Chapter 13 Flashcards
What are business cycles?
fluctuations in the growth of real GDP around its trend growth rate
What is a recession?
significant, widespread decline in real income and employment
What is the aggregate demand curve?
The curve that shows all the combinations of inflation and real growth that are consistent with a specified rate of spending growth
More spending plus the same goods equals..
higher prices
Spending growth=
inflation+real growth
If spending growth increases, which way will the AD curve shift?
up and to the right
If spending growth decreases, how is the AD curve affected?
It shifts it inwards
What is the solow growth rate?
Rate of economic growth that would occur given flexible prices and the existing real factors of production (labor, capital and ideas)
What is the long run aggregate supply curve?
It is a vertical line at the solow growth rate
The economy will grow at the potential growth rate if..
markets are working well and prices are perfectly flexible
What are shifts in the solow growth rate caused by?
“Real shocks” aka productivity shocks
What are “real shocks?”
Any shocks that increase or decrease the potential growth
rate (i.e. economy’s fundamental ability to make stuff)
Which way do positive shocks shift the LRAS?
right
Which way do negative shocks shift the LRAS?
left
What does a negative real shock do to the inflation rate and growth rate?
It drives the inflation rate up and the growth rate down
What does a positive real shock do to the inflation rate and growth rate?
It drives the inflation rate down and the growth rate up
When prices are sticky, the economy can grow faster or slower than the..
solow growth rate
What is the short run aggregate supply curve?
shows the positive relationship between the inflation rate and real growth during the period when prices and wages are sticky.
In what way does the SRAS sloping?
upward
In the short run, an increase in AD will increase both..
inflation and real growth
What is an aggregate demand shock?
a rapid and unexpected shift in the AD curve
If there is an unexpected increase in the money supply, inflation and the growth rate increase in..
the short run
Workers can sometimes mistake a nominal wage increase for a..
real wage increase
Prices almost never move instantly because..
it is costly to change prices and firms are uncertain about whether current market conditions are temporary or permanent
What happens when AD falls due to a fall in the money supply?
- The economy shifts to a new short run equilibrium point.
- The inflation rate decreases a little.
- Real growth is reduced a lot (recession).
Changes in the velocity of money tend to be..
temporary
If the velocity of money increases, then the growth rate of C I G NX must..
increase
Bank failures reduced the money supply and spending. This reduced the efficiency of..
financial intermediation
