Exam 2 Flashcards
Aggregate Demand
Total demand for goods and services within an economy at various price levels; it includes consumption, investment, government spending, and net exports
Aggregate Supply
Total output (goods and services) that firms in an economy plan to produce at various price levels
AD/AS Equilibrium
Where AD meets AS, determining the economy’s output level and price level
AD Shifts
caused by changes in consumer confidence, government policies, or global economic conditions
AS Shifts
caused by changes in resource prices, technological advancements, and government regulations
Recession
significant decline in economic activity lasting more than a few months, typically visible in GDP, employment, and industrial production
Causes of Recession
Demand shocks, supply shocks, financial crises, or high interest rates
Fiscal Policy
Government policy on spending and taxation aimed at influencing economic conditions
Expansionary Fiscal Policy
Used to combat recessions, includes increasing government spending and cutting taxes to boost aggregate demand
Contractionary Fiscal Policy
Used to cool down an overheated economy, involves decreasing government spending and increasing taxes
Automatic Stabilizers
Built-in government programs, like unemployment benefits, that automatically help stabilize the economy without new legislation
Business Cycle
Recession is part of the business cycle, following a peak and eventually leading to a trough before recovery
Role of the Fed
central bank of the United States, responsible for monetary policy, regulating banks, and ensuring financial stability
Dual Mandate
Fed aims for maximum employment and stable prices
Federal Open Market Committee (FOMC)
Decides on the direction of monetary policy, particularly interest rates
Monetary Policy
actions by the Fed to control the money supply and interest rates to achieve economic goals
Expansionary Monetary Policy
lowering interest rates and buying government securities, increases money supply, stimulates economy
Contractionary Monetary Policy
raising interest rates and selling government securities, decreasing money supply, used to combat inflation
Open Market Operations
buying/selling of government securities
Discount Rate
interest rate the Fed charges banks for loans
Reserve Requirements
amount of funds banks must hold in reserve, influences how much banks lend out
Classical Economists
belief that all prices eventually adjust and that the economy goes back to long-run equilibrium
Keynesian Economists
believe that return to long-run equilibrium as delayed/ unpredictable. stresses the importance of aggregate demand, calls for government to shift aggregate demand using fiscal and monetary policy
