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
