We considered two kinds of expectations.
]]> Lagged expectations of current variables:
Current expectations of future variables:
We considered two kinds of expectations.
]]> Lagged expectations of current variables:
Current expectations of future variables:
ch. 5, #2
ch. 5, #3
Some ideas for Midterm 3:
Type 1 questions are analytic bits such as steps in the major derivations.
Type 2 questions have longer answers to questions that start with the initial equations and end with the conclusions. One question will be the basic Solow model. Another will likely be exogenous tech change, human capital, or endogenous tech change.
Type 3 questions will be a copy of a chart/charts and "What does Jones say this shows?"
First, we went through some algebra.
Then, we found a direct route to the answer.
Adding endogenous technological change to the basic model:
The optimal savings rate (to maximize consumption) is s = alpha.
To find the point where the derivative is zero, we can cancel the n+g+d factors. Differentiating the factors involving s using the product rule yields the result.
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Step one is to know the basic model.
Then, organize your cases.
We concluded with four cases:
An increase in foreign income causes an expansion. An increase in p then returns the equilibrium to the initial point.
McCallum describes the automatic changes in the money supply caused by imposition of a fixed exchange rate. An alternative view is that the government could engage directly in domestic open market operations.
With a fixed exchange rate, fiscal policy is effective in increasing y if it is below full output and monetary policy is not.
The other two options are to do nothing (letting price adjustments increase y) and to devalue.
A common scenario is an IS curve drifting to the left (because of investment declines, for example). The central bank spends foreign exchange reserves to defend the exchange rate, but at some point resorts to devaluation to get back to full output. We really cannot ignore the expectations terms in thinking about this case. The effects of abrupt, large changes in the exchange rate are also an important issue.
With a fixed exchange rate enforced by a common currency, there simply is no LM curve.
