chap 20 (final)

Question 1

long run and short run GDP

Answer 1

long run grows about 3% a year, short run fluctuates

Question 2

recession

Answer 2

periods of falling real incomes and rising unemployment

Question 3

depressions

Answer 3

severe recessions

Question 4

business cycles

Answer 4

short run economic fluctuations

Question 5

3 facts about economic fluctuations

Answer 5

1. they’re irregular and unpredictable
2. as output falls, unemployment rises
3. most macroeconomic quantities fluctuate together

Question 6

the model of aggregate demand and aggregate supply axis

Answer 6

y-axis: P (price level)

x-axis: Y (real GDP, quantity of output)

Question 7

Aggregate-demand (AD) curve

Answer 7

shows the quantity of all g&s demanded in the economy at any given price level

Question 8

the wealth effect (P and C)

Answer 8

when P rises, the dollars are worth less, real wealth is lower, people feel poorer, C (consumption) falls

Question 9

the interest-rate effect (P and I)

Answer 9

p rises, buying g&s requires more $, people sell bonds/assets to get $, increases interest rate, I (investment) falls

Question 10

the exchange-rate effect (P and NX)

Answer 10

P rises, interest rate rise in US, foreign investors want US bonds, higher demand for $ in foreign exchange market, exchange rate appreciates, exports are more expensive to others, imports cheaper to US, NX falls

Question 11

increase in P ____ the quantity of g&s demands bc …

Answer 11

reduces … C, I, NX all fall

Question 12

event that changes C, I, G, or NX, no change in P will…

Answer 12

shift the AD curve

Question 13

C, I, G or NX rise, the the curve shifts

Answer 13

right

Question 14

how might C change?

Answer 14

stock market boom/crash, preferences (consumption/saving tradeoff), tax hikes/cuts

Question 15

how might I change?

Answer 15

firms by new equipment/factories/etc, expectations, interest rates, monetary policy, tax incentives

Question 16

how might G change?

Answer 16

federal spending, state and local spending

Question 17

how might NX change?

Answer 17

boom/recessions in other countries that trade, appreciation/depreciation from exchange market

Question 18

the aggregate supply (AS) curve

Answer 18

shows the total quantity of g&s firms produce and sell at any given price level

Question 19

the AS slope is

Answer 19

upward sloping in the short run, vertical in the long run

Question 20

natural rate of output (Yn)

Answer 20

the amount of output the economy produces when unemployment is at its natural rate

Question 21

other names for Yn

Answer 21

potential output or full-employment output

Question 22

why is long run Yn vertical

Answer 22

it depends on physical outputs so price level does not affect it

Question 23

how might Yn shift?

Answer 23

immigration, increase tech knowledge, etc, anything that changes the determinants

Question 24

what are the determinants of Yn?

Answer 24

labor (L), physical capitol (K), human capitol (H), natural resources (N), the level of technology (A)

Question 25

how might L shift the LRAS curve?

Answer 25

immigration, large population retired, govt policies reduce natural u-rate

Question 26

how might K or H shift the LRAS curve?

Answer 26

investment in factories, more people get college education, factories destroyed

Question 27

how might N change shift the LRAS curve?

Answer 27

new mineral deposits found, reduction in supply of imported oil, change weather patterns affecting production

Question 28

how might technology shift LRAS curve?

Answer 28

productivity improvements from tech. progress

Question 29

an upward sloping SRAS curve affects ___ when a vertical LRAS doesn't

Answer 29

output and employment

Question 30

the sticky-wage theory

Answer 30

nominal wages are sticky in the short run, they adjust sluggishly, firms/workers set nominal wage based on expected price level

Question 31

if actual P is higher than expected P, what happens to production and employment

Answer 31

revenue is higher but labor cost isn't, production has more profit, increases output and employment

Question 32

the sticky-price theory

Answer 32

many prices are sticky in the short run due to menu costs

Question 33

what happens when the fed increases money supply, according to the sticky price theory

Answer 33

firms without menu cost raise prices immediately, firms with menu costs wait to raise prices, prices are lower so there is more demand for their product, increases output and employment

Question 34

the misperceptions theory

Answer 34

firms may confuse changes in P with changes in relative price of the products they sell

Question 35

the three theories of Yn all have this in common:

Answer 35

Y deviates from Yn when P deviates froms Pe

Question 36

Y - Yn = (equation)

Answer 36

Y = Yn + a (P - Pe) | a - how much Y responds to unexpected changes in P

Question 37

in the long run, all three theories

Answer 37

correct themselves, stickiness becomes more flexible, misperceptions are corrected

Question 38

everything that shifts the LRAS also shifts the

Answer 38

SRAS

Question 39

economic fluctuations

Answer 39

shift in AD and/or AS, view these the same way as more eq'm shifts