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Macroeconomics Chapter 10

Chapter 10.
STUDY
PLAY
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