Ch 33 & 34

depression

a severe recession

real variables

real GDP, the real interest rate, and unemployment

recession

- a period of declining real incomes and rising unemployment - a period of falling real GDP that lasts 6 months or more

business cycle

- fluctuations in the economy - short-run fluctuations in real GDP

Real GDP

- measures the value of all final goods & services produced within a given period of time - measures total income (adjusted for inflation) of everyone in the economy

nominal variables

- money supply and the price level - be the first things we see when we observe an economy because economic variables are often expressed in units of money

Interest rate effect

Interest rate effect: When price level falls → cost of borrowing money falls → quantity of output demanded to rise

Which of the following correctly describes actions of the U.S. government during the recession of 2008-2009?

It became part owner of some banks and made a large increase in government spending.

The Stock Market Boom of 2015 Imagine that in 2015 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. Which curve shifts and in which direction?

aggregate demand shifts left

classical macroeconomic theory

changes in the money supply affect nominal variables but not real variables

During recessions employment typically

falls substantially. As the recession ends, employment rises gradually

The economic boom of the early 1940s resulted mostly from

increased government expenditure

Other things the same, the aggregate quantity of output supplied will decrease if the price level

is lower than expected so that firms believe the relative price of their output has decreased.

Sticky nominal wages can result in

lower profits for firms when the price level is lower than expected

Wealth effect

price lv ↑, purchasing power of household's real wealth will ↓, causing quantity of output demanded to ↓

classical dichotomy

separation of variables into real variables (those that measure quantities or relative prices) and nominal variables (those measured in terms of money)

Suppose that banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time. In the long run, if the Fed does not respond, the change in price expectations created by the crisis shifts

short-run aggregate supply right.