Topic Oral Exam Macroeconomic

1. Consumption

1. Explain about Keynesian consumption function!

https://www.economicshelp.org/blog/2812/economics/consumption-function-
definition/
Keynesian consumption function expresses the level of consumer spending
depending on 3 factors. Yd: Disposable income (Income after government
intervention -e.g benefits, taxes). a: autonomous consumption (consumption when
income is zero, even with no income you may borrow to able to buy food). b:
marginal propensity to consume (the % extra income that is spent), also known as
induced consumption.
C = a + b.Yd or C = Ca + cYd
Higher Yd leads to higher consumer spending. This model suggests that as income
rises, consumer spending will rise. However, spending will increase at lower rate
than income.
People who has low income tend to have marginal propensity to consume extra
income. People with high incomes will tend to have a lower marginal propensity to
consume (they will save more).

pada gambar ini garis C1 pindah ke C2 karena consumer

membelanjakan nilai lebih tinggi dari pendapatan mereka.

pada gambar ini nilai b (MPC) meningkat. Orang

membelanjakan % lebih tinggi dari penghasilan tambahan mereka.
Simple characteristic: Consumption strongly depends on current disposable income. The
share of consumption to disposable income decreases (when disposable income increases).
 2. What is model of intertemporal allocation? Assumptions:
• Consumption in 2 periods: period 1 (current period) and period 2 (future period)
• Fixed price level
• Perfect competition (one consumer can not effect interest rate when save or
borrow)
• Perfect certainty (one consumer knows his future income.
Model of intertemporal allocation
• A consumer prefers a balanced consumption path over time (consumption
smoothing)
Indifference curve Consumer indefference curves

Indifference curve show all combination

consumption in period 1 and consumpti
period 2 which brings the same total uti
(or between which a consumer is indiffe

The slope of the indifference curve tells

willing a consumer is to substitute betwe
first and second period consumption.

The father is IC from the begining, the h

total utility.

Indifference curves do not intersect.

U = f (C1, C2)

Intertemporal budget constraint. It shows all combinations of first and second period
consumption a consumer can afford. Y1: income in period 1. Y2: income in period 2.
Model of intertemporal allocation
Period 1 - present value of total income:
!"
R1 = Y1 + ("$%)
The
Period intertemporal
2 – future value of total income budget constraint
R2 = Y1 (1+i) + 2
Budget constraint shows all combinations of
first and second period consumption a consumer
can afford.

The slope of budget constraint curve is:

-(1+i)

𝑌2
𝑅1 = 𝑌1 +
(1 + 𝑖)
 Model
Consumerof intertemporal
optimal choice: consumerallocation
will choose the combination of first and second
Consumer´s
period consumption optimal
that puts them on thechoice
highest indifference curve that their
intertemporal budget constraint makes feasible. E = optimal choice.
Period 2
Optimal choice (E) – a consumer will choose the
combination of first and second period
consumption that puts them on the highest
Indifference curve that their intertemporal
budget constraint makes feasible.

Graphically - budget constraint touches

the highest indifference curve (or both curve
have the same slope)

Point „D“ - initial income distribution

- borrower or saver (period 1)

Period 1

Effect of changes:
• Change of income in period 1
• Change of income in period 2
• Change of interest rate

3. What is life-cycle theory?

https://www.economicshelp.org/blog/27080/concepts/life-cycle-hypothesis/
(by. Richard Brumberg and Franco Modigliani). Theory that people attempt to
smooth consumption over their lifecycle. This suggest that spending will be
dependent on current income, future expected income and also a function of
wealth.
4. What is permanent-income theory? (by. Milton Friendman) Theory that a person’s
consumption is determined, not just by current income but also future expected
income. It suggest that consumer will attempt to ‘smooth consumption’ over their
The Keynesian consumption function and
lifetime. E.g: borrowing as student, running down savings in retirement.
effects of interest rate and wealth
5. What is the relationship between Keynesian consumption function and effects of
interest rate and wealth?
C

C=Ca+cYD

Ca

45°

YD

2. Investment
1. What is Neoclassical model of investment? It assumes that firms invest if their
current capital stock is smaller than the optimal capital stock. Investment: fixed
 investment and investment into inventories. Fixed investment: optimal quantity of
capital and optimal quantity of capital vs actual quantity of capital.
2. For fixed investment, what is marginal revenue product of capital? additional
revenue due to change of capital by one unit. Marginal physical product of capital:
additional (physical) product due to a change of capital by 1 unit. Marginal revenue:
additional revenue due to a change of product by one unit. In perfect competition,
MR = P. http://www.economicsdiscussion.net/investment/neoclassical-theory/the-
Marginal Revenue Product of Capital
neoclassical-theory-of-investment-with-diagram/10383
MRPK

In perfect competition MR = P (price is given by market

and is constant for a company).

Curve MRPK we obtain if we multiply downward

sloping curve of MPK by the constant price level.

MRPK

Kapitál
K
(K)
Marginal
3. What is marginal cost Additional
cost of capital? of capitalcost for an additional unit of capital.
MFCK
In perfect competition – the real interest rate is constant
(one company can not influence the real interest rate, which
is given by the whole market)
We also assume (for simplicity) that the depreciation rate is
constant. Then the curve MFCK must be a horizontal line.

MFCK MFCK is the additional cost for an additional unit of capital.

On the horizontal axes we measure units of capital.
Each additional unit of capital costs the same amount
(for example 200 CZK). The curve is horizontal – the first
additional unit of capital costs 200 CZK, the second
additional unit of capital costs 200 CZK too and so on.
KKapitál (If we have total cost curve – in our condition – the curve
(K)
4. What is optimal quantity of capital?
would beRevenue
a upward slopingfrom an additional unit of capital must
linear curve).

be equal to the cost of connected with an additional unit of capital.

Optimal quantity of capital
MRPK
MFCK

I
t capital
K* - optimal quantity of Q
of production and factor Revenue from an additional unit of capital
must be equal to the cost connected with
Investment during this year depends on the (expected) level
an additional unit of capital.
ε (epsilon)- gradual adjustment factor
It Q E
MFCK
If K is lower than K* - MRPK > MFCK -
It Qt Qt 1
a company which Imaximizes
t ( Kprofit
t
*
K t* 1 )
must
increase units of capital
of capital was identical to the optimal quantity of capital for the previous year.
we assume that at the end of previous year, the MRPactual
K quantityIf K is higher than K* - MRPK < MFCK -
optimal quantity of capital of the previous year (at the end). Fora simplicity
company which maximizes profit must
the optimal quantity K* Kapitál
K the end of year) and
of capital of this year (at reducetheunits of capital
(K)
5. What is demand for fixed investment?
Investment during this year equals the difference between

It K*t K*t 1 t-1 – previous period (e.g. previous year)

t – current period (e.g. this year)

Demand
6. What for investment
is the different – a and
between accelerator company
multiplier?view
Multiplier shows the
effect of a change in investment on income and employment whereas accelerator
shows the effects of a change in consumption on investment. In other words, in the
case of multiplier, consumption is dependent upon investment, whereas in the case
Demand for investment – a macroeconomic view

K* Y ν (ný) – accelerator – demand of investment is

effected by the change (expected) of GDP

It Yt Yt 1 Accelerator vs. multiplier

It Y

ε (epsilon)- gradual adjustment factor

of accelerator investment is dependent upon consumption. It Y
 7. What is investment and fiscal and monetary policy? Fiscal policy: expenditure side –
crowding out effect. Revenue side - change of taxes, expected change of taxes,
investment benefits. Monetary policy – change of money quantity and interest rate.
8. What is investment into
Investment into inventories?
inventories
Planned inventories
Z* Se τ- all other factors affecting the optimal inventory
levels excluding the expected sales.
Zt ( Z t* Z t 1 )
Z*- the optimal quantity of planned inventories
Zt ( Ste Zt 1 )
Se – expected sales
Zt-1 – the actual quantity of planned inventories
St – actual sales
Unplanned inventories
Zt (Set St )
ε (epsilon)- gradual adjustment factor

Total investment to inventories

Zt 1 ( Set Zt 1 ) 2 (Set St )

3. Product-expenditure model
1. What is the assumptions of the model?
• Product is below its potential level (output gap): sufficient supply of capital,
sufficient supply of labor (unemployment)
• Fixed price level (fixed wages)
• Product (income) is determined by planned aggregate expenditure.
2. What is four sectors economy? Households, companies, government, and foreign
countries
3. What is equilibrium product?
• Equality of injections and leakages. Injections: investment, government
purchases, exports. Leakages: savings, net taxes, imports.
imonoceorcam cisab – ymonoce srotces -owT
• Level of the product at which actual product equals planned expenditure.
• Level of product at which unplanned investment is zero
The multiplier –• aRLevel
change S ofCequilibrium
T Tof product atM G product
Xplanned
which Iexpenditure
C line intersects the 45o line.
4. What is the multiplier?
RT T S M X G I
5. What is effect of changes of multiplier and changes of autonomous expenditures
) M X( upon) G equilibrium
RT T( product?
S I
1
∆𝐺𝐷𝑃 = (∆𝐶𝑎 + ∆𝐼𝑃 )
Two- sectors economy 1 − 𝑐– basic macroeconomic identity
6. What is basic macroeconomic identity?
C I G X M C S T TR
nrevog ,tnemtsevni :snoIitcG
ejnIX M strSopTmi TR
,sexat ten ,sgnivas :segakaeL
I S (T TR G ) (X M )

X G I M TN S

segakael dnLeakages:
oitcsavings,
a4.snMoney i fo net
ejnSupplyytiltaxes,
auqeimports
:tcudorpInjections:
muirbiliinvestment,
uqE government purchaces, exports

1. What is money? Anything that is widely accepted as a means of payment in the

S NT M I G X
economy.
2. What is money function?
• Medium ofproduct:
Equilibrium change: money
equality allows and
of injections theleakages
exchange of goods. With money, we can
separate the acts of buying and selling
• Unit of account: with money we can express the value of goods (present, past,
future)
 • Store of value: economic agents can hold part of their wealth is money
3. What is money aggregates?
• Narrow aggregate (M1): currency, i.e banknotes and coins, and overnight
deposits.
• Intermediate aggregate (M2): M1 + deposits with an agreed maturity up to 2
years and deposits redeemable at a period of notice up to 3 months.
Balance sheet of central bank
• Broad aggregate (M3): M2 + repurchase agreements, money market fund
shares/unit and debt securities up to 2 years.
4. How is the form of balance sheets of central bank and commercial bank?
Central bank:
assets Central bank liabilities

government securities currency in circulation

loans to bank reserves

- minimum reserves
foreign exchange reserves (deposits at CB and cash
in vaults)

Balance
other assets sheet of commercial bank
- excess reserves

other liabilities
Commercial banks:
assets Commercial bank liabilities

securities deposits of clients

reserves loans from central bank

- minimum reserves
(deposits at CB and cash other liabilities
in vaults)
- excess reserves

loans to clients
Quantity theory of money
other assets
5. What is multiple deposit creation? Assumptions: no cash, only non-cash
Fisher´s version (1911)
transactions. No excess reserves, only minimum reserves (10%). Only demand
deposits (no term deposits). Watch youtube for detail flow.
6. What is money multiplier?
nable if Fisher´s version describes the real demand for
left side of Demand
4. Money the equation is the total amount of
and the right side
1. What of the
is the quantity equation
theory is arethe
of money? There total
4 quantity value
theory ofIt
of money.
based on fisher and Cambridge version, Keynes, and Friedman.
(product). 2.Formally, it Cambridge
What is fisher’s and is possible
version? to rewrite money
Fisher version:
1
MD P Y
VY

ate has no effect on money demand.

money only for transaction purposes.
 Quantity theory of money
Cambridge version

• A. Total
Marshall,
amount ofA.C. Pigou equal
expenditure and to
also
totalJ.value
M. ofKeynes.
transactions (product). The
• There is focus on money demand not on hold
interest rate has no effect on money demand. People moneysupply.
money only for
transaction purposes.
Cambridge version:
* k – Cambridge coefficient
MD k P Y
k = Cambridge coefficient
Money is held for the convenience and security of having cash. K gives how much
money
Money economic
is held for thesubjecys want to hold
convenience andansecurity
a given level of nominal
of having product
cash. „k“ gives how much mon
(income). There is some effect of wealth an d also interest rate.
economic
3. What issubjects
the Keynes want toofhold
theory at a given
preference level ofThey
of liquidity? nominal productMotives
prefer liquidity. (income).

brium at goods and services marke

There
forisholding
somemoney:
effect of wealth and also interest rate.
• Transaction motive: current transactions, it arises from the timing differences
between revenue and expenditure, it is proportional to income.
• Precautionary motive: unexpected expenditures, it is proportional to income
• Speculative motive: normal (expected) vs current interest rate, capital gain vs
capital loss, it depends on the interest rate.
4. What is the friedman’s demand for money? Money is only one form of assets
esses all combinations of interest rates and real produ
(money, bonds, equities, real capital, human capital). Subjects try to allocate wealth
into different types of assets to maximize utility.
arket of5.Model
goods IS-LM-BPand services is in equilibrium.
1. What is the assumption of each model?
• Short run
• Product is below its potential level (output gap): sufficient supply of capital.
sufficient supply of labour (unemployment)
• Fixed price level
• Exogenous money supply (central bank fully controls money supply)
2. For IS curve, what is market of goods and services? Equilibrium at goods and services
S curve: market. IS curve expresses all combination of interest rates and real product in
which the market of goods and services is in equilibrium.

Y ( A vR bi )
3. For LM curve, what is market of money and other financial assets? LM curve
expresses all combinations of interest rate and real product in which the money
market and also the market of other financial assets al equilibrium.
4. For BP curve, what is external equilibrium? BP curve expresses all combination of
interest rates and real product in which the balance of payments is in equilibrium.

6.Fiscal and monetary policy in the case of perfect capital mobility

1. What is fixed and flexible exchange rate?
2. What is restrictive and expansive fiscal or monetary policy?

7.Fiscal and monetary policy in the case of perfect capital immobility

1. What is fixed and flexible exchange rate?
2. What is restrictive and expansive fiscal or monetary policy?
8.Fiscal and monetary policy in the case of imperfect capital mobility
1. What is fixed and flexible exchange rate?
2. What is restrictive and expansive fiscal or monetary policy?

9.Exchange rate
1. What is exchange rate market? Exchange rate is the price of one currency in term of
another currency. Forex market is where currencies of various nations are traded for
one another. Demand of czk created by:
• Czech exporter of goods and services
• Foreign investor who invest in Czech rep
Supply of Czk created by:
• Czech importer of goods and services
• Czech investor who invest in foreign countries
There are 2 exchange rate system:
• Fixed exchange rate system. Advantages: lower risk for trader and Investors.
Prevention against inflation (home currency is fixed against currency of country
with low inflation). Disadvantages: central bank has no ability to use an
independent monetary policy.
• Flexible exchange rate system (floating). Advantages: central bank has the ability
to use and independent monetary policy. Can prevent transmission of high
inflation from one country to another. Can eliminate speculative attacks on
currencies.
2. What is theory of purchasing power parity? Law of one price. The goods must have
the same price in all locations. If there are differences in prices, commodity arbitrage
will take place.
3. What is PPP in absolute and relative version? Absolute version: external and internal
purchasing powers of the currency are equal. Domestic price level divide by foreign
price level. Real exchange rate with the absolute version of PPP Rd/f = 1. Relative
version:
4. What is interest rate rate parity theory? Assumptions: no inflation, assets have the
same liquidity and risk, assets differ only the rates of return, investors are
indifferent. There are 2: uncovered and covered.
5. What is synthesis purchasing power parity and interest rate parity?

10.Labour market. Unemployment rate.

1. What is type of unemployment? All person aged 15 or over who satisfy all of the
following 3 conditions: not employed, actively seeking a job, available for work
within 14 days. There are 4 types: frictional, structural, cyclical, seasonal.
2. What is natural rate of unemployment rate and full employment?
• Unemployment rate at the level of potential output (full employment).
• Includes frictional, structural, and seasonal unemployment
• It is not one number, it can change in time, and it can vary between countries
Factors:
• Demographic changes
• Structural changes in economy
• Government policy
 Classical model of labour market
3. What is classical model?
(W/P)
DL
SL

W0/P1

P0 P1
W0/P0=W1/P1 E0

Traditional Keynesian Lmodel

=L* of labour market
0
L
(fixed nominal
4. What is Keynesian model wage)
(W/P)
DL
SL

W0/P1

P0 P1
W0/P0 E0

Monetarist model of labour market (the worker-misperception

L1 L0=L*
model, M. Friedman) L

5. What is monetarist model?

(W/P)
DL(W/P)
SL(W/Pe)

W1/P0 B

W0/P0 E0

A
W1/P1

L0=L* L1
L

11.Aggregate demand and aggregate supply model in closed economy

1. What is aggregate demand? Amount of goods and services (real GDP) which
households, companies, government and foreign customers want to buy at different
price levels
2. What is derivation of aggregate demand curve from IS-LM model?
• Increase of price level
• Decrease of real money supply (nominal money supply is stable)
• Increase of interest rate
• Decrease of investment, consumption
• Decrease of real product
3. How is shift of aggregate demand curve? Any variable other than the price level that
shifts either the IS curve or LM curve also shifts the aggregate demand curve.
IS curve:
 • Change of government purchases
• Change of consumption (taxes, expectation, transfer)
• Change of investment
LM curve:
• Change of nominal quantity (stock) of money
4. What is aggregate supply sticky-wage model? Aggregate supply is amount of goods
and services (real GDP) which are offered by all producers at different price levels.
There are short and long term. For short term there are 3 different models: The
sticky wage model, the worker misperception, the imperfect information.
5. What is worker misperception model?
• Friedman
• All prices and wages are flexible
• Workers know nominal wage but they do not have exact information about price
level
• Firms have exact information about actual price level
• Increase in price level
• Workers have the same expected price level.
6. What is imperfect information model?
• Labour market clears, nominal wages are flexible
• Firms do not have better information than workers
• Firms exist in separate markets
• An unexpected increase in the overall price level may be perceived by firms as
increase of relative prices of their productions.

12.Fiscal and monetary policy in the aggregate demand and aggregate supply model.
1. What is the situation in the short term and long-term?

13.Phillips curve
1. WhatPhillips curveRelationship between inflation rate and unemployment rate.
is phillips curve?
Original
Original: wage version
Wage
inflation
(%) 6

0
1 2 3 4 5 6 7 Unemployment rate
(%)

Assumption: wages are the main part of total costs, or, prices are set as surcharge to
wages.
2. What is situation in the short and long term?
3. What is the effect of expectations? Type of expectations:
• Adaptive expectations: economic subjects form their expectations about what
will happened in the future based on what has happened in the past
• Rational expectations: economic subjects use all available information, they do
not make systematic error when predicting the future, and deviations form
perfect foresight are only random
Interest rate parity
Dipengaruhi oleh

1. Suku bunga bank central

2. Interest rate
3. Exchange rate
4. Inflasi
Berdampak pada terjadinya arbitrage atau nggak.