Macro Econ Ch 20

Front 1

Recession

Back 1

-a period of declining real income and rising unemployment
-is relatively mild

Front 2

Depression

Back 2

-a severe recession

Front 3

Business Cycle

Back 3

-fluctuations in the economy
-corresponds to changes in business conditions
- ex: when GDP grows rapidly, business is good
- economic fluctuations are very irregular and are almost impossible to predict

Front 4

What is real GDP used to measure?

Back 4

-it is the variable used most commonly to monitor short range changes in the economy because it is the most comprehensive measure of economic activity
-it measures the value of all final goods and servicesproduced within a given period of time
- it also measures the total income (adjusted for inflation) of everyone in the economy

Front 5

What does real GDP influence?

Back 5

When real GDP falls, so do personal income, corporate profits, consumer spending, investment spending, industrial production, sales..etc.

Front 6

The reasons of economic conditions changing

Back 6

-much of the decline is attributed to reduction in spending on new factories, housing, and inventories
-changes in the economy's output of goods and services - correlated with changes in the economy's utilization of its labor force
--ex: when real GDP declines, the rate of unemployment rises

Front 7

Unemplyment rate

Back 7

- when a recession ends and real GDP rises, the unemployment rate gradually declines
-it never reaches zero; instead it fluctuates around its natural rate of about 5 or 6 %

Front 8

Model of Aggregate Demand and Aggregate Supply

Back 8

-the model that most economists use to explain short-run fluctuations in economic activity around its long-run trend

Front 9

Model of Aggregate Demand and Aggregate Supply

Back 9

-the model that most economists use to explain short-run fluctuations in economic activity around its long-run trend

Front 10

Model of Aggregate Demand and Aggregate Supply

Back 10

-the model that most economists use to explain short-run fluctuations in economic activity around its long-run trend

Front 11

Model of Aggregate Demand and Aggregate Supply

Back 11

-the model that most economists use to explain short-run fluctuations in economic activity around its long-run trend

Front 12

Aggregate -Demand Curve

Back 12

a curve that shows the quantity of goods and services that households, firms, the government, and customers abroad want to buy at each price level

Front 13

Aggregate Supply Curve

Back 13

A curve that shows the quantity of goods and services that firms choose to poduce and sell at each price level.

Front 14

The two variables behind the model of short-run economic fluctuations

Back 14

1) the economy's output of goods and services, as measured by real GDP

2) the average level of prices, as measured by the CPI and the GDP deflator

Front 15

The economy's output and price level for goods and services are what type of variable?

Back 15

its a real variable, whereas the price level is a nominal variable

Front 16

What point does the output and the price level adjust to on the Model of Aggregate Demand and Aggregate Supply?

Back 16

they adjust at the point at which the aggregate-supply and aggregate-demand curves intersect
- according to this model, the price level and the quantity of output adjust to bring AD and AS into balance

Front 17

what the Model of AD and AS explains?

Back 17

-it explains the quantity of real GDP,
-this measures the total quantity goods and services produced by all firms in all markets
-the AD is downward-sloping and AS is upward-sloping

Front 18

The GDP Formula

Back 18

Y (GDP)=C (consumption)+ I (Investment) + G (government purchases) + NX (net exports)

Front 19

what is the first reason why is the AD curve downward -sloping?
(The Price Level and Consumption:The Wealth Effect)

Back 19

- a decrease in the price level raises the real value of the money
-makes consumers wealthier, which encourages them to spend more
-the increase in consumer spending means a larger quantity of goods and services demanded
-an increase in price level reduces the real value of money and makes consumers poorer
-which then reduces consumer spending and the quantity of goods and services demand

Front 20

What is the second reason why is the AD curve downward sloping?
(The Price Level and Investment: the Interest Rate Effect)

Back 20

- a lower price level reduces the interest rate, encourages greater spending on investment goods, and thereby increases the quantity of goods and services demanded
-a higher price level raises the interest rate, discourages investment spending, and decreases the quantity of goods and services demanded.

Front 21

What is the third reason why the AD curve is downward sleeping?

Back 21

-when a fall in the US price level causes the US interest rates to fall
------the real value of the dollar declines in foreign exchange markets
-this depreciations stimulates US net exports and thereby increases the quantity of good and services demanded
-when the US price level rises and causes US interest rates to rise, the real value of dollar increases
-this reduces the US net exports and the quantity of goods and services demanded

Front 22

What are the three reasons a fall in the price level increases the quantity of goods and services demanded?

Back 22

1.) Comsumers are wealthier, which stimulates the demand for consuimption goods
2.) Interest rates fall, which stimulates the demand for investment goods
3.) the currency depreciates, which stimulates the demand for net exports

Front 23

Why the AD curve might shift?

Back 23

1) from changes in consumption
--increases in consumer spending means greater quantity of good and services demanded at any given price level, so AD curve moves to the right
-when the gov't raises taxes,. people cut down on the their spending, so the AD curve shifts to the left
2.) from changes in investment
- because the quantity of goods and services demanded at any price level is higher, the AD curve shifts to the right
- if investment spending is decreased than the AD curve moves to the left
- tax policy affects AD

Front 24

Stagflation

Back 24

a period of stagnation (falling output) and inflation (rising prices)

Front 25

The 3 lessons of Shifts in AD

Back 25

1. In the short run, shifts in the AD cause fluctuations in th economy's output of goods and services
2.) In the long run, shifts in the AD affect the overall price level but do not affect output

3.) Policymakers who influence AD can potentially mitigate the severity of economic fluctuations

Front 26

The 3 alternative explanations for the upward slope of the SRAS curve

Back 26

1) Sticky wages
2) sticky prices
3) misperceptions about relative prices

Front 27

The Quantity of Output Supplied Formula and Explained

Back 27

Quantity of output supplied= Natural raye of output + a (Actual price level -Expected price level)

- This suggests that output deviates in the short run from its long-run level (the natural rate) when the actual price level deviates from the price level that people had expected

Front 28

The Sticky Wage Theory

Back 28

- the short-run aggregate-supply curve slopes upward because nominal wages are slow to adjust to changing economic conditions
- wages are "sticky" in the short run

Front 29

Why might the Long-Run Aggregate - Supply Curve Shift?

Back 29

1.) from changes in Labor
2.) from changes in Capital
3.) from changes in Natural Resources
4.) from changes in Technological Knowledge

Front 30

Natural rate of Output

Back 30

- also called the long-run level of production/ potential output or full employment output
- the production of goods and services that an economy achieves in the long run when unemployement is at its normal rate

Front 31

Why is the AS Curve Vertical in the Long Run?

Back 31

- in the long run, an economy's production of goods and services (its real GDP) depend on its supplies of labor, capital, and natural resources and on the available technology used to turn these factors of production into goods and services
-the overal price level does not affect the long-run growth, the output of the goods and services will be the same
-price level doesn't affect the run determinant of real GDP