Macroeconomics - Assignment Essays

question

Business cycle

answer

Recurrent rises and falls in real GDP over a period of years

question

Business cycle consists of 4 phases:

answer

Peak, recession, trough, and recovery

question

Recession

answer

Generally defined as at least 2 consecutive quarters of real GDP decline

question

Expansion

answer

During which real GDP rises

question

Peak

answer

Occurs when real GDP reaches its maximum level during a recovery

question

Economic growth

answer

measured by the annual percentage change in real GDP in a nation

question

Leading, coincident, and lagging indicators

answer

economic variables that change before, at the same time as, and after changes in real GDP, respectively

question

Unemployment rate

answer

is the ratio of the number of unemployed to the number in the civilian labor force multiplied by 100

question

Civilian labor force

answer

consists of people who are employed plus those who are out of work but are seeking employment

question

Discouraged workers

answer

a reason critics say the unemployment rate is understated. People who want to work but have given up searching for work.

question

Types of unemployment

answer

Frictional, structural, and cyclical unemployment

question

Frictional unemployment

answer

seeking for new jobs that exist

question

structural unemployment

answer

long-term unemployment caused by factors in the economy, including lack of education, technological change, and globalization

question

cyclical unemployment

answer

unemployment resulting from insufficient aggregate demand

question

full employment

answer

occurs when the unemployment rate is equal to the total of the frictional and structural unemployment rates

question

GDP gap

answer

the difference between actual real GDP and full employment, or potential real GDP. / Also measures the loss of output due to cyclical unemployment

question

The phase of the business cycle follows a recession

answer

trough

question

A general rule is that economy is experiencing a recession when

answer

real GDP declines for at least six months

question

The increase in unemployment associated with a recession is called

answer

cyclical unemployment

question

what stage of the business cycle immediately follows the trough

answer

expansion

question

Inflation

answer

an increase in the general (average) price level of goods and services in the economy

question

deflation

answer

a decrease in the general level of prices

question

Consumer price index (CPI)

answer

most widely known price-level index. it measures the cost of purchasing a market basket of goods and services by a typical household during a time period relative to the cost of the same bundle during a base year

question

Equation:

Annual rate of inflation =

answer

CPI in a given year - CPI in previous year
__________________________________________ x 100

CPI in previous year

question

Disinflation

answer

a reduction in the inflation rate. ( DOES NOT MEAN THAT PRICES WERE FALLING, ONLY THAT THE INFLATION RATE FELL )

question

Inflation rate

answer

determined by the CPI is criticized bc
1) it is not representative
2) it has difficulty adjusting for quality changes
3) it ignores the relationship between price changes and the importance of items in the market basket

question

Nominal income

answer

income measured in actual money amounts. Measuring your purchasing power requires converting nominal income into real income

question

real interest rate

answer

the nominal interest rate adjusted for inflation ex. if real interest rates are negative, lenders incur losses

question

adjustable-rate mortgage

answer

home loan that adjusts the nominal interests rate to changes in an index rate, such as rates on treasury securities

question

demand-pull inflation

answer

caused by pressure on prices originating from the buyers' side of the market.

question

cost-push inflation

answer

caused by pressure on prices originating from the sellers' side of the market

question

hyperinflation

answer

can disrupt an economy by causing inflation psychosis, credit market collapses, a wage-price spiral, ad speculation

question

wage-price spiral

answer

occurs when increases in nominal wages cause higher prices, which, in turn, cause higher wages and prices

question

Inflation is defined as an increase in

answer

the average price level

question

Inflation is measured by an increase in

answer

the consumer price index (CPI)

question

Who benefits from inflation?

answer

Borrowers

question

Prices indexes such as the CPI are calculated using a base year. the term base year refers to

answer

an arbitrarily chosen reference year

question

Suppose the price of banana rises over time and consumers respond by buying fewer bananas. This situation contributes to which bias in the consumer price index?

answer

substitution bias

question

The real interest rate is defined as the

answer

nominal interest rate minus the inflation rate

question

What can create demand-pull inflation?

answer

excessive aggregate spending

question

Cost-push inflation is due to

answer

labor cost increases
energy cost increases
raw material cost increases

question

During periods of hyperinflation, what would most likely be the response of consumers?

answer

spend money as fast as possible

question

The base year in the consumer price index (CPI) is

answer

a year chosen as a reference for prices in all other years

question

If the rate of inflation is a given time period turns out to be lower than lenders and borrowers anticipated, then the effect will be a

answer

redistribution of wealth from borrowers to lenders

question

John Maynard Keynes

answer

rejected the classical theory that the economy self-corrects in the long run to full employment

question

Keynesian theory

answer

aggregate demand, rather than the classical economists focus on aggregate supply.

question

aggregate spending

answer

adequate, the economy can experience prolonged and severe unemployment

question

Say's Law

answer

the classical theory that "supply creates its own demand" and therefore the Great Depression was impossible.

question

Say's Law is

answer

the theory that the value of production generates an equal amount of income and, in turn, total spending.

question

Classical economists rejected the argument that underconsumption is possible bc...

answer

they believed flexible prices, wages, and interest rates would soon establish a balance between supply and demand

question

consumption function (C)

answer

determined by changes in the level of real disposable income

question

autonomous consumption

answer

consumption that occurs even if real disposable income equals zero

question

marginal propensity to consume (MPC)

answer

the change in consumption associated with a given change in real disposable income. It tells how much of an additional dollar of disposable income households will spend for consumption

question

marginal propensity to save (MPS)

answer

the change in saving associated with a given change in real disposable income. It measures how much of an additional dollar of disposable income households will save

question

Investment demand curve (I)

answer

shows the amount of business spend for investment goods at different possible rates of interest. The determinants of this schedule are the expected rate of profit and rate of interest. Shifts in the investment demand curve result from changes in expectations, technology, capacity utilization, and business taxes.

question

autonomous expenditures

answer

spending that does not vary with the current level of disposable income. The Keynesian model applies this simplifying assumption to investment. As a result, the investment demand curve is a fixed amount determined by the rate of profit and the interest rate.

question

The popular theory prior to the Great Depression that the economy will automatically adjust to achieve full employment in the long run is

answer

classical economists

question

If the economy is experiencing less than full equilibrium, the Keynesian school recommends that the gov't

answer

undertake fiscal policy to stimulate aggregate

question

Keynesian theory argues that

answer

the economy is inherently unstable and may require gov't intervention to control aggregate expenditures and restore full employment

question

Investment, government spending and net exports

answer

can be treated as autonomous expenditures

question

Equation:
the aggregate expenditures function (AE)

answer

add consumption (C), investment (I), government spending (G), and net exports (X-M)

question

Keynesian aggregate expenditures model

answer

determines the equilibrium level of real GDP by the intersection of the aggregate expenditures and the aggregate output and income curves

question

Each equilibrium level in the economy is associated with

answer

a level of employment and corresponding unemployment rate

question

aggregate expenditures and real GDP are equal

answer

AE = C + I + G+ (X - M) line intersects the 45 degree line

question

Spending multiplier

answer

is the ratio of the change in equilibrium output to the initial change in any of the components of aggregate expenditures.

question

Recessionary gap

answer

the amount by which aggregate expenditures fall short of the amount necessary for the economy to operate at full-employment real GDP.

question

Tax multiplier

answer

the multiplier by which an initial change in taxes changes aggregate demand (total spending) after an infinite number of spending cycles.

question

Inflationary gap

answer

the amount by which aggregate expenditures exceed the amount necessary to establish full-employment equilibrium and indicates upward pressure on prices.

question

Aggregate demand curve

answer

shows the level of real GDP purchased in the economy at different price levels during a period of time

question

reasons why the aggregate demand curve is downward sloping:

answer

1) real balances effect is the impact on real GDP caused by the inverse relationship between the purchasing power of fixed value financial assets and inflation, which causes a shift in the consumption schedule

question

reasons why the aggregate demand curve is downward sloping:

answer

2) The interest-rate effect assumes a fixed money supply; therefore inflation increases the demand for money. As demand for money increases, the interest rate rises, causing consumption and investment spending to fall.

question

reasons why the aggregate demand curve is downward sloping:

answer

3) the net exports effect is the impact on real GDP caused by the inverse relationship between net exports and inflation. An increase in the US price level tends to reduce US exports and increase imports, vice versa

question

aggregate supply curve

answer

shows the level of real GDP that an economy will produce at different possible price levels.

question

The aggregate supply curve has 3 ranges:

answer

1) Keynesian range
2) Intermediate range
3) Classical range

question

Keynesian range of the curve

answer

horizontal because neither the price level nor production costs will increase or decrease when there is substantial unemployment in the economy

question

Intermediate range

answer

both prices and costs rises as real GDP rises toward full employment

question

Classical range

answer

Vertical segment of the aggregate supply curve. It coincides with the full-employment output.

question

Aggregate demand and aggregate supply analysis

answer

determines the equilibrium price level and the equilibrium real GDP by the intersection of the aggregate demand and aggregate supply curves

question

Stagflation

answer

exists when an economy experiences inflation and unemployment simultaneously. Holding aggregate demand constant, a decrease in aggregate supply results in the unhealthy condition of a rise in the price level and a fall in real GDP and employment

question

cost-push inflation is

answer

inflation that results from a decrease in the aggregate supply curve while the aggregate demand curve remains fixed.

question

cost-push inflation is..

answer

undesirable because it is accompanied by declines in both real GDP and employment

question

demand-pull inflation is

answer

inflation that results from an increase in the aggregate demand curve in both the classical and the intermediate ranges of the aggregate supply curve, while the aggregate supply curve is fixed

question

upward-sloping shape of the short-run aggregate supply curve (SRAS)

answer

the result of fixed nominal wages and salaries as the price level changes

question

vertical shape of the long-run aggregate supply curve (LRAS)

answer

the result of nominal wages and salaries eventually changing by the same percentage as the price level changes

question

increase in aggregate demand (AD) in the long run

answer

causes the short-run aggregate supply curve (SRAS) to shift leftward bc nominal income rises and the economy self-corrects to a higher price level at full-employment real GDP

question

decrease in aggregate demand in the long run

answer

causes short-run aggregate supply curve (SRAS) to shift rightward bc nominal income falls and the economy self-corrects to a lower price level at full-employment real GDP

question

Economic growth in potential real GDP

answer

represented by a rightward shift in the long-run aggregate supply curve (LRAS) Shifts in LRAS are cause by changes in resources ad advances in technology

question

Fiscal policy

answer

the use of gov't spending and taxes to stabilized the economy

question

discretionary fiscal policy

answer

follows the Keynesian argument that the fed gov't should manipulate aggregate demand in order to influence the output, employment, and price levels in the economy. Requires new legislation to change either gov't spending or taxes in order to stabilize the economy

question

spending multiplier (SM)

answer

the multiplier by which an initial change in the one component of aggregate demand, for ex., gov't spending alters aggregate demand (total spending) after an infinite number of spending cycles.

question

Equation:
SM=

answer

1/(1 - MPC)

question

expansionary fiscal policy

answer

a deliberate increase in gov't spending, a deliberate decrease in taxes, or some combination of these two options

question

contractionary fiscal policy

answer

same as expansionary fiscal policy

question

tax multiplier

answer

the change in aggregate demand (total spending) that results from an initial change in taxes after an infinite number of spending cycles. (TM) = 1 - SM

question

combating recession and inflation

answer

can be accomplished by changing gov't spending or taxes. total change in aggregate demand= the change in gov't spending x SM

question

balanced budget multiplier

answer

not neutral. a dollar gov't spending increases real GDP more than a dollar cut in taxes

question

budget surplus

answer

occurs when gov't revenues exceed gov't expenditures

question

budget deficit

answer

occurs when gov't expenditures exceed gov't revenues

question

automatic stabilizers

answer

changes in taxes and gov't spending that occur automatically in response to changes in the level of real GDP

question

supply-side fiscal policy

answer

lower taxes encourage work, saving, and investment, which shift the aggregate supply curve right-ward as a result, output and employment increase without inflation

question

Laffer curve

answer

represents the relationship between the income tax rate and the amount of income tax revenue collected by the gov't

1 of 101

question

Business cycle

answer

Recurrent rises and falls in real GDP over a period of years

question

Business cycle consists of 4 phases:

answer

Peak, recession, trough, and recovery

question

Recession

answer

Generally defined as at least 2 consecutive quarters of real GDP decline

question

Expansion

answer

During which real GDP rises

question

Peak

answer

Occurs when real GDP reaches its maximum level during a recovery

question

Economic growth

answer

measured by the annual percentage change in real GDP in a nation

question

Leading, coincident, and lagging indicators

answer

economic variables that change before, at the same time as, and after changes in real GDP, respectively

question

Unemployment rate

answer

is the ratio of the number of unemployed to the number in the civilian labor force multiplied by 100

question

Civilian labor force

answer

consists of people who are employed plus those who are out of work but are seeking employment

question

Discouraged workers

answer

a reason critics say the unemployment rate is understated. People who want to work but have given up searching for work.

question

Types of unemployment

answer

Frictional, structural, and cyclical unemployment

question

Frictional unemployment

answer

seeking for new jobs that exist

question

structural unemployment

answer

long-term unemployment caused by factors in the economy, including lack of education, technological change, and globalization

question

cyclical unemployment

answer

unemployment resulting from insufficient aggregate demand

question

full employment

answer

occurs when the unemployment rate is equal to the total of the frictional and structural unemployment rates

question

GDP gap

answer

the difference between actual real GDP and full employment, or potential real GDP. / Also measures the loss of output due to cyclical unemployment

question

The phase of the business cycle follows a recession

answer

trough

question

A general rule is that economy is experiencing a recession when

answer

real GDP declines for at least six months

question

The increase in unemployment associated with a recession is called

answer

cyclical unemployment

question

what stage of the business cycle immediately follows the trough

answer

expansion

question

Inflation

answer

an increase in the general (average) price level of goods and services in the economy

question

deflation

answer

a decrease in the general level of prices

question

Consumer price index (CPI)

answer

question

Equation:

Annual rate of inflation =

answer

CPI in a given year - CPI in previous year
__________________________________________ x 100

CPI in previous year

question

Disinflation

answer

a reduction in the inflation rate. ( DOES NOT MEAN THAT PRICES WERE FALLING, ONLY THAT THE INFLATION RATE FELL )

question

Inflation rate

answer

question

Nominal income

answer

income measured in actual money amounts. Measuring your purchasing power requires converting nominal income into real income

question

real interest rate

answer

the nominal interest rate adjusted for inflation ex. if real interest rates are negative, lenders incur losses

question

adjustable-rate mortgage

answer

home loan that adjusts the nominal interests rate to changes in an index rate, such as rates on treasury securities

question

demand-pull inflation

answer

caused by pressure on prices originating from the buyers' side of the market.

question

cost-push inflation

answer

caused by pressure on prices originating from the sellers' side of the market

question

hyperinflation

answer

can disrupt an economy by causing inflation psychosis, credit market collapses, a wage-price spiral, ad speculation

question

wage-price spiral

answer

occurs when increases in nominal wages cause higher prices, which, in turn, cause higher wages and prices

question

Inflation is defined as an increase in

answer

the average price level

question

Inflation is measured by an increase in

answer

the consumer price index (CPI)

question

Who benefits from inflation?

answer

Borrowers

question

Prices indexes such as the CPI are calculated using a base year. the term base year refers to

answer

an arbitrarily chosen reference year

question

Suppose the price of banana rises over time and consumers respond by buying fewer bananas. This situation contributes to which bias in the consumer price index?

answer

substitution bias

question

The real interest rate is defined as the

answer

nominal interest rate minus the inflation rate

question

What can create demand-pull inflation?

answer

excessive aggregate spending

question

Cost-push inflation is due to

answer

labor cost increases
energy cost increases
raw material cost increases

question

During periods of hyperinflation, what would most likely be the response of consumers?

answer

spend money as fast as possible

question

The base year in the consumer price index (CPI) is

answer

a year chosen as a reference for prices in all other years

question

If the rate of inflation is a given time period turns out to be lower than lenders and borrowers anticipated, then the effect will be a

answer

redistribution of wealth from borrowers to lenders

question

John Maynard Keynes

answer

rejected the classical theory that the economy self-corrects in the long run to full employment

question

Keynesian theory

answer

aggregate demand, rather than the classical economists focus on aggregate supply.

question

aggregate spending

answer

adequate, the economy can experience prolonged and severe unemployment

question

Say's Law

answer

the classical theory that "supply creates its own demand" and therefore the Great Depression was impossible.

question

Say's Law is

answer

the theory that the value of production generates an equal amount of income and, in turn, total spending.

question

Classical economists rejected the argument that underconsumption is possible bc...

answer

they believed flexible prices, wages, and interest rates would soon establish a balance between supply and demand

question

consumption function (C)

answer

determined by changes in the level of real disposable income

question

autonomous consumption

answer

consumption that occurs even if real disposable income equals zero

question

marginal propensity to consume (MPC)

answer

the change in consumption associated with a given change in real disposable income. It tells how much of an additional dollar of disposable income households will spend for consumption

question

marginal propensity to save (MPS)

answer

the change in saving associated with a given change in real disposable income. It measures how much of an additional dollar of disposable income households will save

question

Investment demand curve (I)

answer

question

autonomous expenditures

answer

question

The popular theory prior to the Great Depression that the economy will automatically adjust to achieve full employment in the long run is

answer

classical economists

question

If the economy is experiencing less than full equilibrium, the Keynesian school recommends that the gov't

answer

undertake fiscal policy to stimulate aggregate

question

Keynesian theory argues that

answer

the economy is inherently unstable and may require gov't intervention to control aggregate expenditures and restore full employment

question

Investment, government spending and net exports

answer

can be treated as autonomous expenditures

question

Equation:
the aggregate expenditures function (AE)

answer

add consumption (C), investment (I), government spending (G), and net exports (X-M)

question

Keynesian aggregate expenditures model

answer

determines the equilibrium level of real GDP by the intersection of the aggregate expenditures and the aggregate output and income curves

question

Each equilibrium level in the economy is associated with

answer

a level of employment and corresponding unemployment rate

question

aggregate expenditures and real GDP are equal

answer

AE = C + I + G+ (X - M) line intersects the 45 degree line

question

Spending multiplier

answer

is the ratio of the change in equilibrium output to the initial change in any of the components of aggregate expenditures.

question

Recessionary gap

answer

the amount by which aggregate expenditures fall short of the amount necessary for the economy to operate at full-employment real GDP.

question

Tax multiplier

answer

the multiplier by which an initial change in taxes changes aggregate demand (total spending) after an infinite number of spending cycles.

question

Inflationary gap

answer

the amount by which aggregate expenditures exceed the amount necessary to establish full-employment equilibrium and indicates upward pressure on prices.

question

Aggregate demand curve

answer

shows the level of real GDP purchased in the economy at different price levels during a period of time

question

reasons why the aggregate demand curve is downward sloping:

answer

question

reasons why the aggregate demand curve is downward sloping:

answer

question

reasons why the aggregate demand curve is downward sloping:

answer

question

aggregate supply curve

answer

shows the level of real GDP that an economy will produce at different possible price levels.

question

The aggregate supply curve has 3 ranges:

answer

1) Keynesian range
2) Intermediate range
3) Classical range

question

Keynesian range of the curve

answer

horizontal because neither the price level nor production costs will increase or decrease when there is substantial unemployment in the economy

question

Intermediate range

answer

both prices and costs rises as real GDP rises toward full employment

question

Classical range

answer

Vertical segment of the aggregate supply curve. It coincides with the full-employment output.

question

Aggregate demand and aggregate supply analysis

answer

determines the equilibrium price level and the equilibrium real GDP by the intersection of the aggregate demand and aggregate supply curves

question

Stagflation

answer

question

cost-push inflation is

answer

inflation that results from a decrease in the aggregate supply curve while the aggregate demand curve remains fixed.

question

cost-push inflation is..

answer

undesirable because it is accompanied by declines in both real GDP and employment

question

demand-pull inflation is

answer

inflation that results from an increase in the aggregate demand curve in both the classical and the intermediate ranges of the aggregate supply curve, while the aggregate supply curve is fixed

question

upward-sloping shape of the short-run aggregate supply curve (SRAS)

answer

the result of fixed nominal wages and salaries as the price level changes

question

vertical shape of the long-run aggregate supply curve (LRAS)

answer

the result of nominal wages and salaries eventually changing by the same percentage as the price level changes

question

increase in aggregate demand (AD) in the long run

answer

causes the short-run aggregate supply curve (SRAS) to shift leftward bc nominal income rises and the economy self-corrects to a higher price level at full-employment real GDP

question

decrease in aggregate demand in the long run

answer

causes short-run aggregate supply curve (SRAS) to shift rightward bc nominal income falls and the economy self-corrects to a lower price level at full-employment real GDP

question

Economic growth in potential real GDP

answer

represented by a rightward shift in the long-run aggregate supply curve (LRAS) Shifts in LRAS are cause by changes in resources ad advances in technology

question

Fiscal policy

answer

the use of gov't spending and taxes to stabilized the economy

question

discretionary fiscal policy

answer

question

spending multiplier (SM)

answer

the multiplier by which an initial change in the one component of aggregate demand, for ex., gov't spending alters aggregate demand (total spending) after an infinite number of spending cycles.

question

Equation:
SM=

answer

1/(1 - MPC)

question

expansionary fiscal policy

answer

a deliberate increase in gov't spending, a deliberate decrease in taxes, or some combination of these two options

question

contractionary fiscal policy

answer

same as expansionary fiscal policy

question

tax multiplier

answer

the change in aggregate demand (total spending) that results from an initial change in taxes after an infinite number of spending cycles. (TM) = 1 - SM

question

combating recession and inflation

answer

can be accomplished by changing gov't spending or taxes. total change in aggregate demand= the change in gov't spending x SM

question

balanced budget multiplier

answer

not neutral. a dollar gov't spending increases real GDP more than a dollar cut in taxes

question

budget surplus

answer

occurs when gov't revenues exceed gov't expenditures

question

budget deficit

answer

occurs when gov't expenditures exceed gov't revenues

question

automatic stabilizers

answer

changes in taxes and gov't spending that occur automatically in response to changes in the level of real GDP

question

supply-side fiscal policy

answer

lower taxes encourage work, saving, and investment, which shift the aggregate supply curve right-ward as a result, output and employment increase without inflation

question

Laffer curve

answer

represents the relationship between the income tax rate and the amount of income tax revenue collected by the gov't

Order an Essay Now & Get These Features For Free:

Turnitin Report

Formatting

Title Page

Citation

Outline

Place an Order