Macroeconomics Chapter 10

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Chapter 10.

Stagflation

A decrease in aggregate supply can lead to a recession and inflation

Long-Run Aggregate Supply Curve

The relationship between the quantity of real GDP supplied and the price level at full employment

Long-Run Aggregate Supply Curve

The relationship between the quantity of real GDP supplied and the price level in the long run when real GDP equals potential GDP

Long-Run Aggregate Supply Curve

The relationship between the quantity of real GDP supplied and the price level at the natural rate of unemployment

Full Unemployment

Occurs when the labor market is in equilibrium

Natural Rate of Unemployment

The unemployment rate that exists at full employment

Aggregate Supply

Capital and technology are fixed at a point in time here

Aggregate Supply Curve

The relationship between the aggregate price level (GDP Deflator) and the aggregate quantity supplied

Aggregate Quantity Supplied

The production technology of the economy and the operation of the labor market

Aggregate Production Function

Y = F (L, K, T). This is the:

Function

Y = F (L, K, T) is the aggregate production function. F means:

Labor

Y = F (L, K, T) is the aggregate production function. L means:

Capital

Y = F (L, K, T) is the aggregate production function. K means:

Technology

Y = F (L, K, T) is the aggregate production function. T means:

Labor

The supply and demand for this determine the level of employment

Aggregate Output

Together with the known capital stock and level of technology, this level of employment determines this:

Real Wage

Labor market equilibrium determines this:

Real Wage

Wage/Price

Long-Run Aggregate Supply Curve

This is vertical because think about how firms in the aggregate would respond to an increase in the price level

Short-Run Macroeconomic Equilibrium

Occurs when the quantity of real GDP demanded equals the quantity of real GDP supplied

Long-Run Macroeconomic Equilibrium

Occurs when real GDP equals potential GDP, (i.e. the economy is on its long-run aggregate supply curve)

Economic Growth

This occurs because the quantity of labor grows, capital is accumulated, and technology advances

Inflation

This occurs when aggregate demand increase by more than long-run aggregate supply

Long-Run Equilibrium

This occurs when real GDP equals potential GDP

Business Cycle

This occurs because aggregate demand and short-run aggregate supply fluctuate but the money wage rate does not adjust quickly enough to keep real GDP at potential GDP

Short-Run Aggregate Supply Curve

When the price level rises, holding the money wage rate and other resource prices constant, the quantity of real GDP supplied increases and there is a movement along this:

Potential GDP

This changes as a result of:

1) Changes in the full-employment quantity of labor
2) Changes in the quantity of capital
3) Advances in technology

Money Wage Rate

Changes in this changes short-run aggregate supply but does not change long-run aggregate supply

Aggregate Demand

The relationship between the quantity of real GDP demanded and the price level

Aggregate Demand

The quantity of real GDP demanded is the sum of the real consumption expenditure (C), investment (I), government purchases (G), and exports (X) minus imports (M)

Aggregate Demand

Y = C + I + G + (X-M)

Wealth Effect

When aggregate demand slopes downward, changes in the price level, with other things remaining the same, change real wealth known as:

Wealth Effect

When aggregate demand slopes downward, when P rises, people try to restore wealth by increasing saving and decreasing consumption known as:

Substitution Effect

When aggregate demand slopes downward, when P rises, the purchasing power of existing money goes down; in response to this relative scarcity, interest rates rise and people substitute future consumption for present consumption while firms cut back on capital acquisition known as:

Substitution Effect

When aggregate demand slopes downward, when P rises, consumers wish to spend less on domestic items and more on imported items known as:

Aggregate Demand

A change in any factor than influences buying plans other than the price level is a change in:

Aggregate Demand

The factors that influence buying plans other than the price level and bring a change in this are: expectations, fiscal/monetary policies, and the world economy

Quantity of Real GDP Demanded

When the price level changes, other things remaining the same, this changes and there is movement along the aggregate demand curve

Short-Run Aggregate Supply Curve

The relationship between the quantity of real GDP supplied and the price level in the short run when the money wage rate, other resource prices, and potential GDP remain constant

Disposable Income

Aggregate income - Taxes + Transfer Payments

Below Full-Employment Equilibrium

A macroeconomic equilibrium in which potential GDP exceeds real GDP

Above Full-Employment Equilibrium

A macroeconomic equilibrium in which real GDP exceeds potential GDP

Recessionary Gap

The difference in which potential GDP exceeds real GDP

Inflationary Gap

The difference in which real GDP exceeds potential GDP

Decreases

Expected future incomes, inflation, or profits decrease. Aggregate Demand:

Decreases

Fiscal policy decreases government purchases, increases taxes, or decreases transfer payments. Aggregate Demand:

Decreases

Monetary policy decreases the quantity of money and increases interest rates. Aggregate Demand:

Decreases

The exchange rate increases or foreign income decreases. Aggregate Demand:

Increases

Expected future incomes, inflation, or profits increase. Aggregate Demand:

Increases

Fiscal policy increases government purchases, decreases taxes, or increases transfer payments. Aggregate Demand:

Increases

Monetary policy increases the quantity of money and decreases interest rates. Aggregate Demand:

Increases

The exchange rate decreases or foreign income increases. Aggregate Demand:

Classical

This type of macroeconomist believes that the economy is self-regulating and always at full employment

New Classical

This type of macroeconomist views the business cycle fluctuations are the efficient responses of a well-functioning market economy that is bombarded by shocks that arise from the uneven pace of technological change

New Keynesian

A macroeconomist who holds the view that not only is the money wage rate sticky but also that the prices of goods and services are sticky

Keynesian

A macroeconomist who believes that left alone, the economy would rarely operate at full employment and that to achieve full employment, active help from fiscal policy and monetary policy is required

Monetarist

A macroeconomist who believes that the economy is self-regulating and that it will normally operate at full employment, provided that monetary policy is not erratic and that the pace of money growth is kept steady

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