Krugman's Economics for AP®, 1e, Module 35

political business cycle

a business cycle that results from the use of macroeconomic policy to serve political ends. (p. 351)

monetary policy rule

a formula that determines the central bank's actions. (p. 349)

real business cycle theory

a theory of business cycles that asserts that fluctuations in the growth rate of total factor productivity cause the business cycle. (p. 352)

monetarism

a theory of business cycles, associated primarily with Milton Friedman, that asserts that GDP will grow steadily if the money supply grows steadily. (p. 348)

rational expectations

a theory of expectation formation that holds that individuals and firms make decisions optimally, using all available information. (p. 352)

Quantity Theory of Money

a theory that emphasizes the positive relationship between the price level and the money supply. It relies on the equation (M x V = P x Y). (p. 349)

new classical macroeconomics

an approach to the business cycle that returns to the classical view that shifts in the aggregate demand curve affect only the aggregate price level, not aggregate output. (p. 351)

natural rate hypothesis

the hypothesis that the unemployment rate is stable in the long run at a particular natural rate. According to this hypothesis, attempts to lower the unemployment rate below the natural rate of unemployment will cause an ever-rising inflation rate. (p. 350)

velocity of money

the ratio of nominal GDP to the money supply. (p. 349)

discretionary monetary policy

the use of changes in the interest rate or the money supply to stabilize the economy. (p. 348)

macroeconomic policy activism

the use of monetary policy and fiscal policy to smooth out the business cycle. (p. 346)

new Keynesian economics

theory that argues that market imperfections can lead to price stickiness for the economy as a whole. (p. 352)