Test 2 key focus
..basic model II
Sure, let's break down the key points from the document to address your
queries:
### IS-LM Macroeconomic Model Equations
#### (i) IS Curve
The IS curve represents equilibrium in the goods market. It shows
combinations of interest rates (r) and output (Y) where the goods market is in
equilibrium. The IS curve is downward sloping because lower interest rates
lead to higher investment and thus higher output.
#### (ii) LM Curve
The LM curve represents equilibrium in the money market. It shows
combinations of interest rates (r) and output (Y) where the money market is
in equilibrium. The LM curve is upward sloping because higher output
increases the demand for money, leading to higher interest rates.
#### (iii) Equilibrium Output (Y) and Interest Rate (r)
Equilibrium in the IS-LM model occurs at the intersection of the IS and LM
curves, indicating simultaneous equilibrium in both the goods and money
markets. At this point, the equilibrium output (Y) and interest rate (r) are
determined.
### Determinants of Money Supply
1. **Lending by Commercial Banks**: Money creation through the extension
of credit.
2. **Repo Rate**: Interest rate at which commercial banks borrow from the
central bank.
3. **Open Market Operations**: Buying and selling of government securities
to influence money supply.
### Determinants of Money Demand
1. **Transactionary Motive**: Holding money for transactions.
2. **Precautionary Motive**: Holding money for unforeseen events.
3. **Speculative Motive**: Holding money for investment opportunities.
### Chain Reactions and Diagrams
#### Effect of Monetary Policy Hike
A monetary policy hike (increase in repo rate) leads to:
1. **Primary Effect**: Decrease in money supply, upward pressure on interest
rates, decrease in investment, decrease in aggregate expenditure, and
decrease in output.
2. **Secondary Effect**: Higher interest rates discourage investment further,
leading to a contraction in economic activity.
#### Effect of Government Spending Increase
1. **Primary Effect**: Increase in government spending leads to higher
aggregate expenditure, higher output, and higher income.
2. **Secondary Effect**: Increased income raises the demand for money,
leading to higher interest rates, which may discourage private investment.
3. **Net Effect**: The primary effect usually outweighs the secondary effect,
resulting in a net increase in output.
### Factors Causing Shifts in IS and LM Curves
#### IS Curve Shifts
- **Rightward Shifts**: Increase in autonomous consumption, investment,
government expenditure, exports, or decrease in taxes.
- **Leftward Shifts**: Decrease in autonomous consumption, investment,
government expenditure, exports, or increase in taxes.
#### LM Curve Shifts
- **Rightward Shifts**: Increase in money supply.
- **Leftward Shifts**: Decrease in money supply, increase in price level,
increase in real money demand.
### Implications of the Slope/Steepness of the LM Curve
- **Steep LM Curve**: Low interest elasticity of money demand, indicating
that changes in money supply have a significant impact on interest rates.
- **Flat LM Curve**: High interest elasticity of money demand, indicating that
changes in money supply have a less significant impact on interest rates.
BASIC MODEL III
Let's break down the key points from the document to address your queries:
### Understanding Rand Appreciation and Depreciation
**Appreciation**: When the rand appreciates against the US dollar, it means
the value of the rand increases relative to the dollar. For example, if the
exchange rate changes from 1 USD = R18.30 to 1 USD = R16.47, the rand
has appreciated. This makes imports cheaper and exports more expensive
for foreign buyers.
**Depreciation**: When the rand depreciates against the US dollar, it means
the value of the rand decreases relative to the dollar. For example, if the
exchange rate changes from 1 USD = R18.30 to 1 USD = R20.13, the rand
has depreciated. This makes imports more expensive and exports cheaper
for foreign buyers.
### Determinant Variables for Changes in Imports, Exports, and Capital
Inflows
#### Imports (M)
1. **Disposable Income**: Higher disposable income leads to increased
imports.
2. **Price Ratio**: The price of imported goods relative to locally produced
goods.
3. **Exchange Rate**: A stronger rand makes imports cheaper, while a
weaker rand makes imports more expensive.
4. **Other Factors**: Trade policies, import taxes, tariffs, quotas, sanctions,
or boycotts.
#### Exports (X)
1. **Foreign Income Levels**: Higher foreign income levels increase demand
for domestic exports.
2. **Price Ratio**: Higher domestic prices relative to foreign prices
discourage exports.
3. **Exchange Rate**: A stronger rand makes exports more expensive, while
a weaker rand makes exports cheaper.
4. **Other Factors**: Trade policies, export subsidies, geography, quality of
infrastructure.
#### Capital Inflows
1. **Relative Interest Rates**: Higher local interest rates compared to foreign
rates attract foreign capital.
2. **Rates of Return**: Higher expected returns on real investments attract
foreign investors.
3. **Exchange Rate**: A weaker rand encourages foreign investment by
reducing prices.
4. **Political Uncertainty**: Can affect capital inflows in both positive and
negative directions.
### Chain Reactions Illustrating Effects of Monetary and Fiscal Policies
#### Contractionary Monetary Policy (Interest Rate Hike)
**i. BoP Financial Account**
- **Interest Rate Increase**: Higher interest rates attract foreign capital
inflows, leading to a surplus in the financial account.
**ii. BoP Current Account**
- **Decrease in Income (Y)**: Higher interest rates discourage investment
and reduce aggregate expenditure, leading to a decrease in imports and a
surplus in the current account.
**iii. Overall BoP**
- **Combined Effect**: The surplus in both the financial and current accounts
leads to an overall BoP surplus.
**Chain Reaction**:
1. Repo rate ↑ → i ↑ → inflow of foreign capital → financial account surplus.
2. Y ↓ → imports ↓ → current account surplus.
3. Overall BoP surplus.
#### Expansionary Fiscal Policy (Government Spending Increase)
**i. BoP Financial Account**
- **Interest Rate Increase**: Increased government spending raises income,
leading to higher interest rates and attracting foreign capital inflows,
strengthening the financial account.
**ii. BoP Current Account**
- **Increase in Income (Y)**: Higher income increases imports, leading to a
deterioration in the current account.
**iii. Overall BoP**
- **Combined Effect**: The net effect of the opposing impacts on the
financial and current accounts determines the overall BoP position.
**Chain Reaction**:
1. G ↑ → Y ↑ → i ↑ → inflow of foreign capital → financial account surplus.
2. Y ↑ → imports ↑ → current account deficit.
3. Overall BoP position determined by net effects.
### Diagrams for IS-LM Model
Here are the diagrams illustrating the IS-LM model:
#### IS Curve
The IS curve represents equilibrium in the goods market. It is downward
sloping because lower interest rates lead to higher investment and thus
higher output.
#### LM Curve
The LM curve represents equilibrium in the money market. It is upward
sloping because higher output increases the demand for money, leading to
higher interest rates.
#### Equilibrium in IS-LM Model
The intersection of the IS and LM curves indicates simultaneous equilibrium
in both the goods and money markets. At this point, the equilibrium output
(Y) and interest rate (r) are determined.
These diagrams help visualize how changes in economic factors affect the
equilibrium output and interest rate in the IS-LM model.
Unit 5
Sure! Let's go through some calculation examples for the labour market
indicators.
### 1. Labour Force
The labour force is the sum of employed and unemployed individuals actively
seeking work.
**Example**:
- Employed: 15,000,000
- Unemployed: 5,000,000
**Calculation**:
$$\text{Labour Force} = \text{Employed} + \text{Unemployed} =
15,000,000 + 5,000,000 = 20,000,000$$
### 2. Labour Force Participation Rate
The labour force participation rate is the percentage of the working-age
population that is part of the labour force.
**Example**:
- Labour Force: 20,000,000
- Working-age Population: 30,000,000
**Calculation**:
$$\text{Labour Force Participation Rate} = \left(\frac{\text{Labour Force}}{\
text{Working-age Population}}\right) \times 100 = \left(\frac{20,000,000}
{30,000,000}\right) \times 100 = 66.67\%$$
### 3. Unemployment Rate
The unemployment rate is the percentage of the labour force that is
unemployed.
**Example**:
- Unemployed: 5,000,000
- Labour Force: 20,000,000
**Calculation**:
$$\text{Unemployment Rate} = \left(\frac{\text{Unemployed}}{\
text{Labour Force}}\right) \times 100 = \left(\frac{5,000,000}{20,000,000}\
right) \times 100 = 25\%$$
### 4. Absorption Rate
The absorption rate is the percentage of the working-age population that is
employed.
**Example**:
- Employed: 15,000,000
- Working-age Population: 30,000,000
**Calculation**:
$$\text{Absorption Rate} = \left(\frac{\text{Employed}}{\text{Working-age
Population}}\right) \times 100 = \left(\frac{15,000,000}{30,000,000}\
right) \times 100 = 50\%$$
### Definitions of Key Terms
#### i. Reservation Wage
The reservation wage is the minimum wage at which a worker is willing to
accept a particular type of job.
#### ii. Efficiency Wage
Efficiency wages are wages paid above the market equilibrium to increase
worker productivity and reduce turnover.
#### iii. Strict Unemployment Rate
The strict unemployment rate is the official unemployment rate, calculated
as the percentage of the labour force that is unemployed.
#### iv. Expanded Unemployment Rate
The expanded unemployment rate includes discouraged work-seekers and
other individuals who are not actively seeking work but are available to work.
#### v. Discouraged Work-Seeker
A discouraged work-seeker is an individual who has stopped looking for work
because they believe no jobs are available for them.
Unit 5.2
Let's break down the key points from the document to address your queries:
### Components of the Wage Determination Equation
The wage determination equation is given by:
$$W = P^e \cdot f(u, z)$$
Where:
- \(W\) is the nominal wage.
- \(P^e\) is the expected price level.
- \(u\) is the unemployment rate.
- \(z\) represents other institutional factors.
**Impact of Determinant Factors**:
- **Expected Price Level (\(P^e\))**: Higher expected price levels lead to
higher nominal wages (\(P^e \uparrow \rightarrow W \uparrow\)).
- **Unemployment Rate (\(u\))**: Higher unemployment rates lead to lower
nominal wages (\(u \uparrow \rightarrow W \downarrow\)).
- **Institutional Factors (\(z\))**: Factors such as labor laws, minimum wages,
and unemployment benefits can increase nominal wages (\(z \uparrow \
rightarrow W \uparrow\)).
### Calculation and Interpretation of Labour Market Indicators
#### i. Labour Force
The labour force is the sum of employed and unemployed individuals actively
seeking work.
**Calculation**:
$$\text{Labour Force} = \text{Employed} + \text{Unemployed}$$
#### ii. Labour Force Participation Rate
The labour force participation rate is the percentage of the working-age
population that is part of the labour force.
**Calculation**:
$$\text{Labour Force Participation Rate} = \left(\frac{\text{Labour Force}}{\
text{Working-age Population}}\right) \times 100$$
#### iii. Unemployment Rate
The unemployment rate is the percentage of the labour force that is
unemployed.
**Calculation**:
$$\text{Unemployment Rate} = \left(\frac{\text{Unemployed}}{\
text{Labour Force}}\right) \times 100$$
#### iv. Absorption Rate
The absorption rate is the percentage of the working-age population that is
employed.
**Calculation**:
$$\text{Absorption Rate} = \left(\frac{\text{Employed}}{\text{Working-age
Population}}\right) \times 100$$
### Definition of Key Terms
#### i. Reservation Wage
The reservation wage is the minimum wage at which a worker is willing to
accept a particular type of job.
#### ii. Efficiency Wage
Efficiency wages are wages paid above the market equilibrium to increase
worker productivity and reduce turnover.
#### iii. Strict Unemployment Rate
The strict unemployment rate is the official unemployment rate, calculated
as the percentage of the labour force that is unemployed.
#### iv. Expanded Unemployment Rate
The expanded unemployment rate includes discouraged work-seekers and
other individuals who are not actively seeking work but are available to work.
#### v. Discouraged Work-Seeker
A discouraged work-seeker is an individual who has stopped looking for work
because they believe no jobs are available for them.
Would you like more detailed explanations or specific examples for any of
these points?
