Chapter 12

Question 1

Okun’s law

Answer 1

The negative relationship between unemployment and real GDP, according to which a decrease in unemployment of one percentage point is associated with additional growth in real GDP of approximately two percent

Question 2

Leading indicators

Answer 2

Economic variables whose fluctuations often precede and thereby signal fluctuations in the economy’s output

Question 3

What is the key difference between the short run and the long run?

Answer 3

In the long run, prices are flexible and can respond to changes in supply or demand. In the short run, many prices are “sticky” at some predetermined level

Question 4

Aggregate demand

Answer 4

The negative relationship between the price level and the aggregate quantity of output demanded that arises from the interaction between the goods market and the money market

Question 5

Aggregate supply

Answer 5

The relationship between the price level and the aggregate quantity of output firms produce

Question 6

What are the difference between the long run and the short run in terms of the aggregate supply and aggregate demand curve?

Answer 6

In the long run prices are flexible, the AS curve is vertical, and changes in AD affect the price level but not the output. In the short run prices are sticky, the AS curve is flat and changes in AD affect the economy’s output of goods and services

Question 7

Shocks

Answer 7

An exogenous change in an economic relationship, such as the AD curve or the AS curve

Question 8

Demand shock

Answer 8

Exogenous events that shift the AD curve

Question 9

Supply shock

Answer 9

Exogenous events that shift the AS curve

Question 10

Stabilization policy

Answer 10

Public policy aimed at reducing the severity of short-run economic fluctuations