Economics: Endogenous and Exogenous Variables

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Chapter 1

• Endogenous variables are explained within a model.
• Exogenous variables are taken as given and are not explained within the model.
• Firms make decisions about price-setting, wage setting, and investment.
• Factors influencing firm decisions include wages at other companies, the unemployment rate, real interest rates, and the economy's long-term outlook.
• Households decide between consumption and saving, and between consuming domestic and imported goods.
• Factors influencing households' decisions include current income, expected future income, real interest rates, and wealth.
• Demand for imported goods depends on the same factors as consumption, plus the real exchange rate.
• The real exchange rate is the relative price between domestically produced and foreign goods.
• Foreign lenders lending in different currencies consider interest rates on loans in different currencies and expected changes in the exchange rate.
• High interest rates are required in a currency expected to depreciate when foreign lenders choose between lending in the currencies of two different countries.

Chapter 2

• Limits on the number of firms entering markets reduces competition, increases mark-ups and profits, and reduces the labor share of income.
• Laws increasing the bargaining power of unions affect the labor share of income.
• The labor share of income depends on technology and the degree of competition in the goods market.
• Increased taxes on non-labor incomes with reduced taxes on wage income leave the pre-tax labor share unchanged, but increase the after-tax labor share.
• Reduced working hours are equivalent to an E reduction and reduce income without affecting the labor share.

Chapter 3

• Investment is much more volatile than GDP because, for a given real interest rate, desired capital stock is proportional to production and about twice as large as GDP in one year.
• A one percent increase in production corresponds to a two percent of GDP increase in desired capital stock and ~10 percent of investment (since investment is 20-30 percent of GDP).
• Inflation increases and the central bank does not react, the real interest rate falls, investment increases because firms believe they can sell goods at a higher price in the future.
• Inflation increases and the central bank reacts by raising the interest rate more than the increase in the inflation rate, the real interest rate increases, reducing aggregate demand.
• More workers entering the labor market leads to an increase in employment.
• The marginal product of capital increases for firms in a capital stock because of the increase in employment.
• Computers becoming cheaper and more powerful improves productivity, increasing the profitability of investment, so investment increases.
• Increased savings in a closed economy increases the supply of lending so the real interest rate is reduced and investment increases.

Chapter 5

• The theory predicts that GDP per capita should converge under certain conditions; in the long run, all countries should have the same GDP per capita.
• Countries must have access to the same technology and education levels for convergence to occur.
• The return to investment will be higher in a country with a small capital stock per worker.
• More saving and investment with a small capital stock lead to catching up with countries with a big capital stock.
• Differences in technology explain at least 50% of income disparity, physical and human capital contribute to less than 50% of income differences.
• Factors such as depreciation rate, impatience level, competition level, and natural unemployment rate are not significant enough to explain large disparities.
• Political and social systems (laws, regulations, norms) also play a role in income disparity.
• There should be higher real return on loans in a growing economy as consumers expect higher future income.
• With the interest rate equal to the discount rate, consumers would want to consume more than their income to smooth consumption.
• The real interest rate must be higher than the subjective rate of discount to "convince" consumers not to consume more than is available.
• Subsidizing R&D is supported by the existence of externalities where knowledge produced can be freely copied, limiting the initial investor's return.
• Government subsidization of education is warranted by externalities as an educated worker's knowledge spreads to other workers.
• Another reason for subsidising education is that children, or their parents, may not have the financial resources to make profitable investments in education, i.e. there are liquidity constraints.

Chapter 6

• Without depreciation of capital, long-run levels of capital stock and production would be higher.
• The growth rates of capital stock and production would be unaffected without depreciation of captial.
• Shift in labor demand to skilled workers while decreasing demand for unskilled workers is skill-biased technical change.
• One approach is to make wages more flexible by allowing more unequal wages via lowering minimum wages.
• Reducing benefits for the unemployed along with lower taxes on low incomes can be combined with increasing wage flexiblity.
• Educating more workers enables the supply of skilled workers to better match demand.
• Subsidizing jobs for less-educated workers is imprecise because it distorts allocation between different types of production.
• Rapid productivity growth (E increases as a result of technological innovations) the labor demand increases for a given real wage.
• If the unemployment benefit is a constant fraction of the pre-unemployment wage, the incentives to take a job are roughly unchanged, and employment is unaffected while the real wage increases.
• If the unemployment benefit is kept constant in real terms, the real wage increases relative to the unemployment benefit and the natural unemployment level should decrease.
• A law that working hours must be shortened has the same effect as a reduction in E
• If unemployment benefit is a constant fraction of the pre-unemployment wage, incentives to search don't chnage so employment should also stay the same.
• If the unemployment benefit is kept constant in real terms, the incentives to search are reduced because the wage (per day or month) for those who work will fall when hours are reduced, and thus the level of employment will fall.

Chapter 7

• Things that qualify as "money" in theory have the four characteristics that money has in the model.
• Gold used to be a means of payment but isn't in modern economies.
• Dollar bills are accepted for payments and set prices/wages, but the central bank doesn't directly control their quantity in circulation.
• Banks are free to convert money on their accounts in the payment system to dollar bills.
• Monetary base (bills/coins + banks' claims = reserves) is controlled by the central bank.
• Money in a savings account cannot be used directly for payments, and deposit holders get interest along with the amount not really controlled by the central bank. Therefore, it doesn't correspond well to "money".
• Credit cards allow payments but always from one account to another via a monetary base.
• Foreign currency can be accepted as payments in transactions and prices/wages are set in them like in a country with a fixed exchange rate or monetary union.
• Banks' claims in the payment system (reserves) can be seen as part of the money supply since all payments are ultimately made.
• If people start using foreign currency for payments because of high inflation, demand for monetary base will decrease.
• If people go on vacation, they may use more cash, but firms have fewer transactions, so the net effect is unclear.
• If banks start holding more in their accounts, demand for monetary base increases.
• If people pay with credit cards, people carry less cash and faster circulation implies decreases demand for monetary base.
• In the long run, high inflation is a tax on cash savings only if they lend their money, they should get an interest rate compensating for inflation.
• Inflation tax brings in revenue, but a much smaller amount than explicit taxation of income.
• Higher expected inflation in the future will reduce the real interest rate for a given nominal interest rate, so consumption and investment will increase.
• Production increases above the natural level lead to wage increases and higher inflation.
• Demand and inflation need not increase if the central bank raises the interest rate.

Chapter 8

• If labor income increases by 100 million, 20% of consumers have no assets and just consume their income, the other 80% behave according to consumption theory.
• Assume income increase is distributed among varying consumers.
• 1/5 of consumers spend everything they have amounting to about 20 million.
• The others receiving 80 million see 40 million as permanent and 40 as temporary.
• Permanent parts they should spend and temporary increases they should put it in the bank.
• Consumption increases, purchases increase, and IS curve shifts from increase technology and firms seeing new investment possibilities when production is initially at the natural level.
• Production increases if the central bank keeps the money supply constant.
• It's likely the central bank will raise the interest rate because originally being on the natural level, the bank will be worried about rising wages that increase inflation.

Chapter 9

• The data shows that many countries had higher inflation and unemployment in 1975 than 1965.
• Inflation rose in the late 60's/ early 70's so people expected high inflation.
• Oil prices also rose in 1973-74, feeding into other prices.
• The natural rate of unemployment rose in comparaison to the 60's possibly from unemployement benefits, labour market regulation, and strong unions.
• Also, cyclical downturn after the boom in 1973 -75 and oil price increase.
• A smaller output gap over several periods may be preferred to a large output gap in one period.
• A clear policy to reduce inflation quickly impacts expectations if they aren't backward-looking.
• In this way, a “big bang” approach may lead to a smaller total loss in terms of production and employment.

Chapter 10

• CPI inflation is above target, but inflation expectations are in line the target, so core inflation may be due to rising energy prices or taxes, for example.
• The central bank can let effects pass temporarily without raising rates.
• If the central bank worries that expectations will be affected, then inflation will continue so they should raise interest rates.
• A poor harvest will cause the level of natural production and IS curve to shift inwards, a positive output gap, increased inflation, therefore, the interest rate should be increased.
• Interbank rate determines costs for banks influencing consumption and investment.
• When margin increases, the central bank should decrease its repo rate to compensate for margin increase or else lower demand and production.
• If core inflation increases without an increase in actual inflation, underlying inflation has increased but is countered by falling energy prices or reduced indirect taxes.
• Because latter effects are temporary, the risk of increased inflation leads to an increase in the interest rate.

Chapter 11

• Different measurements appear when calculated the government sector from the use side and the product side becuase the government uses goods and services and from the private sector.
• Governmenr share of use (consumption and investment) is larger than the share of production.
• A large fraction of government income is used for transfers government share of is bigger share of use.

Chapter 13

• The effect of the current account and the real exchange rate from these shocks:
• World real interest rate is increases: real interest rate increases and domestic demand declines in small open economy.
• Bad harvest in small open economy reduces supply, demand falls, net exports must decrease, currency has to depreciate.
• Shift in export demand happens: produced goods becomes cheaper and net exports is unchanged.
• Factors that limit international financial integration are: the lack of information, legal differences, Tobin taxes etc.
• Institutions integration: Banks, companies that borow and lend, pension funds that help savers to invest.
• Factors that cause difference in savings ratios are: differences in pension systems and taxes and differences in taxes, access to technology etc.

Chapter 14

• Natural resource discovery leads to increased consumption/ investmen, at unchanged interest rate it results in higher employment and inflation
• An increase in taxes helps reduce consumption, a reduction in government expenditure has a similar effect, all if Ricardian equivalence.
• Increasing rates will lead to appreciated exchange rate and reduction in net export.
• Investment is needed order to exploit. Demand for goods today has increased both the increased intertemporal and the international
• Relative prices of goods both rise

Kapitel 15

• Similarities: The Bretton Woods system, the gold standard, a currency basket, and a target zone use a target level for exchange with the main goal of adjusting the monetary policy.
• Differences: Bretton Woods system and gold were fixed to gold/dollars while the Basket and zone exchange rates fluctuate.
• Trade-off between stable exchange rate, monetary independence, capital flows- can't exist together
• If there is some arbitrage then interest rate must be the same, otherwise it has to be regulated
• Governement rise in taxes and small open economy:
• If they increase demand by lowering interest the IS curve will move.
• If there isn't a change then there is a decrease in employment and if IS shifts.
• With full equivalence there will be no effect of a tax.

Kapitel 16

• Define "trend cycle and natural. levels" and analyze the following: --Permanent increase in technology- raises. --Earthquake- a reduction. --A labor market reform" raises trend
• To discuss output gap, with improvements, central bank needs to keep production on correct/ higher levels
• Temporary fall more than demand, so the bank needs to raise.

Kapitel 17

• Consumption and investment is 60%.
• Trend division has .009.
• All 3 mechanisms amplify. If there is an increase production, its leads to an increase investment + consumption

Kapitel 18

• More monetary Policy the borrowers are more better, it reduces rate and increase employee
• Policy benefits- reduce intrest rate and employment, savers get a return.
• Run inflaction will be higher and so the monetary which should be unaffected.
• If citizens pursuer in a long time but policies have a constraint.

Additional definitions

• Market Price vs. Basic Price : price is taxes less subsides.
• Gross and Net- refers to net/production income with consumption of capital.
• National Accounts - shows income from the period.
• 5 Production structures: Labor, Capital, Technology, intermediate good and taxes.
• Three Structures: Positive marginal produce, diminishing returns and constant scales.
• Markup - Determined by how competitive the farm is.
• Investments is imports because its correlated
• Demands differ because labor is shorter. Short run is production because the level they are in.
• P in 4 is how a consumer values future, a consumer who is impatient has a high, a constumer in future will have a low.
• Interest rate - make savings more better with a less consumption.
• Consumers are better off with Ramses implications

Exogenous vs. Endogenous Variables

• Exogenous variables: Given within analysis and that the change
• Indogenous: Variables that is determined with government expendirures,

Firms & Wages

• Price setting depends on wage and labor productivity.
• Wage setting depends on other frims and employment.
• Investment Decisions depend on expections with firms levels.