about a decade or longer\n", "3. of about a generation or longer\n", "4. never relevant: things will have changed before the long run comes\n", "5. none of the above/not enough information\n", "\n", " \n", "\n", "\n", "\n", "(D) **SHORT ANSWER: Why do you think it has proven so much easier to spread around the world knowledge about how to obtain good public health than knowledge about how to obtain frontier levels of economic activity?**\n", "\n", "* Send email to: \n", "* “Econ 101b S2018 Quiz 4” as the subject line\n", "\n", "----\n", "\n", " " ] }, { "cell_type": "markdown", "metadata": {}, "source": [ "# iClicker\n", "\n", "**We study business cycles because**:\n", "\n", "1. They almost invariably have decisive influence on the long run trend of economic growth\n", "2. A five percent rise or fall in production and a two percent fall of rise in the unemployment rate is a bigger deal in the short run in which we live than most other things affecting the economy\n", "3. They pose a great intellectual puzzle\n", "4. They demonstrate the optimality of a market economy\n", "5. None of the above/not enough information\n", "\n", " \n", "\n", "**The consumption function**:\n", "\n", "1. Relates consumption spending by households primarily to household disposable income\n", "2. Relates consumption spending by households primarily to the real interest rate\n", "3. Relates consumption spending by households primarily to the nominal interest rate\n", "4. Relates consumption spending by households primarily to the level of the stock market\n", "5. None of the above/not enough information\n", "\n", " \n", "\n", "**In the flexible price model**:\n", "\n", "1. The business cycle fluctuations in production and employment are unusually severe\n", "2. There are no business cycle fluctuations in production and employment\n", "3. The business cycle fluctuations in production and employment are confined to the export sector\n", "4. Whether business cycle fluctuations in production and employment are serious depends on the intertemporal elasticity of substitution\n", "5. None of the above/not enough information\n", "\n", "----\n", "\n", " " ] } ], "metadata": { "kernelspec": { "display_name": "Python 3", "language": "python", "name": "python3" }, "language_info": { "codemirror_mode": { "name": "ipython", "version": 3 }, "file_extension": ".py", "mimetype": "text/x-python", "name": "python", "nbconvert_exporter": "python", "pygments_lexer": "ipython3", "version": "3.6.5" } }, "nbformat": 4, "nbformat_minor": 2 }