ECON 200 Handout 9 Key Terms

Question 1

Recession

Answer 1

When short-run equilibrium output (Y*) is less than full-employment equilibrium output (Y bar)

Question 2

Cyclical Unemployment

Answer 2

The difference when unemployment (u) is greater than the natural rate of unemployment (u bar)

Question 3

Slack Labor

Answer 3

The unhappily unemployed people searching for jobs that would work for wages less than the wages employers are currently paying

Question 4

Real Balances

Answer 4

Money Supply/Price Level

Question 5

Liquidity

Answer 5

The level of real balances in an economy

Question 6

Liquidity Effect

Answer 6

The change in real balances from the change in P

Question 7

Wealth Effect

Answer 7

When P falls and the purchasing power of existing money balances increases causing people to feel wealthier and, therefore, to consume more

Question 8

Economic Boom

Answer 8

When Y* exceeds Y bar

Question 9

Activist Policy (Countercyclical Policy)

Answer 9

Expansionary fiscal or monetary policies to return the economy to Y bar more rapidly than accomplished by waiting for prices to adjust

Question 10

Laissez-Faire Policy

Answer 10

Policy where the government consciously does nothing (as opposed to actively trying to influence the economy

Question 11

Real Business Cycle (RBC) Theory

Answer 11

The belief that the observed economy is continuously at full-employment-as if organized by a Walrusian auctioneer-and there is no need for activist policy

Question 12

Policy Lags

Answer 12

The length of time it takes for activist policies to have their full effect

Question 13

Recognition Lag

Answer 13

The time it takes to recognize that a recession has begun

Question 14

Decision Lag

Answer 14

The time it takes to decide the appropriate policy

Question 15

Action Lag

Answer 15

The time it takes to implement the policy

Question 16

Automatic Stabilizers

Answer 16

Forms of countercyclical policy that are preprogrammed to be conducted immediately upon the advent of conditions associated with recessions or booms

Question 17

Federal Open Market Committee (FOMC)

Answer 17

The arm of the Fed that decides monetary policy; Composed of 19 members

Question 18

Board of Governors

Answer 18

Posses a majority of the votes on any monetary policy proposal

Question 19

Federal Reserve System

Answer 19

12 regional banks of the United States

Question 20

Business Cycle

Answer 20

The observed fluctuations in Y that Keynesian and RBC theorists have two very different interpretations of

Question 21

Monetary Union

Answer 21

Where multiple countries share a single currency, and they set up a central bank to oversee their currency