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Macro Test #4 - Chapter 20
Terms in this set (42)
Over the long run, how much does real GDP grow on per-year
on average, about 3%
In the short run, GDP fluctuates around...
its trend- recessions/depressions
periods of falling real incomes/GDP and rising unemployments
short-run economic fluctuations (not really a "cycle" because these fluctuations are not predictable)
On a year-to-year basis, economic fluctuations are...
irregular and unpredictable
Do most macroeconomic quantities fluctuate together or separately?
What happens to investment, income, consumer spending, profits, stock prices, tax revenue, and spending on imports during a recession?
They all fall
What happens when tax revenue falls?
The budget deficit rises
What happens when spending on imports falls?
The trade deficit shrinks
As output falls, what happens to unemployment?
it rises- when firms cut back on production they don't need as many workers
What happens to unemployment during economic expansion?
it falls- firms need more workers as they increase output of goods & services
What is the model of aggregate demand and aggregate supply used for?
to study short run economic fluctuations- differs from classical economic theories used to explain the long run
the separation of variables into two groups- real & nominal
quantities, relative prices, dollar amount- u-rate & real GDP (Y)
measured in terms of money- money supply & price level (P)
Neutrality of money
changes in the money supply affect nominal variables, but not real variables
shows the quantity of goods and services that households, firms, the government, and customers abroad want to buy at each price level
a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level
Ways that the price level affects the aggregate-demand curve (3)
Wealth affect (P and C)
1. P rises
2. dollars people hold buy fewer g&s
3. real wealth is lower, people feel poorer
2. C falls
Interest-rate effect (P and I)
1. P rises
2. buying g&s requires more dollars
3. people sell bonds/assets to get these dollars
4. interest-rates rise
5. I falls (I depends negatively on interest rates)
Exchange-rate effect (P and NX)
1. P rises
2. U.S. interest rates rise
3. foreign investors want more U.S. bonds
4. higher demand for $ in foreign exchange market
5. U.S. exchange rate rises
6. U.S. imports = more expensive to people abroad, imports cheaper to U.S. residents
7. NX falls
Examples of changes in C
-stock market boom/crash
Examples of changes in I
-firms buy new equipment
-positive & negative expectations
-interest rates/monetary policy
-investment tax credit or other tax incentives
Examples of changes in G
-federal spending (defense)
-state & local spending (roads/schools)
Examples of changes in NX
-booms/recessions in countries that buy our exports
-appreciation/depreciation resulting from speculation in foreign exchange market
Natural rate of output (also called potential or full-employment output)
amount of output the economy produces when unemployment is at its natural rate
Why is long-term aggregated supply vertical?
Yn is determined by stocks of labor/capital/natural resources/technology level
-increase in P doesn't affect these, so Yn doesn't change
-over time Pe = P
Factors that might shift the LR aggregate-supply curve (left-right)
labor (L & u-rate), capital/human capital (K or H), natural resources, changes in technology
Examples of changes in L
-govt. policies reduce natural u-rate
Examples of changes in K or H
-investment in factories/equipment
-more people graduating college
-factories destroyed by weather
Examples of changes in natural resources
-new mineral deposits
-reduction in supply of oil
-changing weather: change agricultural production
Example of a change in technology
productivity improves due to technological progess
What do the three theories of SRAS have in common?
they're all a type of market imperfection which results in
output deviating from its natural rate when the actual price level deviates from the price level people expect
What are the three theories of SR aggregate-supply
sticky-wage theory, sticky-price theory, misperceptions theory
P > Pe causes higher Y, SRAS curve slopes upward
P > Pe: if Fed increases $ supply, P will rise in the long run. In the SR firms w/o menu costs can raise their prices immediately. Firms with menu costs wait, have cheaper products & higher demand for those products increasing Y and L.
higher P is associated w/ higher Y, SRAS curve slopes upward
P > Pe: firms don't realize their price is rising & think its their relative price, so they increase Y & L.
an increase in P can cause increase in Y, SRAS curve slopes upward
Long-run equilibrium of price & output
Pe = P
Y = Yn
2 big AD shifts
1. Great depression- money supply, stock prices, Y, and P all fall. u-rate rises
2. WWII- govt. outlays, Y, and P all rise. u-rate falls
Resonse to 2008-2009 housing crash (recession)
-Fed reduces Fed Funds, purchases mortgage securities
-treasury put capital in banking system to avoid credit crunch
-policymakers increase govt. spending & reduce taxes by $800 billion
General theory of employment- John Keynes
recessions/depressions can result from inadequate demand, policymakers should shift AD. "The long run is a misleading guide to current affairs."
THIS SET IS OFTEN IN FOLDERS WITH...
EC 111 Module 2
Macroeconomics Final Exam
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