Chapter 10: The Business Cycle

The various quantities of output that all market participants are willing and able to buy at alternative price levels in a given time period is

Aggregate demand

labor force

All persons over age 16 who are either working for pay or actively seeking paid employment.

Business Cycle

Alternating periods of economic growth and contraction.

inflation

An increase in the average level of prices of good and services.

External shocks to an economy include

Distribution in trade, wars, and natural disasters

A tax cut or government spending increase intended to shift aggregate demand to the right is known as

Fiscal stimulus

What are the three basic measures of macroeconomic performance?

GDP growth, unemployment, and inflation.

According to Keynes

Government intervention in the economy is necessary at times

Which of the following is a redistributive mechanism of inflation?

Price effect. Supply effect Demand effect.

The aggregate supply curve is positively sloped because as the price level increases

Profit margins increase in the short run

In figure 11.2, at what level of output does equilibrium occur?

Q3

_____ income is adjusted for inflation; it is income expressed in constant dollars.

Real

The total value of goods and services produced within a nation's borders, measured in constant prices refers to

Real GDP

Real income

Reflects the purchasing power of money

Which of the following types of unemployment would best characterize a swimming instructors unemployment during the winter months?

Seasonal Unemployment

Say's Law states that

Supply creates its own demand

A headline article in the textbook is titled "Hurricane Damage to Gulf ports delays deliveries, Raises costs." Ceteris Parivus, if production costs increase, then aggregate

Supply will shift to the right

The fraction of each additional dollar of disposable income not spent on consumption is referred to as

The MPS

price stability

The absence of significant changes in the average price level; officially defined as a rate of inflation of less than 3 percent.

An improvement in consumer confidence will cause

The aggregate demand curve to shift to the right

Production Possibilities

The alternative combinations of goods and services that could be produced in a given time period with all available resources and technology.

nominal income

The amount of money income received in a given time period, measured in current dollars.

inflation rate

The annual rate of increase in the average price level.

Alternating periods of growth and contraction in real GDP define

The business cycle

A decrease in the average price level is called:

deflation.

During the great depression, Keynes advocated the use of _____ policy to increase the ______ goods and services

fiscal; demand for

The consumer price index is used specifically to measure the

inflation rate

A budget deficit occurs if government spending

is greater than tax revenues

The unemployment rate is the percentage of the ______ that is unemployed.

labor force

The labor force consists of the:

members of the population over age sixteen who are employed or who are actively seeking employment.

A recession is technically ______ months or more of declining output or real GDP.

six

If the number of dollars you receive every year is the same, but prices are rising, then your nominal income

stays the same but your real income falls

When the economy is operating at full employment:

the economy is operating at the lowest rate of unemployment consistent with price stability.

If the price level doubles from one period to the next, and if the price of one particular good less than doubles:

the real price of that product has declined.

We measure the total volume of output by calculating:

the total market value of output.

The inability of labor-force participants to find jobs is known as

unemployment

The Great Depression:

was a severe and prolonged reduction in output and employment for the United

Assuming aggregate demand is represented by AD3, the economy depicted in figure 12.1 confronts a real GDP gap of

zero

Deflation occurs when the

Price decreases for some goods and services outweigh price increases on all other goods and services

The three basic measures of macro performance are:

1. Output (GDP) Growth 2. Unemployment 3. Inflation

The redistributive mechanics of inflation include

1. Price effects. People who prefer goods and services that are increasing in price least quickly end up with a larger share of real income. 2. Income effects. People whose nominal incomes rise faster than the rate of inflation end up with a larger share of total income. 3. Wealth effects. People who own assets that are increasing in real value end up better off than others.

In table 10.2, what is the unemployment rate in year 1?

20.0 percent

During the last three months of 2008, the U.S. economy shrank by ___%, which was the sharpest decline in ___ years.

3.8; 26

Over the last two years, U.S. college tuition prices have risen by:

6.5%.

Which of the following could cause a recession?

A decline in aggregate demand

recession

A decline in total output (real GDP) for two or more consecutive quarters.

deflation

A decrease in the average level of prices of goods and services.

Consumer Price Index (CPI)

A measure (index) of changes in the average price of consumer goods and services.

Structural unemployment occurs

Because of a mismatch between skills and jobs

Self-adjustment of markets is assumed in

Classical economic theory

The four components of aggregate demand are

Consumption, investment, government spending, and net exports

real income

Income in constant dollars; nominal income adjusted for inflation.

Ceteris paribus, a leftward shift of the aggregate supply curve will cause the equilibrium price level to ______ and equilibrium real output to ________.

Increase; decrease

Which of the following is a mechanism Keynes advocated for dealing with a situation of depressed output?

Increasing government expenditure

If consumers spend 85 cents out of every extra dollar received, the

MPC is 0.85

The study of aggregate economic behavior is referred to as

Macroeconomics

The GDP gap is

The difference between equilibrium output and full-employment output

unemployment

The inability of labor force participants to find jobs.

real GDP

The inflation-adjusted value of GDP; the value of output measured in constant prices. real GDP doesn't increase in consistent, smooth increments but in a pattern of steps, stumbles, and set backs.

All persons over the age 16 who are either working for pay or actively seeking paid employment refers to

The labor force

full employment

The lowest rate of unemployment compatible with price stability; variously estimated at between 4 and 6 percent unemployment.

relative price

The price of one good in comparison with the price of other goods.

unemployment rate

The proportion of the labor force that is employment.

Which of the following is not an example of investment spending?

The purchase of stock in the stock market

Macroeconomics

The study of aggregate economic behavior, of the economy as a whole.

nominal GDP

The total value of goods and services produced within a nation's borders, measured in current prices.

The CPI is:

an indicator of overall inflation. a measure of changes in the average prices of consumer goods and services. the Consumer Price Index.

When economists talk about real output they mean:

nominal output adjusted for changes in the price level to obtain real values.