How does an expansionary monetary policy shift the IS-LM equilibrium in the short run?

It shifts the LM curve downward/rightward, lowering equilibrium real interest rates and stimulating investment, which increases equilibrium real aggregate output (Y).

What is stagflation, and what causes it in the AD-AS framework?

Simultaneous high inflation and stagnant economic growth/unemployment, caused by an adverse supply shock shifting the Short-Run Aggregate Supply (SRAS) curve leftward.

How does the tax multiplier compare in magnitude and sign to the government spending multiplier?

Tax Multiplier = -MPC / (1 - MPC) = -MPC / MPS; it has a negative sign and is smaller in absolute magnitude because part of a tax cut is saved (leakage) rather than spent.

How do the Cournot and Bertrand models of duopoly differ in strategic choice and market price?

Cournot duopolists choose output quantities simultaneously, resulting in a price above MC but below monopoly; Bertrand duopolists choose prices simultaneously, driving price down to MC (competitive outcome).

What is Purchasing Power Parity (PPP) in foreign exchange markets?

The theory that nominal exchange rates between two currencies adjust until an identical basket of goods costs the exact same in both countries: S = P_domestic / P_foreign.

What is the short-run vs. long-run trade-off illustrated by the Phillips Curve?

In the short run, there is an inverse relationship between inflation and unemployment; in the long run, the Phillips curve is vertical at NAIRU as inflation expectations adjust.

What does the IS curve represent in the IS-LM macroeconomic model?

The combinations of real interest rates and real output levels where the goods market is in equilibrium, equating planned expenditure with output (Investment = Savings); slopes downward.

What does the Stolper-Samuelson Theorem state regarding factor prices after trade liberalization?

Free trade increases the real return to the owners of the country's abundant factor of production and reduces the real return to the owners of the scarce factor.

What is the Quantity Theory of Money equation of exchange, and what does it imply under classical assumptions?

M * V = P * Y; assuming velocity (V) and real output (Y) are fixed or stable in the long run, proportional changes in money supply (M) cause equivalent changes in price level (P).

What is a Nash Equilibrium in non-cooperative game theory?

A strategy profile where no player can unilaterally deviate to an alternative strategy and achieve a strictly higher payoff, given the chosen strategies of all other players.

What modern tools does a central bank use to conduct monetary policy under an ample-reserves framework?

Interest on Reserve Balances (IORB) as an administered policy rate floor/anchor, Overnight Reverse Repurchase Agreement (ON RRP) facility rate, and open market balance sheet adjustments.

What is the Mundell-Fleming Trilemma (Impossible Trinity) in open-economy macroeconomics?

A country cannot simultaneously maintain all three: free capital mobility, a fixed exchange rate, and independent monetary policy; it must choose at most two.

What is the strategic dilemma in the classical Prisoner's Dilemma game?

Both players have a strictly dominant strategy to defect (betray), leading to an equilibrium outcome (defect, defect) that is Pareto-inferior to mutual cooperation.

State the Twin Deficits Hypothesis.

From the national accounting identity (S - I) + (T - G) = NX: if private savings and investment balance, a government budget deficit (G > T) translates into a current account trade deficit (NX < 0).

Why is the Long-Run Aggregate Supply (LRAS) curve vertical at potential output (Y*)?

Because in the long run, nominal wages and input prices adjust fully to price level changes, leaving real output determined solely by technology, capital, and labor resources.

State the Taylor Rule formula for central bank nominal policy rate target setting.

i = r* + π + 0.5(π - π*) + 0.5(y - y*), balancing real equilibrium interest rate (r*), actual inflation (π), inflation gap, and output gap.

What is the simple theoretical money multiplier in a fractional-reserve banking system?

Money Multiplier = 1 / rr (where rr is the required reserve ratio), assuming zero excess reserves held by banks and zero cash leakages by depositors.

What is the Tit-for-Tat strategy in an infinitely repeated Prisoner's Dilemma, and why is it effective?

Cooperate in round one, then copy the opponent's previous move thereafter; it is clear, immediately retaliatory against defection, and forgiving upon return to cooperation.

What is the simple Keynesian government spending multiplier formula?

Multiplier = 1 / (1 - MPC) = 1 / MPS, indicating the total shift in aggregate demand resulting from an autonomous increase in government spending.

What does the LM curve represent in the IS-LM model?

The combinations of interest rates and output levels where money demand (liquidity preference) equals real money supply in the money market; slopes upward.

What is the Ricardian Law of Comparative Advantage?

A country gains from international trade by specializing in and exporting goods that it produces at a lower opportunity cost relative to other nations, even if it has an absolute advantage in all goods.

What is Covered Interest Parity (CIP) versus Uncovered Interest Parity (UIP)?

CIP equates interest rate differentials to forward exchange rate premia using forward contracts (F/S = (1+i_d)/(1+i_f)); UIP equates interest differentials to expected changes in future spot rates without hedging.

How does an import tariff differ from an import quota regarding government revenue and quota rents?

A tariff transfers price markup revenue directly to the government treasury, whereas an import quota creates quota rents that accrue to import license holders or foreign exporters unless auctioned.

What does Ricardian Equivalence hypothesize about debt-financed tax cuts?

Forward-looking consumers recognize that debt-financed tax cuts require future tax increases of equal present value, choosing to save the entire tax cut rather than expand consumption.

What is the Heckscher-Ohlin Theorem in international trade theory?

Countries export goods that intensively use their abundant factors of production (capital, labor, land) and import goods that intensively use their scarce factors.

What are automatic stabilizers in fiscal policy, and how do they function during recessions?

Built-in budgetary features (progressive income taxes and unemployment benefits) that automatically boost government spending and cut taxes during downturns without discretionary legislative action.

What is a Liquidity Trap in Keynesian economics, and why is conventional monetary policy ineffective in it?

A situation where nominal interest rates approach zero and money demand becomes infinitely elastic, rendering open-market purchases unable to lower interest rates further.

What is a Subgame Perfect Nash Equilibrium (SPNE) and how is it solved?

A refinement of Nash equilibrium in extensive-form dynamic games requiring strategies to form a Nash equilibrium in every subgame; solved using backward induction.

Define a strictly dominant strategy.

A strategy that yields a strictly higher payoff to a player than every other strategy available to them, regardless of the strategies chosen by opponents.

Why does the Aggregate Demand (AD) curve slope downward in macroeconomic models?

Due to the Wealth Effect (Pigou effect: lower prices raise real purchasing power), Interest Rate Effect (Keynes effect: lower price level reduces money demand, lowering interest rates and raising investment), and Exchange Rate Effect (Mundell-Fleming effect: lower interest rates cause currency depreciation, boosting net exports).

What are the two primary components of a nation's Balance of Payments, and what is their accounting relationship?

Current Account (trade balance, net factor income, unilateral transfers) and Capital/Financial Account (net foreign asset flows); conceptually, Current Account + Financial Account + Capital Account = 0.

What is the Crowding-Out Effect in expansionary fiscal policy?

Deficit-financed government spending increases the demand for loanable funds, driving up real interest rates and thereby dampening private investment and interest-sensitive consumer spending.

Macroeconomics (Advanced): Macroeconomic Policy, Open Economy Macro & Strategic Interaction

Fiscal and monetary policy frameworks, IS-LM/AD-AS synthesis, open economy trade and exchange rate regimes, and strategic game theory

Level: advanced
Languages: en → en
Cards: 32
Markdown: Macroeconomics (Advanced): Macroeconomic Policy, Open Economy Macro & Strategic Interaction (.md)

Flashcards (32)

#	Front (Term / Question)	Back (Definition / Answer)
1	How does an expansionary monetary policy shift the IS-LM equilibrium in the short run?	It shifts the LM curve downward/rightward, lowering equilibrium real interest rates and stimulating investment, which increases equilibrium real aggregate output (Y).
2	What is stagflation, and what causes it in the AD-AS framework?	Simultaneous high inflation and stagnant economic growth/unemployment, caused by an adverse supply shock shifting the Short-Run Aggregate Supply (SRAS) curve leftward.
3	How does the tax multiplier compare in magnitude and sign to the government spending multiplier?	Tax Multiplier = -MPC / (1 - MPC) = -MPC / MPS; it has a negative sign and is smaller in absolute magnitude because part of a tax cut is saved (leakage) rather than spent.
4	How do the Cournot and Bertrand models of duopoly differ in strategic choice and market price?	Cournot duopolists choose output quantities simultaneously, resulting in a price above MC but below monopoly; Bertrand duopolists choose prices simultaneously, driving price down to MC (competitive outcome).
5	What is Purchasing Power Parity (PPP) in foreign exchange markets?	The theory that nominal exchange rates between two currencies adjust until an identical basket of goods costs the exact same in both countries: S = P_domestic / P_foreign.
6	What is the short-run vs. long-run trade-off illustrated by the Phillips Curve?	In the short run, there is an inverse relationship between inflation and unemployment; in the long run, the Phillips curve is vertical at NAIRU as inflation expectations adjust.
7	What does the IS curve represent in the IS-LM macroeconomic model?	The combinations of real interest rates and real output levels where the goods market is in equilibrium, equating planned expenditure with output (Investment = Savings); slopes downward.
8	What does the Stolper-Samuelson Theorem state regarding factor prices after trade liberalization?	Free trade increases the real return to the owners of the country's abundant factor of production and reduces the real return to the owners of the scarce factor.
9	What is the Quantity Theory of Money equation of exchange, and what does it imply under classical assumptions?	M * V = P * Y; assuming velocity (V) and real output (Y) are fixed or stable in the long run, proportional changes in money supply (M) cause equivalent changes in price level (P).
10	What is a Nash Equilibrium in non-cooperative game theory?	A strategy profile where no player can unilaterally deviate to an alternative strategy and achieve a strictly higher payoff, given the chosen strategies of all other players.
11	What modern tools does a central bank use to conduct monetary policy under an ample-reserves framework?	Interest on Reserve Balances (IORB) as an administered policy rate floor/anchor, Overnight Reverse Repurchase Agreement (ON RRP) facility rate, and open market balance sheet adjustments.
12	What is the Mundell-Fleming Trilemma (Impossible Trinity) in open-economy macroeconomics?	A country cannot simultaneously maintain all three: free capital mobility, a fixed exchange rate, and independent monetary policy; it must choose at most two.
13	What is the strategic dilemma in the classical Prisoner's Dilemma game?	Both players have a strictly dominant strategy to defect (betray), leading to an equilibrium outcome (defect, defect) that is Pareto-inferior to mutual cooperation.
14	State the Twin Deficits Hypothesis.	From the national accounting identity (S - I) + (T - G) = NX: if private savings and investment balance, a government budget deficit (G > T) translates into a current account trade deficit (NX < 0).
15	Why is the Long-Run Aggregate Supply (LRAS) curve vertical at potential output (Y*)?	Because in the long run, nominal wages and input prices adjust fully to price level changes, leaving real output determined solely by technology, capital, and labor resources.
16	State the Taylor Rule formula for central bank nominal policy rate target setting.	i = r* + π + 0.5(π - π) + 0.5(y - y), balancing real equilibrium interest rate (r*), actual inflation (π), inflation gap, and output gap.
17	What is the simple theoretical money multiplier in a fractional-reserve banking system?	Money Multiplier = 1 / rr (where rr is the required reserve ratio), assuming zero excess reserves held by banks and zero cash leakages by depositors.
18	What is the Tit-for-Tat strategy in an infinitely repeated Prisoner's Dilemma, and why is it effective?	Cooperate in round one, then copy the opponent's previous move thereafter; it is clear, immediately retaliatory against defection, and forgiving upon return to cooperation.
19	What is the simple Keynesian government spending multiplier formula?	Multiplier = 1 / (1 - MPC) = 1 / MPS, indicating the total shift in aggregate demand resulting from an autonomous increase in government spending.
20	What does the LM curve represent in the IS-LM model?	The combinations of interest rates and output levels where money demand (liquidity preference) equals real money supply in the money market; slopes upward.
21	What is the Ricardian Law of Comparative Advantage?	A country gains from international trade by specializing in and exporting goods that it produces at a lower opportunity cost relative to other nations, even if it has an absolute advantage in all goods.
22	What is Covered Interest Parity (CIP) versus Uncovered Interest Parity (UIP)?	CIP equates interest rate differentials to forward exchange rate premia using forward contracts (F/S = (1+i_d)/(1+i_f)); UIP equates interest differentials to expected changes in future spot rates without hedging.
23	How does an import tariff differ from an import quota regarding government revenue and quota rents?	A tariff transfers price markup revenue directly to the government treasury, whereas an import quota creates quota rents that accrue to import license holders or foreign exporters unless auctioned.
24	What does Ricardian Equivalence hypothesize about debt-financed tax cuts?	Forward-looking consumers recognize that debt-financed tax cuts require future tax increases of equal present value, choosing to save the entire tax cut rather than expand consumption.
25	What is the Heckscher-Ohlin Theorem in international trade theory?	Countries export goods that intensively use their abundant factors of production (capital, labor, land) and import goods that intensively use their scarce factors.
26	What are automatic stabilizers in fiscal policy, and how do they function during recessions?	Built-in budgetary features (progressive income taxes and unemployment benefits) that automatically boost government spending and cut taxes during downturns without discretionary legislative action.
27	What is a Liquidity Trap in Keynesian economics, and why is conventional monetary policy ineffective in it?	A situation where nominal interest rates approach zero and money demand becomes infinitely elastic, rendering open-market purchases unable to lower interest rates further.
28	What is a Subgame Perfect Nash Equilibrium (SPNE) and how is it solved?	A refinement of Nash equilibrium in extensive-form dynamic games requiring strategies to form a Nash equilibrium in every subgame; solved using backward induction.
29	Define a strictly dominant strategy.	A strategy that yields a strictly higher payoff to a player than every other strategy available to them, regardless of the strategies chosen by opponents.
30	Why does the Aggregate Demand (AD) curve slope downward in macroeconomic models?	Due to the Wealth Effect (Pigou effect: lower prices raise real purchasing power), Interest Rate Effect (Keynes effect: lower price level reduces money demand, lowering interest rates and raising investment), and Exchange Rate Effect (Mundell-Fleming effect: lower interest rates cause currency depreciation, boosting net exports).
31	What are the two primary components of a nation's Balance of Payments, and what is their accounting relationship?	Current Account (trade balance, net factor income, unilateral transfers) and Capital/Financial Account (net foreign asset flows); conceptually, Current Account + Financial Account + Capital Account = 0.
32	What is the Crowding-Out Effect in expansionary fiscal policy?	Deficit-financed government spending increases the demand for loanable funds, driving up real interest rates and thereby dampening private investment and interest-sensitive consumer spending.