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| economists who view the self-correcting mechanism through wage and price adjustment to be very slow and hence see the need for government to pursue active, discretionary policy to eliminate high unemployment whenever it develops |
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| the relationship between the quantity of aggregate output demanded and the price level |
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| the relationship between the quantity of output supplied in the short run and the price level |
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| waves of optimism and pessimism that affect business and consumer spending |
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| total demand for consumer goods and services |
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| the term used to describe the six factors that shift aggregate demand |
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| the equation MxV=PxY, which relates nominal income to the money supply |
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| spending by all levels of government on goods and services |
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| the theory that departures from full employment levels result from past high unemployment |
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| activist economists who are followers of Keynes |
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| nonactivist economists led by Milton Friedman |
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| natural rate of unemployment |
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| the rate of unemployment consistent with full employment at which the demand for labor euals the supply of labor |
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| net foreign spending on domestic goods and services, equal to exports minus imports |
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| economists who see much less need for government policy to restore the economy to the natural rate levels of output and unemployment |
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| planned investment spending |
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| total planned spending by business firms on new machines, factories, and other inputs to production plus planned spending on new homes |
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| the theory that nominal income is determined soley by changes in the quantity of money |
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| real business cycle theory |
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| a theory that views real shocks to tastes and technology as the major driving force behind short-nun fluctuations in the business cycle |
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| self-correcting mechanism |
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| a characteristic of the economy that causes output to return to the natural rate level of output regardless of where output is initially |
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| changes in technology and the supply of raw materials |
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| the average number of times per year that a dollar is spent on final goods and services |
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| according to the component parts approach to deriving aggregate demand, why does the aggregate demand curve slope downward? |
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Definition
| according to the components approach, the aggregate demand curve slopes downward because an increase int eh price level reduces the real money supply and leads to a higher interest rate and an appreciation of the domestic currency. the higher interest rate reduces investment spending and teh appreciation of the domestic currency reduces net exports, both of which reduce aggregate output. |
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| according to the component parts approach to deriving aggregate demand, what factors cause the aggregate demand curve to shift? |
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Definition
| according to the conponents approach, changes in the money supply, changes in government spending, taxes, investment, consumer expenditures, and net exports shift the aggregate demand curve. |
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| according to the quantity theory of money approach to deriving aggregate demand, how does a decrease in the price level lead to an increase in the aggregate quantity demanded? |
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Definition
| holding the nominal money supply and velocity constant, the equation of exchange implies that a higher price level is associated with a lower level of aggregate output and a lower price level is associated with a higher level of aggregate output. |
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| explain why the aggregate supply curve slopes upward in the short run. |
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Definition
| in the short run, the costs of many factors of production are fixed, so when the overall price level rises, the price of a unit of output will rise relative to the cost of producing it, and profit per unit will rise. firms respond by increasing production. |
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| contrast the views of activist and nonactivist economists on the speed of the self-correcting mechanism. |
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Definition
| acitivists believe that the self-correcting mechanism is a slow while nonactivits believe the self-correcting mechanism is reasonalby rapid. |
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| according to real business cycle theory, what is the major driving force behind short-run business cycle fluctutations? |
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Definition
| according to real business cycle theory, shocks to tastes and technology are the major driving forces behind short-run fluctuations in the business cycle. |
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| what is hysteresis? how does it account for high unemployment? |
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Definition
| hysteresis is said to occur when a departure from full employment levels are a result of past high unemployment. when unemployment rises as a result of a reduction in aggregate demand, the natural rate of unemployment rises above the full employment level. this could occur because the unemployed become discouraged and do not look hard for work or because employers may be reluctant to hire workers who have been unemployed for a long time. |
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| describe the movements in aggregate demand and supply that resulted in the rise in inflation and the increase in unemployment during the Vietnam War buildup, 1964-1970. |
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Definition
| increased spending on the Vietnam War as well as faster money growth shifted the aggregate demand curve right, which resulted in higher aggregate output, lower unemployment, and a rise in the price level. |
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| describe the movements in aggregate demand and supply that resulted in the rise in inflation and the increase in unemployment during the periods of negative supply shocks, 1964-1970 and 1978-1980. |
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Definition
| in 1973 the OPEC oil embargo caused oil prices to quadruple. in addition, crop failures caused food prices to rise, and removal of wage and price controls caused wages to rise. these three factors caused the aggregate supply curve to shift left, which led to a rise in both the price level and the unemployment rate. oil and food prices once again rose sharply in 1978, causing the aggregate supply curve to shift left. as a result, the price level and unemployment rate both shot upwards. |
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| describe the movements in aggregate demand and supply that resulted in the rise in aggregate output, the decrease in unemployment, and the decrease in inflation during teh period of favorable supply shocks, 1195-1999. |
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Definition
| over the period 1995-1999 medical costs fell and productivity rose. these two factors caused the aggregate supply curve to shift right. as a result aggregate output rose and unemployment and inflation both fell. |
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Term
T/F
according to the components approach to deriving aggregate demand, the one primary factor that cuases aggregate demand to shift is changes in the quantity of money. |
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Definition
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T/F
the velocity of money measures how quickly consumer expenditures rise following a tax cut. |
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T/F
the equation of exchange relates the money supply to aggregate spending. |
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T/F
the equation of exchange is transformed into the modern quantity theory of money by assuming taht the price level and aggregate output are inversely related. |
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Definition
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T/F
according to the quantity theory of money approach, aggreage demand is comprimised of component parts: consumer expenditure, planned investment spending, government spending, and net exports. |
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Definition
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T/F
according to the quantity theory of money approach, a decrease in the price level leads to an increase in the real money supply, which leads to a decrease in the interest reate and an increase in aggregate demand. |
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Definition
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T/F
a decrease in the price level cauess the exchange rate to rise, which leads to a decline in the quantity of aggregate demand. |
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T/F
"animal spirits" refers to waves of consumer and business optimism and pessimism. |
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T/F
acitivists beleive that teh self-correcting mechanism is relatively fast. |
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T/F
the natural rate of unemployment is the rate of unemployment that the economy gravitates to in the long run. |
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T/F
inflation rises when the unemployment rate is equal to the natural rate of unemployment. |
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T/F
starting from the natural rate level of output, an increase in comsumer expenditure caused by "animal spirits" has no impact on the price level in the long run. |
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Definition
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T/F
The self-correcting mechanism describes how the economy eventually returns to the natural rate level of otuput regardless of where output is initially. |
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Definition
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T/F
when aggregate output is above the natural level of output, the aggregate supply curve shifts to the right; when aggregate output is below the natural rate level of output, the aggregate supply curve shifts to the left. |
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Definition
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T/F
during the period 2001-2004, the aggregate supply curve shifted right causing unemployment and inflation to fall. |
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