Study Guides (248,610)
Canada (121,635)
Economics (139)
ECON 359 (1)
Midterm

E359MidtermReview.doc

7 Pages
147 Views

Department
Economics
Course Code
ECON 359
Professor
Frank Atkins

This preview shows pages 1 and half of page 2. Sign up to view the full 7 pages of the document.
Description
11/03/13 Suppose the economy was in recession at point1. If you’re a Keynesian, you’re going to say that because prices are sticky we could stay there for a very long time. So, you can get us to point 3 using policy. However, if you believe in rational expectations you’re going to say that you can’t actually steer the economy to a point like point 3. You would need a tremendous amount of information that is simply no available to us. You would have to know things like: 1) Exactly where y* lies. 2) Even if you did know where y* is, you would need to know how to get to a point like point 2. Remember that underlying this model is a IS/LM model. In order to be able to shift any of these curves you need to know parameters like sensitivity to the interest rate, money supply, etc. 3) If you manage to get all of the information from above, now you need to take a micro approach to the problem. Remember that individuals are out there trying to maximize their utility subject to some constraint. Lucas Critique: you’re under some sort of policy regime. Now suppose the policy changes. When the policy changes, you will maximize your utility subject to this new constraint. So this leads us to conclude that the Keynesian model is nothing more than a snapshot. Once you change policy, people alter their behaviors and your model doesn’t tell you very much. So it isn’t very certain that you’ll be able to reach point 2. As policy makers, we are way over our heads. We have no legitimate way of knowing what our policies will do to the economy. Policies have long and variable lags and there is no way of knowing if people will change their behavior. But remember that people behave differently in different situations. 13/03/13 Canadian price of one USD (1/0.97)=1.03 Us price of one Canadian dollar = $0.97 Relatively speaking, the USD is worth more than the Canadian dollar. Suppose the current CAD/USD exchange rate was equal to 1.03. If the exchange rate in this case were to go to 1.05, then we have seen a depreciation of the CAD (since it takes more Canadian dollars to buy one USD) and an appreciation of the USD (since it now takes less USD to buy one unit of CAD ($0.85)). It is always useful to keep in mind that the exchange rate is nothing more than a price. As a price, there is a nominal exchange rate and a real exchange rate. Suppose we have two goods, good X at price Pxand good Y at price P .yIn this case the . This is called the real exchange rate because it tells us how many units of x we can trade for y, and vice versa. If we want to know how exactly Canadian goods trade as a whole with American goods, we have to consider the real exchange rate. This is why the real exchange rate is also called the terms of trade. Where S=Canadian price of one USD, Pf=American price level and p=Canadian price level. If were to go up, then American goods would become more expensive and we could expect our exports to go up and our imports to go down. What determines level of all nominal variables in the long run? The answer is the quantity theory of money. How does quantity theory of money play a role? The QTOM plays a role because there is some level of foreign money stock that determines that foreign price level just as there is some domestic level of money stock that determines the domestic price level. So now we have to worry about what the foreign country is doing. In the long run, the nominal money stock determines the exchange rate. 18/03/13 Purchasing Power Parity PPP serves as a way to determine if your currency is undervalued or overvalued using the Big Mac Index. For greater discussion on the subject look at the excel spreadsheet Dr. Atkins provided on blackboard. 20/03/13 In previous discussion we said that Keynesian models give us a snapshot of what the economy was at one point. Classical propositions give us a view of how the economy is trending. These models are great in a classroom setting but when we look out the window they don’t always work. The way classical models explain trends is as follows: you get some shock that throws the economy in a certain direction. Once you reach equilibrium, suppose you get yet another shock. Continue this for very long time and we can conclude that the long run equilibrium proposed by classical models is simply the summation of all these shocks that lead us to equilibrium. 20/03/13 Review of assignment 2 Question 1 Once you go through the trivial derivation of the AS curve from the naïve Phillips curve, you must answer the following: (iii) A question of some importance in macroeconomics concerns the existence
More Less
Unlock Document

Only pages 1 and half of page 2 are available for preview. Some parts have been intentionally blurred.

Unlock Document
You're Reading a Preview

Unlock to view full version

Unlock Document

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit