Econ 1010 Exam 3 (final exam)

what type of shock, which direction does curve shift, what happens to GDP and output gap

3 steps to predict economic changes

peak, recession, trough, expansion

A business cycle runs from a ____ (high point), through a _________ (period of declining economic activity), to a ______ (low point), then into an _________ (period of increasing economic activity)

movement along

A change in the real interest rate leads to a ________ _____ the IS curve

Phillips Curve

A curve illustrating the link between the output gap and unexpected inflation Upward-sloping

wage price spiral

A cycle where higher prices lead to higher nominal wages, which leads to higher prices

higher, raise, less

A higher price level corresponds to a ______ inflation rate, which leads the Fed to _____ the real interest rate, leading to ____ aggregate demand

multiplier

A measure of how much GDP changes as a result of both the direct and indirect effects flowing from each extra dollar of spending

GDP

A rise in aggregate expenditure is matched by a rise in production and hence ___

multiplied

An increase in spending has a __________ effect on aggregate expenditure

does not

An inflation-induced change in interest rates (does/does not) shift the aggregate demand curve

Spending shocks

Any change in aggregate expenditure at a given real interest rate and level of income. Shift the IS curve

Supply shocks

Any change in production costs that leads suppliers to change the prices they charge at any given level of output. Shift the Phillips Curve

real interest rate

Any change in the ____ ________ ____ shifts the MP curve

down

Appreciating U.S. dollar shifts the Phillips curve ____

annualized rate

Data converted to the rate that would occur if the same growth rate had occurred throughout the year

seasonally adjusted

Data stripped of predictable seasonal patterns

output gap

Demand-pull inflation is driven by the ______ ___ The more positive it is, the greater the degree of excess demand, and hence the greater the pressure to raise prices

Equilibrium GDP

Describes the level of GDP at the point of macroeconomic equilibrium - the point at which the economy will come to rest

above

Excess demand leads inflation to go _____ inflation expectations

IS MP Framework

Get the IS curve from GDP equation interest rates on y-axis; Y on x-axis Look at what Y will be with a given interest rate, based on the IS Curve

lower

Higher interest rates lead to _____ output and _____ inflation (same word)

less

Higher price level leads to ____ aggregate demand

supply

If inflation rises in a weak economy, or if it falls in a strong economy, that points to a _____ shock as cause

spending

If the output gap has shifted without much movement in the real interest rate, it suggests that there's been a ________ shock

IS curve

Illustrates how lower real interest rates raise spending and hence GDP, leading to a more positive output gap

MP Curve

Illustrates the current real interest rate, which is shaped by monetary policy and the risk premium A flat line

production costs

Increased __________ _____ lead to higher inflation and no change in output

unexpected inflation

Inflation - inflation expectations

create

Inflation expectations ______ inflation and a self-fulfilling prophecy

Interest rates

Lower ________ _____ boost aggregate expenditure (C, I, G, NX)

expansionary

Lower real interest rates are ____________

Macroeconomic equilibrium

Occurs when the quantity of output that buyers collectively want to purchase is equal to the quantity of output that suppliers collectively produce

1 .5

Okun's Rule of Thumb states that for every _ percentage point that actual output falls below potential output, the unemployment rate is around ___% higher

up

Rising production costs shift Phillips curve __

aggregate demand curve

Shows the relationship between the price level and the total quantity of output that buyers collectively plan to purchase

aggregate supply curve

Shows the relationship between the price level and the total quantity of output that suppliers collectively produce

input prices, productivity, exchange rates

The Phillips curve shifts in response to changes in:

higher

The aggregate supply curve is upward-sloping because higher output leads to a ______ price level

short-run aggregate supply curve

The aggregate supply curve that applies over a period where prices are neither fully fixed nor fully flexible. As a result, the short run aggregate supply curve is upward-sloping

long-run aggregate supply curve

The aggregate supply curve that applies to the long run when prices have fully adjusted. Because the economy will return to producing its potential output, this curve is vertical

very-short-run aggregate supply curve

The aggregate supply curve that applies to the very short run, in which no prices have changed. Because prices are effectively fixed, this curve is horizontal

output gap

The difference between actual and potential output, measured as a percentage of potential output (Actual - potential) / potential x 100

potential output

The level of output that occurs when all resources are fully employed

inflation expectations

The rate at which average prices are anticipated to rise next year

Economic Indicators

The top 10 ________ __________ are: 1. Real GDP 2. Real GDI 3. Nonfarm payrolls 4. Unemployment rate 5. Initial unemployment claims 6. Business confidence 7. Consumer confidence 8. Inflation 9. Employment cost index 10. The stock market

Aggregate expenditure

The total amount of goods and services that people want to buy across the whole economy = C + I + G + NX

inflation expectations, demand-pull inflation, supply shocks and cost-push inflation

Three causes of inflation

Identify shock and shift curve, find output gap, assess inflation

Three step process for analyzing macroeconomic shocks

lagging indicators

Variables tat tend to follow the business cycle with a delay ex: unemployment

leading indicators

Variables that tend to predict the future path of the economy Include: business/consumer confidence, the stock market

exceeds

When actual GDP _______ potential GDP, the economy will overheat

positive

When real interest rates decrease, potential GDP is unchanged, so changed in GDP translate to a more ________ output gap

output

When the fed is trying to combat a decline in GDP, it is called an ______-induced response

inflation

When the fed is worried that inflation is too low, it responds but cutting the real interest rate. This is an _________ induced response

insufficient demand

When the quantity demanded at the prevailing price is below what's supplied

inflation expectations

When the quantity is operating at full capacity, inflation equals _________ _________

net exports

___ ________ increase due to global factors

spending

________ shocks shift the IS curve

Government purchases

_________ _________ increase when fiscal policy seeks to expand the economy (spending shock)

Decreased

_________ aggregate expenditure leads to lower output and lower inflation

financial

_________ shocks shift the MP curve

Investment

__________ increases when it's profitable for businesses to expand (spending shock)

Consumption

__________ increases when people feel more prosperous (spending shock)

does

an output-induced change in interest rates (does/does not) shift the aggregate demand curve

Financial shocks

any change in borrowing conditions that change the real interest rate at which people can borrow Shift the MP curve

production

changes in __________ costs shift the aggregate supply curve

movement along

demand-pull inflation leads to ________ _____ the Phillips curve

financial

if the interest rate changes, that's evidence that the economy has been hit by a _________ shock

demand pull inflation

inflation resulting from excess demand

cost push inflation

inflation that results from an unexpected rise in production costs

risk free interest rate + risk premium

real interest calculation

business cycle

short-term fluctuations in economic activity

demand

the IS curve is like a macroeconomic ______ curve

potential GDP

the economy's highest sustainable level of production, determined by available inputs

risk premium

the extra interest that lenders charge to account for the risk of loaning money

Fed model

the framework that uses the IS curve, the MP curve, and the Phillips curve to link interest rates, the output gap, and inflation

risk free interest rate

the interest rate on a loan that involves no risk What the Fed sets to influence the real interest rate

excess demand

when the quantity demanded at the prevailing price exceeds the quantity supplied