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macroeconomics > Chapter 12 > Flashcards

Chapter 12 Flashcards

1
Q

What is mainstream business cycle theory?

A

Potential GDP grows at a steady pace while aggregate demand grows at a fluctuating rate, so real GDP fluctuates around potential GDP

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2
Q

What is real business cycle theory?

A

Real business cycle theory regards random fluctuations in productivity as the main source of economic fluctuations

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3
Q

Where do the fluctuations in productivity come from in RBC?

A

Mostly from the pace of technological change

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4
Q

What are the 2 effects that follow a change in productivity?

A

Change in investment demand
Change in the demand for labor

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5
Q

How does a decrease in productivity affect the Real Wage Rate?

A

Productivity ↓ - Investment ↓ - Demand for Loanable Funds ↓ - Real Interest rate ↓ - Labour Supply ↓ - Employment ↓ - Real Wage Rate ↓

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6
Q

What is Demand-Pull inflation?

A

inflation that starts because aggregate demand increases

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7
Q

What are factors that cause demand-pull inflation? (6)

A

Interest Rate ↓
Quantity of Money ↑
Government Expenditure ↑
Taxes ↓
Exports ↑
Expected Profits ↑

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8
Q

What are the effects of demand-pull inflation, and how is there a return to equilibrium?

A

Aggregate demand → - Price Level ↑ - Real GDP ↑ - Money Wage ↑ - SAS ←

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9
Q

What is a demand-pull inflation spiral?

A

Repeated demand-pull inflation

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10
Q

What effect creates a sustained demand-pull inflation spiral?

A

An increase in the quantity of money

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11
Q

What is Cost-Push inflation?

A

Inflation that starts with an increase in costs

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12
Q

What are the two main sources of an increase in costs?

A
  1. Increase in the money wage rate
  2. An increase in price of raw materials
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13
Q

What are the effects of cost-push inflation, and how is there a return to equilibrium?

A

SAS ← - RGDP ↓ - Price Level ↑ - Quantity of Money ↑ - RGDP ↑ - Price Level ↑

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14
Q

What happens when expected inflation is equal to actual inflation?

A

Money wage rate increases in line with expected inflation, so when there is demand-pull inflation, there is an increase in prices with no change in Real GDP

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15
Q

What happens when expected inflation is less than actual inflation?

A

Demand-pull inflation

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16
Q

What happens when expected inflation is more than actual inflation?

A

Supply-push inflation

17
Q

What is a rational expectation?

A

The best forecast using all available information

18
Q

Describe employment when the rational expectation is correct.

A

Full employment

19
Q

What is deflation?

A

A persistent fall in the price level that happens when aggregate supply grows faster than aggregate demand

20
Q

When does deflation occur?

A

Δ Money < Δ RGPD - Δ Velocity

21
Q

What are the effects of deflation?

A

Redistribution of income and wealth
Lower RGDP
Lower Employment
Diverts resources from production

22
Q

How is deflation ended?

A

Increase the growth rate of money more than the growth rate in RGDP - Velocity change

23
Q

What is a Phillips curve?

A

The relationship between the inflation rate and the unemployment rate

24
Q

What are the 2 timeframes for the Phillips curve?

A

Short-run
Long-run

25
Q

What does the SRPC hold constant?

A

Expected inflation rate
Natural unemployment

26
Q

What happens when the inflation rate exceeds the expected inflation rate?

A

Unemployment rate decreases

27
Q

What happens when the inflation rate is less than the expected inflation rate?

A

Unemployment rate increases

28
Q

What is the LRPC?

A

The relationship between inflation and unemployment when the actual inflation rate equals the expected inflation rate

29
Q

Where is the LRPC?

A

Vertical at the natural unemployment rate

30
Q

Where do the SRPC and the LRPC intersect?

A

At the expected inflation rate

31
Q

What happens when the expected inflation rate shifts downwards?

A

SRPC ↓

32
Q

What happens when there is an increase in the natural unemployment rate?

A

LRPC → - SRPC →

macroeconomics (12 decks)

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