Term
| How do classical/neoclassical economists look at business cycle? |
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Definition
| Natural, necessary, self-adjusting; as prices fall, surplus should be eliminated. |
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Term
| When surplus exists in markets what should happen? |
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Definition
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Term
| In the Great Depression, what happened to prices? |
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Definition
| Prices dropped because surplus existed. |
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Term
| Could neoclassicals explain what was happening during the Great Depression? |
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Definition
| No, because they believed the depression would fix itself. |
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Term
| Is Keynesian economics micro or macro economics? Explain. |
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Definition
| Macro, because it deals with GDP on the global scale. |
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Term
| What is the basic focus of Keynesian economics? |
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Definition
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Term
| According to Keynes, what was the problem in the Great Depression? |
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Definition
| The economy was in a downward spiral; household consumption and business investments both decreased. |
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Term
| What new role of government did Keynes propose? |
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Definition
| Encouraging economic growth, saving, and investment in capital. |
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Term
| What are the basic parts of total spending? |
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Definition
| Private household consumption spending, private business investment spending, government purchases, and net exports. |
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Term
| Why did total spending fall so low in the 1930's? |
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Definition
| Because there was a surplus of product which caused prices to drop, businesses to fail, and unemployment. |
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Term
| How does public confidence affect the economy? |
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Definition
| People quit investing during economic downturn which brings the economy down further. |
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Term
| What is meant by economic growth? |
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Definition
|
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Term
| What is meant by economic decline? |
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Definition
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Term
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Definition
| The value of an economy adjusted for price changes (inflation, deflation). |
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Term
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Definition
| The value of a country's overall economic output. |
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Term
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Definition
| The value of a country's overall economic output. |
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Term
| What is the long run average annual growth rate for the U.S.? |
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Definition
|
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Term
| What are the four phases of a business cycle? |
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Definition
| Peak, contraction, trough, expansion. |
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Term
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Definition
| A 6 month period of falling real GDP; falling production, income, and employment. |
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Term
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Definition
| A very severe recession; deep and prolonged. |
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Term
| What are the major determinants of long run economic growth? |
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Definition
| Increasing resource base, efficiency, and structure. |
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Term
| What can government do to speed-up economic growth? |
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Definition
| Save, educate, research, develop, reduce trade barriers. |
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Term
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Definition
| Searching for work, possibly turning down job offers. |
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Term
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Definition
| Working any number of hours per week. |
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Term
| What is not in the labor force? |
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Definition
| Not looking for a job at all. |
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Term
| Why might the official unemployment rate be understated? |
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Definition
| Because it does not account for part-time workers wanting to work full time or workers who quit searching for a job. |
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Term
| What is frictional unemployment? |
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Definition
| Job changes, firing, layoffs, new job seekers. |
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Term
| What is structural unemployment? |
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Definition
| Demand or technology changes so employees need to be reeducated or relocated. |
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Term
| What is cyclical unemployment? |
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Definition
| Economic decline, GDP declines. |
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Term
| What government policy can be used to eliminate frictional unemployment? |
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Definition
| Better information systems, online resources, job fairs. |
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Term
| What government policy can be used to eliminate structural unemployment? |
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Definition
| Finance employers for training or finance labor for cost of training. |
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Term
| What government policy can be used to eliminate cyclical unemployment? |
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Definition
| Increase total spending/GDP. |
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Term
| What is meant by full employment for the U.S.? |
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Definition
| Employment rate consistent with price stability (4%-6%); no cyclical unemployment. |
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Term
| What is the economic cost of unemployment? |
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Definition
|
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Term
| What is the social cost of unemployment? |
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Definition
| Lowered self-esteem, increased violence, political changes. |
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Term
| What is meant by inflation? |
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Definition
| A continuing rise in the general level of prices. |
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Term
| What is the Consumer Price Index? |
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Definition
| Uses the prices of 400 typical household goods of a family of four to measure inflation. |
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Term
| What is demand-pull inflation? |
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Definition
| Economy's total spending goes beyond capacity and can not increase production to meet increase in demand so prices are bid up by consumers. |
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Term
| What is cost-push inflation? |
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Definition
| Inflation resulting from an increase in production costs which results in higher output prices. |
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Term
| What is the impact of inflation on an economy? |
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Definition
| Redistributes income and wealth; some gain and some lose. |
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Term
| Who gains from inflation? |
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Definition
| People on flexible incomes, people who own items that appreciate in value, and people in debt. |
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Term
| Who loses from inflation? |
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Definition
| People on fixed incomes, savers, creditors. |
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Term
| What is the Federal Reserve and what is its major function? |
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Definition
| Our central bank; controls money supply. |
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Term
| How would the Federal Reserve combat recession? |
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Definition
| By running an expansionary money policy: increase money supply. |
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Term
| How would the Federal Reserve combat demand-pull inflation? |
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Definition
| By running a contractionary money policy: decreasing money supply. |
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Term
| What are the strengths of monetary policy? |
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Definition
| Speed and flexibility, isolated from political pressures, spread throughout economy. |
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Term
| What are the weaknesses of monetary policy? |
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Definition
| People lose confidence in the government's ability to stabilize the economy. |
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Term
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Definition
| Changing Federal government's spending and taxes to achieve macro goals. |
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Term
| What fiscal policy might be used to combat recession? |
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Definition
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Term
| What fiscal policy might be used to combat demand-pull inflation? |
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Definition
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Term
| How does expansionary fiscal policy affect the Federal budget? |
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Definition
| Creates a budget deficit. |
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Term
| How does contractionary fiscal policy affect the Federal budget? |
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Definition
| Creates a budget surplus. |
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Term
| What is the difference between Federal budget deficit and National debt? |
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Definition
| Budget deficit is when expenses outweigh income and national debt is money that the Federal government owes to various creditors. |
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Term
| What are the three causes of large U.S. National debt? |
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Definition
| Wars, recessions, and tax cuts. |
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Term
| Who does the government sell bonds to? |
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Definition
| General public, Federal Reserve (create new money), and foreign governments. |
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Term
| Who holds the U.S. National debt? |
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Definition
53%- Federal government and Federal Reserve
47%- Other/outside U.S. government |
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Term
| What are the major shortcomings of fiscal policy? |
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Definition
| Severe time lags and crowding-out. |
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Term
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Definition
| Increasing government spending, increasing interest rates, and decreasing private investment spending. |
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Term
| What is a healthy unemployment rate? |
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Definition
|
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Term
| What is a healthy inflation rate? |
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Definition
|
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Term
| What is a healthy economic growth rate? |
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Definition
|
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Term
| What is the equation for GDP? |
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Definition
|
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Term
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Definition
| Private household consumption spending (disposable income, wealth, confidence) |
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Term
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Definition
| Private business investment spending for new capital and construction (interest rates, expected profit). |
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Term
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Definition
| Government purchases of goods and services from Federal, state, and local governments. |
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Term
| What does (x-m) stand for? |
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Definition
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