Chapter 18

Question 1

keynes economics

Answer 1

• emphasized teh short run effects of changes in aggregate demand on aggregate output , rather than the long run determination of the aggregate price level
• SRAS slopes upward
• shifts in aggregate demand curve affect aggregate output and employment as well as prices
• animal spirits/business confidence are mainly responsible for business cycles

Question 2

keynesian economics

Answer 2

rests on two main tenets:

• changes in aggregate demand affect aggregate output, employment and prices
• changes in business confidence causes the business cycle

Question 3

macroeconomic policy activism

Answer 3

the use of monetary and fiscal policy to smooth out the business cycle

-result of keynes

– broasly accepted after WWII

Question 4

Milton Freidman and Anna Schwartz

Answer 4

showed that business cycles had historically been associated with fluctuations in the money supply

• persuaded economists that monetary policy could play a key role in economic management
• could be taken out of hands of politicians (fiscal policy)

Question 5

monetarism - Freidman

Answer 5

asserts that GDP will grow steadily if the money supply grows steadily

• want central bank to target a constant rate of growth for moeny supply and maintain this target no matter what
• retained many keynes ideas
• think discretionary fiscal policy doesnt work & makes things worse

Question 6

discretionary monetary policy

Answer 6

the use of changes in the interest rate or the money supply to stabilize the economy

-monetarists think this also faces lags like fiscal policy

Question 7

monetray policy rule

Answer 7

a formula that determines teh central banks actions

-freidman wanted this

Question 8

velocity of money

Answer 8

the ratio of nominal GDP to the money supply

• velocity is a measure of the number of times the average dollar bill turns over per year between buyers and selelrs
• monetarists believe that this is stable in short run and chnages only slowly in the long run

Question 9

natural rate hypothesis

Answer 9

according to this hypothesis, because inflation is evenutally embedded into expectations, to avoid accelerating inflation over time the unemployment rate must be high enough that the actual rate equals the expected inflation rate

• freidman and phelps proposed the natural rate of unemployment
• limits the role of activist monetary policy
• almost unversally accepted

Question 10

freidman-phelps hypothesis:

Answer 10

the apparent tradeoff between unemployment and inflation would not survive an extended period of rising prices. Once inflation was embedded into the publics expectations, it would continue even in teh face of high unemployment

Question 11

political business cycle

Answer 11

results when politicians use macroeconomic policy to serve political ends

Question 12

new classical macroeconomics

Answer 12

an appraoch to the business cycle that returns to the classical view that shifts in the aggregate demand curve affect only the aggregate price level, not aggregate output

Question 13

rational expectations

Answer 13

the view that individuals and firms make decisions optimally, using all available information

Question 14

rational expectations model

Answer 14

expected changes in monetary policy have no effect on unemployment and output and only affect the price level

Question 15

new keynesian economics

Answer 15

market imperfections can lead to price stickiness for the economy as a whole

Question 16

real business cycle theory

Answer 16

claims that fluctuations in teh rate of growth of total factors productivity cause the business cycle

Question 17

Great moderation

Answer 17

the period from 1985-2007 when the us economy experienced relatively small fluctuations and low inflation

Question 18

teh great moderation consensus

Answer 18

combines a belief in monetary policy as the main tool of stabilization, with skeptiscism toward the use of fiscal policy, adn an acknowledgement of the policy constraints imposed by the natural rate of unemployment and the political business cycle