Econ 1010 Exam 3 (final exam)
what type of shock, which direction does curve shift, what happens to GDP and output gap
3 steps to predict economic changes
peak, recession, trough, expansion
A business cycle runs from a ____ (high point), through a _________ (period of declining economic activity), to a ______ (low point), then into an _________ (period of increasing economic activity)
movement along
A change in the real interest rate leads to a ________ _____ the IS curve
Phillips Curve
A curve illustrating the link between the output gap and unexpected inflation Upward-sloping
wage price spiral
A cycle where higher prices lead to higher nominal wages, which leads to higher prices
higher, raise, less
A higher price level corresponds to a ______ inflation rate, which leads the Fed to _____ the real interest rate, leading to ____ aggregate demand
multiplier
A measure of how much GDP changes as a result of both the direct and indirect effects flowing from each extra dollar of spending
GDP
A rise in aggregate expenditure is matched by a rise in production and hence ___
multiplied
An increase in spending has a __________ effect on aggregate expenditure
does not
An inflation-induced change in interest rates (does/does not) shift the aggregate demand curve
Spending shocks
Any change in aggregate expenditure at a given real interest rate and level of income. Shift the IS curve
Supply shocks
Any change in production costs that leads suppliers to change the prices they charge at any given level of output. Shift the Phillips Curve
real interest rate
Any change in the ____ ________ ____ shifts the MP curve
down
Appreciating U.S. dollar shifts the Phillips curve ____
annualized rate
Data converted to the rate that would occur if the same growth rate had occurred throughout the year
seasonally adjusted
Data stripped of predictable seasonal patterns
output gap
Demand-pull inflation is driven by the ______ ___ The more positive it is, the greater the degree of excess demand, and hence the greater the pressure to raise prices
Equilibrium GDP
Describes the level of GDP at the point of macroeconomic equilibrium - the point at which the economy will come to rest
above
Excess demand leads inflation to go _____ inflation expectations
IS MP Framework
Get the IS curve from GDP equation interest rates on y-axis; Y on x-axis Look at what Y will be with a given interest rate, based on the IS Curve
lower
Higher interest rates lead to _____ output and _____ inflation (same word)
less
Higher price level leads to ____ aggregate demand
supply
If inflation rises in a weak economy, or if it falls in a strong economy, that points to a _____ shock as cause
spending
If the output gap has shifted without much movement in the real interest rate, it suggests that there's been a ________ shock
IS curve
Illustrates how lower real interest rates raise spending and hence GDP, leading to a more positive output gap
MP Curve
Illustrates the current real interest rate, which is shaped by monetary policy and the risk premium A flat line
production costs
Increased __________ _____ lead to higher inflation and no change in output
unexpected inflation
Inflation - inflation expectations
create
Inflation expectations ______ inflation and a self-fulfilling prophecy
Interest rates
Lower ________ _____ boost aggregate expenditure (C, I, G, NX)
expansionary
Lower real interest rates are ____________
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
1 .5
Okun's Rule of Thumb states that for every _ percentage point that actual output falls below potential output, the unemployment rate is around ___% higher
up
Rising production costs shift Phillips curve __
aggregate demand curve
Shows the relationship between the price level and the total quantity of output that buyers collectively plan to purchase
aggregate supply curve
Shows the relationship between the price level and the total quantity of output that suppliers collectively produce
input prices, productivity, exchange rates
The Phillips curve shifts in response to changes in:
higher
The aggregate supply curve is upward-sloping because higher output leads to a ______ price level
short-run aggregate supply curve
The aggregate supply curve that applies over a period where prices are neither fully fixed nor fully flexible. As a result, the short run aggregate supply curve is upward-sloping
long-run aggregate supply curve
The aggregate supply curve that applies to the long run when prices have fully adjusted. Because the economy will return to producing its potential output, this curve is vertical
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
output gap
The difference between actual and potential output, measured as a percentage of potential output (Actual - potential) / potential x 100
potential output
The level of output that occurs when all resources are fully employed
inflation expectations
The rate at which average prices are anticipated to rise next year
Economic Indicators
The top 10 ________ __________ are: 1. Real GDP 2. Real GDI 3. Nonfarm payrolls 4. Unemployment rate 5. Initial unemployment claims 6. Business confidence 7. Consumer confidence 8. Inflation 9. Employment cost index 10. The stock market
Aggregate expenditure
The total amount of goods and services that people want to buy across the whole economy = C + I + G + NX
inflation expectations, demand-pull inflation, supply shocks and cost-push inflation
Three causes of inflation
Identify shock and shift curve, find output gap, assess inflation
Three step process for analyzing macroeconomic shocks
lagging indicators
Variables tat tend to follow the business cycle with a delay ex: unemployment
leading indicators
Variables that tend to predict the future path of the economy Include: business/consumer confidence, the stock market
exceeds
When actual GDP _______ potential GDP, the economy will overheat
positive
When real interest rates decrease, potential GDP is unchanged, so changed in GDP translate to a more ________ output gap
output
When the fed is trying to combat a decline in GDP, it is called an ______-induced response
inflation
When the fed is worried that inflation is too low, it responds but cutting the real interest rate. This is an _________ induced response
insufficient demand
When the quantity demanded at the prevailing price is below what's supplied
inflation expectations
When the quantity is operating at full capacity, inflation equals _________ _________
net exports
___ ________ increase due to global factors
spending
________ shocks shift the IS curve
Government purchases
_________ _________ increase when fiscal policy seeks to expand the economy (spending shock)
Decreased
_________ aggregate expenditure leads to lower output and lower inflation
financial
_________ shocks shift the MP curve
Investment
__________ increases when it's profitable for businesses to expand (spending shock)
Consumption
__________ increases when people feel more prosperous (spending shock)
does
an output-induced change in interest rates (does/does not) shift the aggregate demand curve
Financial shocks
any change in borrowing conditions that change the real interest rate at which people can borrow Shift the MP curve
production
changes in __________ costs shift the aggregate supply curve
movement along
demand-pull inflation leads to ________ _____ the Phillips curve
financial
if the interest rate changes, that's evidence that the economy has been hit by a _________ shock
demand pull inflation
inflation resulting from excess demand
cost push inflation
inflation that results from an unexpected rise in production costs
risk free interest rate + risk premium
real interest calculation
business cycle
short-term fluctuations in economic activity
demand
the IS curve is like a macroeconomic ______ curve
potential GDP
the economy's highest sustainable level of production, determined by available inputs
risk premium
the extra interest that lenders charge to account for the risk of loaning money
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
risk free interest rate
the interest rate on a loan that involves no risk What the Fed sets to influence the real interest rate
excess demand
when the quantity demanded at the prevailing price exceeds the quantity supplied