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Principles of Economics > 32. Business Fluctuations: Aggregate Demand and Supply > Flashcards

32. Business Fluctuations: Aggregate Demand and Supply Flashcards

1
Q

Define business fluctuations.

A

Fluctuations of the growth rate of GDP and its trend in growth rate.

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2
Q

Define a recession.

A

A decline in real income and employment.

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3
Q

True or false: Economic growth is not smooth.

A

True.

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4
Q

What do AD and AS stand for?

A

Aggregate demand and aggregate supply.

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5
Q

What does aggregate mean?

A

Total (combination of fragments)

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6
Q

What are the two types of economic shocks?

A

1) Real shocks (aggregate supply shocks)

2) Aggregate demand shocks

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7
Q

What does the aggregate demand curve show?

A

It shows all combinations of inflation and real growth that are consistent with a specified rate of spending growth.

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8
Q

What does more spending plus the same goods equal?

A

Higher prices.

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9
Q

What does M stand for in the aggregate demand curve?

A

Growth rate in money supply.

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10
Q

What does v stand for in the aggregate demand curve?

A

Growth rate in velocity.

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11
Q

What does P stand for in the aggregate demand curve?

A

Growth rate in prices; inflation (pie).

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12
Q

What does Yr stand for in the aggregate demand curve?

A

Growth rate of real GDP (real growth).

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13
Q

What do the arrows on top of letters stand for in the aggregate demand curve?

A

Growth rate.

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14
Q

What does M + V (with arrows on top) also equal to?

A

Inflation + real growth.

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15
Q

How does the AD curve shift?

A

Along the AD curve.

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16
Q

How does an AD curve shift if spending growth increases?

A

Up and to the right (outward).

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17
Q

True or false: An increase in spending growth can be caused by either an increase in M or v (with arrows on top).

A

True.

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18
Q

What does economic growth depend on?

A

Increase in the stocks of labor and capital, and productivity.

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19
Q

What is the Solow growth rate?

A

An economy’s potential growth rate given that there are flexible prices and existing real factors of production.

20
Q

What is money like in the long run?

A

Neutral

21
Q

What is the long-run aggregate supply (LRAS) curve like? And on which axis is the inflation rate and real growth rate on?

A

It’s a vertical line at the Solow growth rate.

Inflation on the vertical axis, real growth on the horizontal.

22
Q

What is the “real business cycle” (RBC) model used for?

A

Business fluctuations caused by real shocks.

23
Q

What do AD and LRAS curves determine?

A

The equilibrium inflation rate and growth rate.

24
Q

What is a consequence of real shocks (productivity shocks)?

A

Increase or decreases on an economy’s ability to produce goods and services.

Increases or decreased the potential growth rate.

They increase or decrease the Solow growth rate.

25
Q

Are changes in the economy by real shocks rapid, moderate or slow?

A

Rapid

26
Q

What does an aggregate demand shock entail?

A

A rapid and unexpected shift in the AD curve (spending).

27
Q

What are “sticky” wages and prices? What curve does it relate to?

A

“Sticky” means not very flexible.

It related to the short-run aggregate supply (SRAS).

28
Q

What are the effects of a positive shock (increase in spending) in the short run and long run?

A

Short-run: increased output

Long-run: increased prices (inflation)

29
Q

What is the curve for short-run aggregate supply (SRAS) like?

A

Upward-sloping.

30
Q

What is the symbol for expected inflation rate?

A

E(pie)

31
Q

Define nominal wage.

A

Wage number.

32
Q

When does nominal wage confusion occur?

A

When workers respond to wage numbers on their checks instead of what the money can actually buy.

33
Q

Define menu costs.

A

Costs of changing prices.

34
Q

Where is the actual inflation rate found?

A

Where the LRAS curve intersects the AD curve.

35
Q

Why does an economy take a long time to adjust to a decrease in aggregate demand?

A

Sticky wages, menu costs and uncertainty makes businesses reluctant to change prices immediately.

36
Q

What is a short run effect in a fall in aggregate demand?

A

It is split between a fall in inflation rates and a fall in growth.

37
Q

What would a fall in aggregate demand induce in the long-run?

A

A recession

38
Q

What do changes to V (with arrow on top) result to in the short run and long run?

A

Short run: decreased inflation

Long run: shifts back to equilibrium

(therefore changes are temporary)

39
Q

What can tax shocks shift?

A

Consumption growth and investment spending growth.

40
Q

What are some positive shocks that increase AD?

A
  • confidence
  • faster money growth rate
  • increased wealth
  • lower taxes
  • increased export growth
  • decreased import growth
41
Q

What was the initial shock that caused the Great Depression in 1929? How did it affect people? What did it do to the AD curve?

A

Wealth shock (fall in stock prices).

People limited spending, so consumption fell. Money supply fell.

The AD curve shifted inwards and to the left.

42
Q

What shocks followed in 1930 during the Great Depression?

A

Confidence shock (drop of confidence) regarding banks. People had bank runs.

43
Q

What was the largest negative shock to aggregate demand in American history in 1931?

A

Shock for money supply, where money supply fell by about 1/3 .

The Fed’s decision not to increase money supply made the Great Depression longer than it needed to be.

44
Q

What did a decrease in aggregate demand cause during the Great Depression?

A

A fall in prices which raised the value of debts. Many debtors went bankrupt.

Debtors spent less money, thereby decreasing aggregate demand more.

45
Q

What were failures of the American Government during the Great Depression?

A
  • Federal Reserve failed to increase money supply
  • tried to combat falling prices by reducing supply
  • raised tariffs (taxes) on imported goods (other countries retaliated); the tariffs were a negative productivity shock
46
Q

What was a natural shock of the Great Depression?

A

The Dust Bowl (drought caused dust storms).

Principles of Economics (8 decks)

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