Macroeconomics Chapter 10 - 2

short-run macroeconomic equilibrium

occurs when the quantity of real GDP demanded equals the quantity of real GDP supplied

recessionary gap

output gap when potential GDP exceeds real GDP

output gap

the gap between real GDP and potential GDP

downward

Unemployment above the natural rate puts ___ pressure on the money wage rate.

real GDP

___ does not change when all prices changes by the same percentage.

quantity of real GDP demanded

total amount of final goods and services produced in the United States that people, businesses, governments, and foreigners plan to buy

quantity of real GDP supplied

total quantity of goods and services, valued in constant base year (2005) dollars, that firms plan to produce during a given period

vertical; potential GDP

The long-run aggregate supply curve is always ____ and is always located at _____.

below full-employment equilibrium

an equilibrium in which potential GDP exceeds real GDP

full-employment equilibrium

an equilibrium in which real GDP equals potential GDP

above full-emploment equilibrium

an equilibrium in which real GDP exceeds potential GDP

C+I+G+X-M

quantity of real GDP demanded (Y)

increase in full-employment labor, increase in capital, advance in technology

three reasons potential GDP can increase

price level

A change in the ___ changes the quantity of real GDP supplied.

aggregate demand increases

aggregate demand: when there is an increase in expected future income..

inflationary gap

the output gap when real GDP exceeds potential GDP

classical

macroeconomic view that believes that the economy is self-regulating and always at full employment

short-run aggregate supply

A change in money wage rate changes (long-run aggregate supply, short-run aggregate supply) changes.

price level; money wage rate

A movement along the LAS curve is accompanied by a change in the ____ and ____.

decreases; leftward

A rise in the money wage rate ____ short-run aggregate supply and shifts the short-run aggregate supply curve ____.

slower

An expected fall in the inflation rate makes the money wage rate rise ____.

faster

An expected rise in the inflation rate makes the money wage rate rise ____.

both

An increase in potential GDP increases (long-run aggregate supply, short-run aggregate supply)

smaller

Other things remaining the same, the higher the price level, the ___ is the quantity of real GDP demanded.

inflation

The AS-AD model explains _____ as a persistent increase in aggregate demand at a faster pace than that of the increase in potential GDP.

economic growth

The AS-AD model explains _____ as increasing long-run aggregate supply.

independent

The long-run aggregate supply curve is vertical because potential GDP is _____ of the price level.

upward

Unemployment below the natural rate puts ___ pressure on the money wage rate.

rise

When the price level rises and other things remain the same, interest rates ___.

decreases

When the price level rises but other things remain the same, real wealth _____.

relative to cost

With no change in price _________, production doesn't change.

AS-AD model

a model of an imaginary market for the total of all the final goods and services that make up real GDP

aggregate demand decreases

aggregate demand: if expected future income, inflation or profit decreases..

aggregate demand increases

aggregate demand: if expected future income, inflation, or profit increases..

aggregate demand decreases

aggregate demand: if fiscal policy decreases government expenditure, increases taxes, or decreases transfer payments..

aggregate demand increases

aggregate demand: if fiscal policy increases government expenditure, decreases taxes, or increases transfer payments..

aggregate demand decreases

aggregate demand: if monetary policy decreases the quantity of money and increases interest rates

aggregate demand increases

aggregate demand: if monetary policy increases the quantity of money and decreases interest rates..

aggregate demand increases

aggregate demand: if the exchange rate decreases or foreign income increases..

aggregate demand decreases

aggregate demand: if the exchange rate increases or foreign income decreases..

aggregate demand increases

aggregate demand: when there is an increase in expected future inflation..

aggregate demand increases

aggregate demand: when there is an increase in expected future profits..

disposable income

aggregate income minus taxes and transfer payments

exchange rate

amount of foreign currency that you can buy with a U.S. dollar

stagflation

combination of recession and inflation

price level, expectations, fiscal policy and monetary policy, world economy

four main factors that buying plans depend on

fiscal policy

government's attempt to influence the economy by setting and changing taxes, making transfer payments, and purchasing goods and services

Keynesian

macroeconomic view that believes that left alone, the economy would rarely operate at full employment and that to achieve and maintain full employment, active help from fiscal policy and monetary policy is required

monetarist

macroeconomic view that believes that the economy is self-regulating and that it will normally operate at full employment, provided that monetary policy is not erratic and that the pace of money growth is kept steady

new classical

macroeconomic view that business cycle fluctuations are the efficient responses of a well-functioning market economy that is bombarded by shocks that arise from the uneven pace of technological change

new Keynesian

macroeconomic view that holds not only that the money wage rate is sticky but also that prices of goods and services are sticky; with a sticky price level, the short-run aggregate supply curve is horizontal at a fixed price level

expectations

most significant influence on aggregate demand in the Keynesian view

quantity of money

most significant influence on aggregate demand in the monetarist view

technological change

most significant influence on both aggregate demand and aggregate supply in the classical view

aggregate supply change

occurs when an influence on production plans other than the price level changes

long-run macroeconomic equilibrium

occurs when real GDP equals potential GDP

full employment

quantity of real GDP supplied = potential GDP

aggregate demand

relationship between the quantity of real GDP demanded and the price level

aggregate supply

relationship between the quantity of real GDP supplied and the price level

long-run aggregate supply

relationship between the quantity of real GDP supplied and the price level when the money wage rate changes in step with the price level to maintain full employment

short-run aggregate supply

relationship between the quantity of real GDP supplied and the price level when the money wage rate, the prices of other resources, and potential GDP remain constant

monetary policy

the Fed's attempt to influence the economy by changing interest rates and the quantity of money

real wealth

the amount of money in the bank, bonds, stocks and other assets that people own, measured in terms of the goods and services that the money, bonds and stocks will buy

exchange rate; foreign income

two main influences that the world economy has on aggregate income

departures from full employment; expectations about inflation

two reasons money wage rate can change

wealth effect, substitution effects

two reasons the aggregate demand curve slopes downward