ch.34 Flashcards
(32 cards)
What are economic fluctuations?
Irregular and unpredictable changes in economic activity such as GDP, employment, and production.
Example: The 2008 global financial crisis led to a sharp drop in GDP and massive job losses.
Define recession.
A period when real GDP declines and unemployment rises.
Example: During the COVID-19 pandemic in 2020, many economies entered recession as output dropped and millions lost their jobs.
What characterizes a depression?
A very severe and prolonged recession.
Example: The Great Depression of the 1930s saw widespread unemployment and a 30% drop in U.S. GDP.
What is the AD-AS model used for?
To study short-run economic fluctuations.
Example: The model explains how an increase in government spending (AD shifts right) boosts GDP in the short run.
List key facts about economic fluctuations.
- Irregular: Cannot be predicted with precision.
- Macro Variables Move Together: Investment and consumption often fall together.
- Unemployment Rises When Output Falls: As firms produce less, they lay off workers.
Example: In 2009, GDP dropped, investment declined, and unemployment rose—confirming these patterns.
What is the classical dichotomy?
Real variables (like output) are separate from nominal ones (like prices).
Example: An increase in money supply raises prices (nominal), but not output (real), in the long run.
Explain the neutrality of money.
In the long run, changes in money supply only affect nominal variables.
Example: Printing more money leads to inflation but doesn’t improve real GDP over time.
What is the slope of the Aggregate-Demand (AD) curve?
It slopes downward due to wealth, interest-rate, and exchange-rate effects.
Define the wealth effect.
Higher price levels reduce the real value of money, so people feel poorer and consume less.
Example: If inflation rises, your money buys less, so you cut back on spending.
What is the interest-rate effect?
Higher price levels raise interest rates, which discourages investment.
Example: If inflation increases, the central bank raises interest rates, so firms borrow and invest less.
Describe the exchange-rate effect.
A higher domestic price level leads to currency appreciation, reducing exports.
Example: If U.S. prices rise, the dollar strengthens, making U.S. goods more expensive abroad—exports drop.
What shifts the AD curve?
Changes in C, I, G, or NX shift the AD curve.
Example: A tech boom increases investment → AD shifts right.
What is the natural rate of output (YN)?
Output produced when unemployment is at its normal level.
Example: Full employment GDP in the U.S. is around $25 trillion.
What does the Long-Run Aggregate-Supply (LRAS) curve indicate?
Vertical at YN, meaning output is fixed in the long run regardless of price level.
Example: Even if inflation rises, output remains at full-employment levels over time.
What are LRAS shifters?
Changes in labor, capital, resources, or technology.
Example: A major invention boosts productivity → LRAS shifts right.
Explain the sticky-wage theory.
Wages don’t adjust quickly to price changes, causing output to deviate from YN.
Example: If prices fall but wages are fixed by contract, labor becomes costly, and firms hire less.
How do expectations affect the SRAS curve?
If people expect higher future prices, firms raise wages and prices now.
Example: Expecting inflation, firms preemptively raise prices → SRAS shifts left.
What causes economic fluctuations?
Shifts in AD and AS.
Example: A stock market crash reduces wealth and consumption → AD shifts left → recession.
What is the relationship between price level and wealth?
A fall in prices increases the real value of money.
Example: Deflation means your money can buy more → you spend more.
What happens to the AD curve when an investment tax credit expires?
AD shifts left as investment decreases.
Example: Without the tax incentive, businesses cut back on spending.
How do foreign booms affect AD?
Increased demand from abroad raises exports → AD shifts right.
Example: Canada buys more U.S. goods during a boom → U.S. AD rises.
What effect do rising price expectations have on SRAS?
Rising price expectations shift SRAS left as firms adjust wages and prices.
Example: Anticipated inflation causes preemptive wage hikes, raising costs.
What are the effects of AD contraction?
Output drops, unemployment rises.
Example: During a recession, firms cut production and jobs.
Are short-run fluctuations predictable?
No, they are unpredictable due to various shocks.
Example: COVID-19 was a shock that no model accurately predicted.
