Chapter 13

Question 1

What are business cycles?

Answer 1

fluctuations in the growth of real GDP around its trend growth rate

Question 2

What is a recession?

Answer 2

significant, widespread decline in real income and employment

Question 3

What is the aggregate demand curve?

Answer 3

The curve that shows all the combinations of inflation and real growth that are consistent with a specified rate of spending growth

Question 4

More spending plus the same goods equals..

Answer 4

higher prices

Question 5

Spending growth=

Answer 5

inflation+real growth

Question 6

If spending growth increases, which way will the AD curve shift?

Answer 6

up and to the right

Question 7

If spending growth decreases, how is the AD curve affected?

Answer 7

It shifts it inwards

Question 8

What is the solow growth rate?

Answer 8

Rate of economic growth that would occur given flexible prices and the existing real factors of production (labor, capital and ideas)

Question 9

What is the long run aggregate supply curve?

Answer 9

It is a vertical line at the solow growth rate

Question 10

The economy will grow at the potential growth rate if..

Answer 10

markets are working well and prices are perfectly flexible

Question 11

What are shifts in the solow growth rate caused by?

Answer 11

“Real shocks” aka productivity shocks

Question 12

What are “real shocks?”

Answer 12

Any shocks that increase or decrease the potential growth

rate (i.e. economy’s fundamental ability to make stuff)

Question 13

Which way do positive shocks shift the LRAS?

Answer 13

right

Question 14

Which way do negative shocks shift the LRAS?

Answer 14

left

Question 15

What does a negative real shock do to the inflation rate and growth rate?

Answer 15

It drives the inflation rate up and the growth rate down

Question 16

What does a positive real shock do to the inflation rate and growth rate?

Answer 16

It drives the inflation rate down and the growth rate up

Question 17

When prices are sticky, the economy can grow faster or slower than the..

Answer 17

solow growth rate

Question 18

What is the short run aggregate supply curve?

Answer 18

shows the positive relationship between the inflation rate and real growth during the period when prices and wages are sticky.

Question 19

In what way does the SRAS sloping?

Answer 19

upward

Question 20

In the short run, an increase in AD will increase both..

Answer 20

inflation and real growth

Question 21

What is an aggregate demand shock?

Answer 21

a rapid and unexpected shift in the AD curve

Question 22

If there is an unexpected increase in the money supply, inflation and the growth rate increase in..

Answer 22

the short run

Question 23

Workers can sometimes mistake a nominal wage increase for a..

Answer 23

real wage increase

Question 24

Prices almost never move instantly because..

Answer 24

it is costly to change prices and firms are uncertain about whether current market conditions are temporary or permanent

Question 25

What happens when AD falls due to a fall in the money supply?

Answer 25

1. The economy shifts to a new short run equilibrium point.
2. The inflation rate decreases a little.
3. Real growth is reduced a lot (recession).

Question 26

Changes in the velocity of money tend to be..

Answer 26

temporary

Question 27

If the velocity of money increases, then the growth rate of C I G NX must..

Answer 27

increase

Question 28

Bank failures reduced the money supply and spending. This reduced the efficiency of..

Answer 28

financial intermediation