Economics: Chapter 33

New classical macroeconomics

New classical macroeconomics is an approach to the business cycle that returns to the classical view that shifts in the aggregate demand curve affect only the aggregate price level, not aggregate output.

Political business cycle

A political business cycle results when politicians use macroeconomic policy to serve political ends.

New Keynesian economics

According to new Keynesian economics, market imperfections can lead to price stickiness for the economy as a whole.

Natural rate hypothesis

According to the natural rate hypothesis, because inflation is eventually embedded into expectations, to avoid accelerating inflation over time the unemployment rate must be high enough that the actual inflation rate equals the expected inflation rate.

Rational expectations model

According to the rational expectations model of the economy, expected changes in monetary policy have no effect on unemployment and output and only affect the price level.

Rational Expectations

Rational expectations is the view that individuals and firms make decisions optimally, using all available information.

Monetary policy rule

a formula that determines the central bank's actions.

Monetarism

asserts that GDP will grow steadily if the money supply grows steadily.

Real business cycle theory

claims that fluctuations in the rate of growth of total factor productivity cause the business cycle.

Great moderation consensus

combines a belief in monetary policy as the main tool of stabilization, with skepticism toward the use of fiscal policy, and an acknowledgement of the policy constraints imposed by the natural rate of unemployment and the political business cycle.

Macroeconomic policy activism

is the use of monetary and fiscal policy to smooth out the business cycle.

Keynesian economics

rests on two main tenets: changes in aggregate demand affect aggregate output, employment, and prices; and changes in business confidence cause the business cycle.

Great moderation

the period from 1985 to 2007 when the U.S. economy experienced relatively small fluctuations and low inflation.

Velocity of money

the ratio of nominal GDP to the money supply.

Discretionary monetary policy

the use of changes in the interest rate or the money supply to stabilize the economy.