Chapter 13 Flashcards

1
Q

What are business cycles?

A

fluctuations in the growth of real GDP around its trend growth rate

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2
Q

What is a recession?

A

significant, widespread decline in real income and employment

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3
Q

What is the aggregate demand curve?

A

The curve that shows all the combinations of inflation and real growth that are consistent with a specified rate of spending growth

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4
Q

More spending plus the same goods equals..

A

higher prices

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5
Q

Spending growth=

A

inflation+real growth

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6
Q

If spending growth increases, which way will the AD curve shift?

A

up and to the right

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7
Q

If spending growth decreases, how is the AD curve affected?

A

It shifts it inwards

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8
Q

What is the solow growth rate?

A

Rate of economic growth that would occur given flexible prices and the existing real factors of production (labor, capital and ideas)

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9
Q

What is the long run aggregate supply curve?

A

It is a vertical line at the solow growth rate

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10
Q

The economy will grow at the potential growth rate if..

A

markets are working well and prices are perfectly flexible

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11
Q

What are shifts in the solow growth rate caused by?

A

“Real shocks” aka productivity shocks

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12
Q

What are “real shocks?”

A

Any shocks that increase or decrease the potential growth

rate (i.e. economy’s fundamental ability to make stuff)

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13
Q

Which way do positive shocks shift the LRAS?

A

right

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14
Q

Which way do negative shocks shift the LRAS?

A

left

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15
Q

What does a negative real shock do to the inflation rate and growth rate?

A

It drives the inflation rate up and the growth rate down

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16
Q

What does a positive real shock do to the inflation rate and growth rate?

A

It drives the inflation rate down and the growth rate up

17
Q

When prices are sticky, the economy can grow faster or slower than the..

A

solow growth rate

18
Q

What is the short run aggregate supply curve?

A

shows the positive relationship between the inflation rate and real growth during the period when prices and wages are sticky.

19
Q

In what way does the SRAS sloping?

A

upward

20
Q

In the short run, an increase in AD will increase both..

A

inflation and real growth

21
Q

What is an aggregate demand shock?

A

a rapid and unexpected shift in the AD curve

22
Q

If there is an unexpected increase in the money supply, inflation and the growth rate increase in..

A

the short run

23
Q

Workers can sometimes mistake a nominal wage increase for a..

A

real wage increase

24
Q

Prices almost never move instantly because..

A

it is costly to change prices and firms are uncertain about whether current market conditions are temporary or permanent

25
Q

What happens when AD falls due to a fall in the money supply?

A
  1. The economy shifts to a new short run equilibrium point.
  2. The inflation rate decreases a little.
  3. Real growth is reduced a lot (recession).
26
Q

Changes in the velocity of money tend to be..

A

temporary

27
Q

If the velocity of money increases, then the growth rate of C I G NX must..

A

increase

28
Q

Bank failures reduced the money supply and spending. This reduced the efficiency of..

A

financial intermediation