Chapter 18 Flashcards
Increases in the money supply lead to ____________
inflation
Thanks to Wesley Mitchell’s work, the _____________ of the business cycles was well advanced by 1930. Bit there was no widely accepted _________ of business cycles
measurement; theory
Modern business cycles are largely the result of __________________________
shifts in the aggregate demand curve
Two innovations of Keynesian economics
Emphasized the short-run effects of changes in aggregate demand on aggregate output, rather than the long-run determination of the aggregate price level
- Other factors, especially the “animal spirits” are mainly responsible for business cycles
animal spirits = business confidence
Classical view graph
SRAS curve is vertical, so shifts in aggregate demand affect the aggregate price level but not aggregate output
The Keynesian View Graph
SRAS curve slopes upward, so shifts in the aggregate demand affect aggregate output as wella s aggregate prices
Keynesian economics
Rests on two main tenets:
- Changes in aggregate demand affect aggregate output, employment and prices
- Changes in business confidence cause the business cycle
Some people consider Keynesian economics a synonym for ________________
left-wing economics
Macroeconomic policy activism
The use of monetary and fiscal policy to smooth out the business cycle
Monetarism
Asserts that GDP will grow steadily if the money supply grows steadily
Discretionary monetary policy
The use of changes in the interest rate or the money supply to stabilize the economy
*Face the same problem of lags as fiscal policy, but to a lesser extent
Crowding out
When a government deficit drives up interest rates and leads to reduced investment spending
Monetary policy rule
A formula that determines the central bank’s actions
Leaves it relatively little discretion
Velocity of money
The ratio of nominal GDP to the money supply
*The measure of the number of times the average dollar bill in the economy turns over per year between buyers and sellers
Velocity equation
M x V = P x Y
M = money supply
V = velocity
P = aggregate price level
Y = Real Gdp
From 1960 to 1980, the velocity of money was __________, leading monetarists to believe that steady growth in the money supply would lead to a stable economy
stable
Natural rate hypothesis
Because inflation is eventually embedded into expectations, to avoid accelerating inflation over time the unemployment rate must be high enough that the actual inflation rate equals the expected inflation rate
Because the government can’t keep unemployment below the natural rate, its task is not to keep unemployment low but to keep it _________ – to prevent large fluctuations in unemployment in either direction
stable
The Friedman-Phelps hypothesis made a strong prediction:
that the apparent trade-off between unemployment and inflation would not survive an extended period of rising prices
Political business cycle
Results when politicians use macroeconomic policy to serve political ends
New classical macroeconomics
An approach 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
New classical macroeconomics evolved in two steps:
- Economists challenged traditional arguments about the slope of the short-run aggregate supply curve based on the concept of rational expectations
- Economists suggested that changes in productivity cause economic fluctuations, known as real business cycle theory
Rationa expectations
The view that individuals and firms make decisions optimally, using all available information
*introduced by John Muth
Under rational expectations, government intervention ___________________
fails in the short run and the long run
