Unit 3 (Ch. 33-34) Vocabulary

Question 1

recession

Answer 1

a period of declining real incomes and rising unemployment

Question 2

depression

Answer 2

a severe recession

Question 3

model of aggregate demand and aggregate supply

Answer 3

the model that most economists use to explain short-run fluctuations in economic activity around its long-run trend

Question 4

aggregate-demand curve

Answer 4

a curve that shows the quantity of goods and services that households, firms, the government, and customers abroad want to buy at each price level

Question 5

aggregate-supply curve

Answer 5

a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level

Question 6

stagflation

Answer 6

a period of falling output and rising prices

Question 7

theory of liquidity preference

Answer 7

Keynes’s theory that the interest rate adjusts to bring money supply and money demand into balance

Question 8

fiscal policy

Answer 8

the setting of the level of government spending and taxation by government policymakers

Question 9

multiplier effect

Answer 9

the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending

Question 10

crowding-out effect

Answer 10

the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending

Question 11

automatic stabilizers

Answer 11

changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action