Econ 102 Final ch17-

misperceptions theory

An unexpectedly low price level leads some suppliers to think their relative prices have fallen, which induces a fall in production

spending shocks

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

sticky price theory

Prices of some goods and services adjust sluggishly in response to changing economic conditions

The current administration announces that it will enact protectionist policies, making imports from China more expensive. General Motors (GM), a U.S. auto maker, uses motor vehicle parts and accessories imported from China in its manufacturing plants. As GM's chief economist, how would you assess how this policy impacts GM and the economy at large?

Rising import prices raise input costs, shifting the Phillips curve up, and raising the prices that American consumers pay.

aggregate demand curve

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

Which of the following shows the correct effect on the IS-MP framework if banks are unwilling to lend except at high interest rates?

The MP curve shifts up; the output gap becomes less positive and interest increases

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.

Phillips Curve

a curve that shows the short-run trade-off between inflation and unemployment, can be used to forecast future inflation

IS-MP framework

a framework used to forecast economic conditions and how they'll respond to monetary and fiscal policy

unexpected inflation

difference between inflation and inflation expectations

what macroeconomic indicator does the s&P 500 track

future business profits

according to the is curve, as the real interest rate decreases, the output gap typically

gets more positive

what is included in aggregate expenditure

gov spends money on jet planes, family building a new home, an automotive company selling cars in italy

key to persistent low inflation

in the long run convince people that inflation is going to be low

the election of a new president leads hourseholds to become more hopeful about their future economic prospects, which leads them to increase their current consumption. The fed model predicts

no change in the real interest rate

demand-pull inflation is driven by

output gap, leads inflation to diverge from inflation expectations

planned investment

the amount that firms plan or intend to invest

output gap

the gap between real GDP and potential GDP, imbalance btw output and productive capacity

when actual output is equal to potential output, which of the following is true

the unemployment rate is equal to the equilibrium umepmloument rate

which business cycle indicators is typically lagged

unemployment

according to okuns rule of thumb, if actual output increases from 0% to 5% above potential output, then

unemployment falls by 2.5%

long run AS curve

vertical (AD is irrelevant to long run output)

New Classicals

A group of economists who interpret fluctuations as the effects of shocks in competitive markets with fully flexible prices and wages.

Aggregate Expenditure Model

A macroeconomic model that focuses on the short-run relationship between total spending and real GDP, assuming that the price level is constant.

Aggregate Expenditure formula

AE = C + I + G + NX total amount of goods and services that people want to buy across the country

Inflation-Induced Response

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

Output-Induced Response

An output-induced change in interest rates changes the real interest rate at the prevailing price level. Output-induced responses shift the aggregate demand curve

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.

inflation expectations

The rate of increase of consumer prices expected by consumers. Expectations can influence spending and saving decisions.

why is aggregate supply upward sloping

a higher average price level results in a greater quantity of output supplied

Why AD is downward sloping

a higher average price level results in a lower quantity of output demanded

If the Federal Reserve decreases the real interest rate from 0.5% to 0.25%, what is most likely to happen to aggregate expenditure in the US?

aggregate expenditure will increase

The labor market phillips curve shows

an inverse relationship btw unemployment and inflation

supply shock

any change in priduction costs that leads suppiers to change the prices they charge at any given level of output , shift the phillips curve

financial shock

change in borrowing conditions that alters the real interest rate at which people can borrow, shift the MP curve

if the canadian dollar appreciates, this makes foreign goods cheaper for canadians. as a result,

competitive pressure on canadian businesses is increased, leading Canadian businesses to lower prices

if a manager has a expectation of ongoing inflation, this means she believes that

cost of inputs will rise

the preseident unexpectedly announces a tariff on aluminum and steel, thus you believe that

cost-push inflation will rise

holding other things equal, real wages__ when inflation rises

decrease

if the average price level increases, the quantity of aggregate demand

decreases

if the output gap is positive, which of the following statements is most accurate

gsp is above its potential

a wage-price spiral is a cycle in which

higher prices lead to higher wages, which lead to higher prices

increase in production costs leads to

increase in inflation due to cost-push

demand-pull inflation

inflation resulting from excess demand

cost-push inflation

inflation results from unexpected rise in production costs

policy makers decide to immediately increase the fed minimum wage to 15, if the output gap does not change, you expect

inflation to rise

phillips curve shifts in response to unexpected changes in

input prices productivity exchange rates

aggregate supply shifts in response to changes in production costs, which can be caused by shifts in

input prices productivity the exchange rate

what do non farm payrolls measure

job creation

increase in output gap

leads to increase in inflation due to demand-pull

when a competitive business sets prices, it takes into account

marginal costs, competitive prices

AD-AS model

model in which the aggregate supply curve and the aggregate demand curve are used together to analyze economic fluctuations.

what can shift the MP curve

monetary policy

the election of a new president leads households to become more hopeful about their future economic prospects, which leads them to increase their current consumption. if the output gap was initially zero, the fed model predicts

output to rise relative to potential output

when the federal reserve decides to increase the real interest rate, what is most likely to happen

people start saving more today instead of consuming

Seasonally Adjusted Data

predictable seasonal patterns of economic activity are now excluded measuring the business cycle

which is a housng market crash likely to lead to in the business cycle

recession

Bank of America charges an interest rate on your car loan of 7% even though the Fed set the interest rate at 3%. What is the difference between these two rates?

risk premium

the chinese government eliminates the tariffs it charges on goods exported from the US. This is illustrated in the fed model by

shifting the IS curve upwards

improvements in manufacturing technology increase the productivity of many american firms. this is illustrated in the fed model by

shifting the phillips curve downwards

A sudden unexpected situation of stagflation (a situation of high inflation and high unemployment) is evidenced when the labor market Phillips curve:

shifts outward

Aggreagate supply curve

shows relationship between the price level and the total quantity of output that suppliers collectively produce (upward sloping)

methods for measuring inflation expectations

surveys of consumers surveys and forecasts of economists financial markets

Keynesians believe

that the government should pursue active policies to stabilize economic fluctuations

consumer confidence increases due to reduced political bickering. In response:

the AD curve shifts to the right

The election of a new President leads households to become more hopeful about their future economic prospects, which leads them to increase their current consumption. if initially unexpected inflation was zero, the fed model predicts

the inflation rate will rise

the average price level increases. in response

there is movement up the AD curve

output gap formula

((actual output - potential output)/potential output) X 100

the AD/AS framework focuses on

- quantity of output products (real GDP) - the price of that output

analyzing macroeconomic shocks

1. identify shock and shift curve 2. find the output gap 3. assess inflation

labor market Phillips curve

A Phillips curve linking unexpected inflation to the unemployment rate. (rather than output gap)

what is most similar to gdp

GDI (gross domestic income)

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.

Assume Congress passed an infrastructure bill that will spend $1.5 billion in the next year. Holding all else constant, how are the output gap and real interest rate (r) change?

Output gap gets more positive; r stays the same

aggregate supply curve

a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level

inflation expectations in the US fell 2.5%, down from 2.8% a month before. If nothing else changes in economy, you expect

actual inflation to fall

inflation expectations can be

adaptive, anchored, rational, sticky

Spending Multiplier

change in gdp= change in spending x multiplier

Stagflation

combination of stagnant economic growth and high inflation

aggregate demand shifters

consumer spending, investment spending, government spending, net exports

Inflation=

expected inflation+ demand pull inflation+ cost push inflation

describe business cycle

from peak to trough of a economic activity through an expansion

The short-run Phillips curve shows:

how developments in the real economy shape nominal values like inflation

mp curve shifts in response to

monetary policy and financial market risk

government intervention

monetary policy and fiscal policy

Change in GDP formula

multiplier x initial change in spending

what falls when the national economy enters a recession

nonfarm payrolls michihgan economic output inflation

monetary policy

process of setting interest rates in an effort to influence economic conditions

unexpected boosts to production costs

push sellers to raise prices, resulting in cost-push inflation

higher real interest rate

raises the opportunity cost of spending, reducing aggregate expenditure

how does the fed respond to higher inflation

raising the real interest rate

According to Okun's Law, for every 1% fall in the actual output below potential output , the unemployment rate

rises by about .5%

OPEC sharply reduces the quantity of oil it releases to the market. in response:

the AS curve shifts up

planned investment example

the m den spends 500 to build new building

What is excess demand?

too many buyers for too few goods

Aggregate Expenditure

total spending on final goods and services in an economy during a given period, usually a year

why would there be a temporary trade off btw inflation and unemployment

unanticipated inflation

Equilibrium GDP

when aggregate expenditure is equal to total output

excess demand

when quantity demanded at the prevailing price is more than quantity supplied, short run solution is increasing prices