Ch 8 - The Business Cycle

Question 1

macroeconomics

Answer 1

the study of aggregate economic behavior, of the economy y as a whole

Question 2

business cycle

Answer 2

alternating periods of economic growth and contraction

Question 3

laissez faire

Answer 3

the doctrine of “leave it alone”, of nonintervention by government in the market mechanism

Question 4

classical view

Answer 4

the economy “self-adjusts” to deviations from its long-term trend

Question 5

law of demand

Answer 5

the quantity of a good demanded in a given time period increases as its price falls, ceteris paribus

Question 6

Say’s Law

Answer 6

supply creates its own demand - Keynes asserted that a market-driven economy is inherently unstable

Question 7

real GDP

Answer 7

the value of final output produced in a given period, adjusted for changing prices

Question 8

recession

Answer 8

a decline in total output (real GDP) for two or more consecutive quarters - occurs when real GDP actually contracts

Question 9

growth recession

Answer 9

a period during which real GDP grows, but at a rate below the long-term trend of 3% - occurs when the economy expands too slowly

Question 10

macro performance outcomes

Answer 10

output, job s, prices, growth, international balances

Question 11

macro performance determinants

Answer 11

internal market forces, external shocks, policy levers

Question 12

aggregate demand

Answer 12

the total quantity of output (real GDP) demanded at alternative price levels in a given time period, ceteris paribus

Question 13

3 reasons explain downward slope of aggregate demand curve

Answer 13

real-balances effect (real value of $is measured by how many goods and services each $1 will buy), foreign effect (Americans buy more foreign goods when made in USA prices rise, vice versa), interest-rate effect (rates increase when demands for loans increase, vice versa)

Question 14

aggregate supply

Answer 14

the total quantity of output (real GDP) producers are willing and able to supply at alternative price levels in a given time period, ceteris paribus

Question 15

equilibrium (macro)

Answer 15

the combination of price level and real output that is compatible with both aggregate demand and aggregate supply

Question 16

2 potential problems w/ macro equilibrium

Answer 16

undesirability, instability

Question 17

full-employment GDP

Answer 17

the total market value of final goods and services that could be produced in a given time period at full employment potential; potential GDP

Question 18

inflation

Answer 18

an increase in the average level of prices of goods and services - may be caused by excessive aggregate demand

Question 19

Keynes theory

Answer 19

inadequate aggregate demand would cause persistently high unemployment

Question 20

3 strategy options for macro policy

Answer 20

shift the aggregate demand curve to the right (stimulate the economy), shift the aggregate supply curve to the right (policy levers reduce cost of production stimulating output), laissez faire (noninterference)

Question 21

fiscal policy

Answer 21

the use of government taxes and spending to alter macroeconomic outcomes

Question 22

monetary policy

Answer 22

the use of $ and credit controls to influence macroeconomic outcomes

Question 23

supply-side policy

Answer 23

the use of tax incentives, (de)regulation, and other mechanisms to increase that ability and willingness to produce goods and services