Econ 1015 Whitworth Exam 2 Cheat Sheet.pdf - Shock An...

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Shock: An unexpected event that affects the economy positively or negatively, ex. Natural disaster, unexpected FOMC policy, change in spending, unexpected war Impulse Response Function: A response of economic variables (GDP, inflation, employment) to a shock, immediate response might be different than long run impact The impact of a macroeconomic variable depends on whether the variable is real or nominal Real variables : population, output, output per worker, are adjusted for inflation Nominal variables: money, spending, wage rate, not adjusted for inflation *Fisher Effect: The 1 to 1 adjustment of nominal IR to inflation Nominal Macroeconomic Shocks Supply Shock: Sudden (temporary) increase/decrease in the supply of a commodity or service; the supply of all (or most) goods/services needs to change. - Immediate impact of a negative supply shock: supply suddenly decreases, price and quantity impact depend on the elasticity of demand curve, Intermediate impact : Can cause stagflation; persistent high inflation with increasing unemployment or stagnating output, Long run impact : unclear If shock goes away, supply curve will return to prior level If shock is persistent, supply curve will remain at new level and alter the amount of output an economy can produce Demand Shocks: Sudden increase or decrease in the demand of a commodity or service; must affect purchasing power of multiple goods or services Negative Demand Shock: Demand suddenly decreases caused by a sudden loss in wealth (financial crisis) Positive Demand Shock: Sudden increase in demand. No permanent impact on economy OR can cause a permanent change or really slow adjustment back to equilibrium Monetary Policy Shocks - Immediate impact : central bank departs from prior IR rules without warning, generally all negative, uncertainty is bad - Long-Run Impact : predominant impact is nominal variable, no theoretical impact, sticky wages may return slowly; can alter beliefs and expectations about central bank Fiscal Policy Shocks: Caused by an unexpected change in government spending and taxation, can be a positive or negative Impacts the economy through a change in supply/demand Long-Run Impact: Theoretically has no long run impact, if permanent ill-advised change in policy may cause a long run deviation from trend, alters beliefs about fiscal policy Technology Shocks: Sudden change in the way an economy produces goods or services, must be a wide reaching change in more than one industry, will see a change in production function – how firms use capital and labor to produce output Positive Technology Shock: Unclear impact as firms invest in new tech Economic Volatility: Combination of shocks to nominal and real variables What is an Economic Institution?

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