Chapter 9 Flashcards
Okun’s “law.”:
an empirical inverse relationship between the unemployment rate and real GDP growth
“full-employment output” (Y*):
for modeling purposes, a level of output that is assumed to correspond to a case of no excessive or burdensome unemployment, but the likely existence of at least some transitory unemployment
aggregate demand (AD)
(in a simple model without government or foreign trade): what house-holds and firms intend to spend on consumption and investment: AD = C + I1
Aggregate Demand = Consumption + Intended Investment
AD = C + II
behavioral equation:
in contrast to an accounting identity, a behavioral equation reflects a theory about the behavior of one or more economic agents or sectors. The variables in the equation may or may not be observable
marginal propensity to consume:
the number of additional dollars of consumption for every additional dollar of income (typically a fraction between zero and one)
marginal propensity to save:
the number of additional dollars saved for each additional dollar of income (typically a fraction between zero and one)
The macroeconomic goal that involves keeping the rate of unemployment and inflation at acceptable levels over the business cycle is the goal of ___________ .
stabilization
The _________ economists believe that aggregate demand needs active guidance, whereas the ___________ economists believe that aggregate demand can take care of itself.
Keynesian, classical
The recurrent fluctuations in the level of national production is called the ___________ .
business cycle
When economic activity declines, usually measured by a fall of real GDP for two consecutive quarters, the economy is said to be in a ___________.
recession
The equation that expresses the inverse relationship between the unemployment rate and the rapid growth of real GDP is known as ___________ .
Okun’s “Law”
The level of output that occurs when the economy is not suffering from an unemployment problem (that is, when any unemployment that exists is just transitory), is called ___________ output.
full employment output
In the traditional macro model (with no government or foreign sector), what households and firms intend to spend on consumption and investment is called ___________
aggregate demand
The equation AD = C + II is a(n) __________, because it reflects a theory about the behavior of one or more economic agents or sectors. The equation Y = C + I is a(n) ___________, because it represents the actual level of aggregate spending that in fact occurs.
behavioral equation, accounting identity
In the Keynesian consumption function,
C = C + mpc Y, C represents _______, the mpc is the __________, and Y represents __________.
autonomous consumption, the marginal propensity to consume, aggregate income.
The ________ is the portion of every dollar of aggregate income that is saved, and can be expressed as ΔS/ΔY..
the marginal propensity to save
The formula 1/(1-mpc) is the formula for the “income/spending __________” in a simple closed economy with no government.
multiplier
T/F: The two “stylized facts” of the business cycle are always corroborated by the historical evidence.
False. The two stylized facts are not always true. There are periods when the
economy has gone into recession and the inflation rate has increased. And there
are periods when the economy has gone into an expansion, and the inflation rate
has not increased.
T/F: According to Okun’s Law, as originally formulated in the early 1960s, a 1% drop in the unemployment rate is associated with an approximately 3% increase in real GDP.
True.
T/F: Y = AD only when actual investment equals intended investment.
True.
T/F: In a situation with insufficient aggregate demand, C + II < C + I
True.
T/F: According to the classical economists, a sudden fall in investment spending would cause a fall in the interest rate, and the lower interest rate would then stimulate investment spending again and return it to its original level.
False. The lower interest rate would primarily dampen saving and stimulate
consumption spending, and the economy would return to equilibrium with a
higher composition of consumption spending and less investment spending than
before.
Explain the two “stylized facts” of the business cycle.
As GDP falls during a contraction, unemployment rises because producers are
producing less goods and services and need fewer workers. And during an expansion, producers need more workers as they increase production, so the unemployment rate
falls (stylized fact #1).
As producers increase their production, however, there’s more competition for the limited supply of workers and other inputs, which bids up wages and prices and results in an increase in the rate of inflation. Whereas during an economic contraction, there’s less pressure on wages and prices and the rate of
inflation slows down or becomes negative (stylized fact #2).
What was the response to the Great Depression of economists trained in the classical school?
Classical economists thought that the economy would recover by itself, so there was no need for the government to intervene.
