Chapter 6: Macroeconomics: The Big Picture

Question 1

Paradox of thrift

Answer 1

when families and businesses are worried about a recession, they cut spending. This cut depresses the economy: consumers spend less, businesses lay off workers.

Question 2

Self-regulating (before 1930s)

Answer 2

Unemployment would be corrected through the work of the “invisible hand” and that gov’t attempts to improve the economy’s performance would be ineffective and would probably make things worse.

Question 3

Keynesian Economics

Answer 3

states that a depressed economy is a result of inadequate spending

Question 4

Monetary policy

Answer 4

Uses changes in the quantity of $ to alter interest rates which in turn affect the overall spending level

Question 5

Fiscal policy

Answer 5

Uses changes in taxes and gov’t spending to affect overall spending

Question 6

recession

Answer 6

a broad based downturn in which output and employment fall in many industries

Question 7

Expansion

Answer 7

when most economic numbers are following an upward trend (unemployment down, GDP up)

Question 8

business cycle

Answer 8

alternation between recessions and expansions

Question 9

Pain of inflation and deflation

Answer 9

1. inflation discourages people from holding on to $ because it loses value over time if overall price level is rising
2. If price level is falling, $ gains value over time, amt of goods/services you can buy with a given amt of $ increases

Question 10

price stability

Answer 10

the overall level of prices changes, if at all, slowly. this is a desirable goal by many economists.

Question 11

trade deficits and surpluses

Answer 11

1. countries with high investment spending relative to savings run trade deficits.
2. Countries with low investment spending relative to savings run trade surpluses.