Exam 4 Flashcards
recession
periods of falling real incomes and rising unemployment
depressions
severe recessions (rare)
short-run economic fluctuations are often called
business cycles
is it true that economic fluctuations are regular and predictable?
no economic fluctuations are irregular and unpredictable
as output decreases, unemployment rate
increases
to study fluctuations most economists use the model of Aggregate Demand and Aggregate Supply which explains
the long-run
M x V = P x Y
Classical Dichotomy separates
real and nominal variables
Neutrality of money shows changes in ___ dont effect
MS dont effect real variables but only nominal
In the short run changes in ______ variables can affect ______ variables
in the short run changes in nominal variables can affect real variables
the aggregate demand (AD) curve shows quantity of goods and services demanded =
Y = C + I + G (constant) + NX
G = government funding
if:
P is increasing C is:
P is increasing I is:
P is increasing NX is:
DECREASING
DECREASING
DECREASING
The wealth effect supposes (P)rice rises and people hold fewer
P INCREASES, C…
goods and services so real wealth is lower
DECREASES
the interest rate effect supposes
P increasing = Investment
price rises and to get more money consumers sell bonds and assets.
this drives up interest rates
Investment decreasing
( I depends negatively on interest rates)
exchange rate effect =
P increasing —>Investment increasing—>Money increasing—>eXports decreasing
M increasing —>NX decreasing
which of C, I, G, NX, P will shift the AD curve?
none expect P will change the AD curve
examples of changes in C
stock market crash
preferences (consumption/ saving tradeoff)
tax cuts
examples of changes in I
firms buy new computers, equipment, factories
expectations
interest rates, monetary policy
investment tax credit or other tax incentives
examples of changes in G
federal spending, defense
state and local spending, roads and schools
examples of changes in NX
recessions in countries that buy our exports
appreciation/ depreciation resulting from international speculation in foreign exchange market
Shifts in C, I, G, NX that shit AD to the RIGHT
C increasing
I increasing
G increasing
NX increasing
Shifts in C, I, G, NX that shit AD to the LEFT
C decreasing
I decreasing
G decreasing
NX decreasing
if a ten year old investment tax credit expires what shifts?
Investment falls so
AD curve shifts left
if the US exchange rate falls what shifts?
NX rises so
AD curve shifts right
if a fall in prices increases the real value of consumers’ wealth what shifts?
move down along AD curve (wealth effect)
if state governments replace sales taxes with new taxes on interest, dividends, and capital gains what shifts?
C rises so
AD shifts right
Long-Run Aggregate-Supply Curve (LRAS) =
Y + A F(K,L,H,N)
the natural rate of output(YN) is the amount of output the economy produces when
YN is also called
unemployment is at its natural rate
potential output
or full-employment output
3 theories of SRA’s (Short-Run Aggregate Supply)
some type of market imperfection result:
output deviates from its natural rate (Y is different then Yn)
when the actual price level (P) deviates from the price level people expected(Pe)
3 theories of SRA’s: The Sticky-Wage Theory
imperfection: nominal wages are sticky in the SR, they adjust sluggishly
due to labor contracts, social norms
firms and workers set the nominal wage in advance based on Pe, the price level they expect
If P > Pe
revenue is higher, but labor is not
production is more profitable
so firms increase output and employment
The Sticky-Price Theory: Firms set sticky prices in advance based on
Pe
3 theories of SRA’s: The Misperceptions Theory
Imperfection: Firms may confuse changes in P with changes in the relative price of the products they sell.
In all 3 theories, Y deviates from YN when P deviates from PE
Y =
Y = YN + a (P – Pe)
Y = output
YN = Natural rate of output (long-run)
a = a > 0, measures how much Y responds to unexpected changes in P
3 theories of SRA’s: The imperfections in these theories are temporary. Over time,
sticky wages and prices become flexible
misperceptions are corrected
In the LR,
PE = P
AS curve is vertical
