Economics Today (the Macro View): Chapter 17: Stabilization
Terms in this set (15)
Active (Discretionary) Policymaking
All actions on part of monetary and fiscal Policymaking that are undertaken in response to or in anticipation of some change in overall economy.
(ex: fiscal and monetary policy)
Passive (Nondiscretionary) Policymaking
Policymaking that's carried out in response to a rule.
(ex: monetary rule & balancing the budget over the business cycle)
It's therefore not in response to an actual or potential change in overall Econ. Activity
Natural Rate of Unemployment
Rate of unemployment that is estimated to prevail in long run.
It is the Long-Run equilibrium rate of unemployment.
when all workers and employers have full adjusted to any changes in Econonmy.
(two components of this: frictional & structural unemployment)
The natural rate is the result of costly and imperfect information and rigidities.
This increased the years after the 1990s.
Curve showing relationship between unemployment and changes in wages or prices. Long thought to reflect a trade off between unemployment and inflation
Rational Expectations Hypothesis
Theory stating people combine effects of past policy changes on important economic variables with own judgement about future effects of current and future policy changes.
individuals base their forecasts about the future values of economic variables on all past and current information.
these expectations incorporate individual's understanding about how the economy operates.
Policy Irrelevance Proposition
Under the assumption of rational expectations on the part of decision makers in the economy, anticipated monetary policy cannot alter either the rate of unemployment or the level of real GDP.
Regardless of the policy, the unemployment rate will equal the natural rate, and real GDP will be determined by the economy's long-run aggregate supply curve.
Characterized by lower real GDP, lower employment, and higher unemployment rate during same period that rate of inflation increases
Small Menu Costs
Costs that deter firms from changing prices in repsonse to demand changes - e.g. Class of renegotiating contracts or printing new price lists
New Keynesian Inflation Dynamics
Pattern of inflation exhibited by an economy with growing AD- initial sluggish adjusted of price level in response to increased AD followed by higher inflation later
unemployment resulting from:
government-imposed licensing arrangments.
government-imposed wage laws.
welfare and unemployment insurance.
a mismatch of worker training and skills with available jobs.
An unexpected increase in AD..
causes the price level to rise and the unemployment rate to fall.
the greater the increase in AD, the greater the rate of inflation and the lower the unemployment rate.
an unexpected decrease in AD..
causes the price level to fall and the unemployment rate to rise.
The greater the decrease in AD, the greater the rate of deflation and the higher the unemployment rate.
The phillips curve trade-off?
non accelerating inflation rate of unemployment.
rate of unemployment below which the rate of inflation tends to rise and above which the rate of inflation tends to fall.
new classical model
a modern version of the classical model in which wages and prices are FLEXIBLE.
There is pure competition in all markets.
The rational expectations hypothesis is assumed to be working.
response to anticipated policy..
if the increase in the money supply was anticipated:
the higher price level would be anticpated.
workers and suppliers would demand higher wages and prices immediately.
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