Chapter 26

Question 1

Potential output

Answer 1

The highest amount of output an economy can sustainably produce using existing production processes and resources

Question 2

Monetary policy

Answer 2

Policy of influencing the economy through changes in the money supply and interest rates

Question 3

Fiscal policy

Answer 3

The deliberate change in either government spending or taxes (more generally the deficit) to stimulate or slow down the economy

Question 4

Keynesian model

Answer 4

Focuses on use of monetary and fiscal policy

Question 5

Recession

Answer 5

Output falls below its potential

Question 6

Equilibrium output

Answer 6

The level of output towards which the economy gravitates in the short run because of the cumulative cycles of declining or increasing production

Question 7

Deflation

Answer 7

An overall decline in the price level in the economy

Question 8

Paradox of thrift

Answer 8

When an Increase in savings leads to a decrease in expenditures, decreasing supply, decreasing output, causing a recession, and lowering total savings.

Question 9

AS/AD model

Answer 9

Aggregate supply / aggregate demand

Question 10

AS/AD model definition

Answer 10

1. Is a short run model
2. Is a pedagogical tool
3. Starts with aggregate relationships