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Definition
| Suppose that the White House decides to sharply increase military spending without decreasing government spending in other areas. This measure would cause |
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| an increase, since the fall in prices was a positive supply shock that lowered production costs. |
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Definition
| Oil prices declined in the summer of 2008, following months of increases since the winter of 2007. Considering only this fall in oil prices, the impact on the short-run aggregate supply was |
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| If the oil price decline is viewed as a temporary shock, the anticipated impact on the long-run aggregate supply is |
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Definition
| exogenous events that cause shifts in the aggregate demand curve. |
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Definition
| events that induce planned spending at any given inflation rate to fall, thus pushing the AD curve leftward |
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Term
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Definition
| events that induce planned spending at any given rate to rise, thus pushing the AD curve rightward |
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Term
| examples of positive demand shocks |
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Definition
-The Federal Reserve autonomously loosens monetary policy
-Sudden optimism within the business community induces a big jump in planned business expenditures.
-War breaks out, forcing the government to substantially enhance defense expenditures. |
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Term
| examples of negative demand shocks |
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Definition
-The government imposes much higher taxes on households.
-Consumer pessimism deepens as the media reports disappointing news about the economy.
-Foreign economies F crash, producing a substantial drop in net exports. |
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Term
| non-examples of demand shocks |
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Definition
-The government adopts ill-advised regulations that diminish the economy's overall efficiency.
-A temporary disruption in oil production occurs, pushing oil prices higher
-The nation's labor unions push forcefully for higher wages and expanded benefits. |
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Term
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Definition
| exogenous events that cause shifts in the aggregate supply curve |
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Definition
| events that induce, at any given inflation rate, an increase in supply, which shifts the AS curve rightward |
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Definition
| events that induce, at any given inflation rate, a decrease in supply, which shifts the AS curve leftward |
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Definition
| events that ultimately make output and inflation different, mostly associated with regulations and technology |
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Term
| examples of positive supply shocks |
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Definition
-The U.S. dollar sharply appreciates, suddenly lowering the prices of imported inputs
-Phenomenally Phenome good weather leads to outstanding harvests of most grains.
-Startling advances in nanotechnology dramatically raise productivity across the economy. |
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Term
| examples of negative supply shocks |
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Definition
-The government adopts ill-advised regulations that diminish the economy's overall efficiency.
-The nation's labor unions aggressively press for higher wages and expanded benefits.
-Hurricanes blast the U.S. Gulf Coast, seriously damaging refining facilities. |
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Term
| non-examples of supply shocks |
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Definition
-The Federal Reserve autonomously tightens monetary policy.
-Foreign economies rebound, producing a substantial rise in net exports.
-Sudden optimism among firms induces a big jump in planned business expenditures. |
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Term
| lower output and more inflation |
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Definition
| short run effects of negative supply shocks |
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Term
| output unchanged, inflation lower, and the real interest rate unchanged |
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Definition
| in the long run, autonomous tightening of monetary policy leaves... |
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Term
| stabilizing economic activity and price stability |
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Definition
| what are the two primary objectives of macroeconomic stabilization policy? |
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Term
| With monetary policy- as fiscal policy takes longer to deliberate and enact. |
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Definition
| is stabilization policy more likely to be conducted with monetary policy or fiscal policy? Why? |
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Term
| an aggregate demand shock and/or a permanent supply shock |
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Definition
| in what situations will the divine coincidence prevail? |
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Term
| Shifting the aggregate demand curve to regain price stability will move the economy farther away from potential output. |
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Definition
| What happens when policy makers respond to a temporary supply shock? |
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Term
| an increase in the real interest rate from autonomous monetary policy tightening |
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Definition
| shifting the MP curve leftward illustrates.. |
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Term
| the economy adjusts slowly |
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Definition
| policy activists generally believe that |
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Term
| because prices, especially wages, are sticky |
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Definition
| why do activists believe the economy's self- correcting mechanism is slow |
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Term
| cost push inflation, where unemployment rate is greater than the natural rate |
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Definition
| a temporary negative supply shock would tend to result in |
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Term
| demand pull inflation, where unemployment rate is less than the natural rate |
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Definition
| increasing aggregate demand to reach an output target above potential output would tend to result in |
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Term
| The Taylor rule implies that the Federal Reserve should increase the real interest rate as inflation increases, and the Fed tends to do the same in its policy. |
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Definition
| How does the Taylor Rule relate to the monetary policy curve? |
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Term
| when at 0, the MP curve becomes a negative relationship, which results in lower inflation producing a higher real interest rate and lower planned spending |
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Definition
| How does the policy rate hitting a floor of zero lead to an upward sloping aggregate demand curve? |
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Term
| because the falling inflation produced by a negative output gap produces higher interest rates when at the ZLB. This increase lowers planned spending and widens the output gap |
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Definition
| why does the self correcting mechanism stop working when the policy rate hits the zero lower bound? |
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Term
| it would likely conduct an easing of monetary policy by lowering the real interest rate for any given inflation rate |
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Definition
| if the economy is in a long-run equilibrium when the Federal Reserve decides decides that its inflation target is too low and chooses to raise it... |
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Term
| target any inflation rate in the long run |
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Definition
| through autonomous monetary policy adjustments the Federal Reserve can... |
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Term
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Definition
| when government revenue exceeds spending, the government runs a ... |
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Term
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Definition
| when government spending exceeds revenue, the government experiences a ... |
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Term
| the govt can finance the deficit by selling bonds or by issuing more money |
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Definition
| What are the two main ways the government can finance deficit spending? |
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Term
| the us govt favors selling bonds |
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Definition
| which method of finance deficit spending is more commonly used between selling bonds or issuing more money? |
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Term
| by increasing govt spending or by cutting taxes |
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Definition
| how can government increase the quantity of aggregate output demanded by changing govt spending and taxes? |
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Term
| an additional dollar of demand for output |
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Definition
| each additional dollar of govt spending represents .. |
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Term
| a portion of each dollar of increased disposable income will be saved rather than spent to buy output |
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Definition
| each additional dollar of tax cuts generates less than an additional dollar of demand for output because.. |
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Term
| supply siders believe that tax cuts shift the AD and LRAS curves to the right, increasing aggregate output in both the short run and the long run |
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Definition
| how does a supply side analysis of the effects of a tax cut differ from one that focuses solely on aggregate demand? |
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Term
| the rise in inflation from a fiscal expansion triggers a fall in the real interest rate, the monetary authorities actually prefer that the policy rate be lower, and the monetary authorities no longer follow the taylor principle |
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Definition
| fiscal policy multipliers are higher when the policy rate has hit the floor of the zero lower bound because once the floor is hit ... |
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Term
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Definition
| whether budget deficits lead to inflation in the long run depends on the... |
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Term
| if a country cannot finance the deficit by issuing bonds and instead resorts to financing the deficit by printing money |
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Definition
| what determines whether budget deficits will result in inflation in the long run |
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Term
-The revenue from seignorage will eventually decrease as it happens with any tax when the tax rate is high
-A high inflation rate will lead to a tax on the holders of money balances.
-The government will use "new money" to purchase real goods and services, possibly creating more inflation. |
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Definition
| what would happen to revenue from seignorage if the inflation rate is very high? |
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Term
| it holds that tax cuts have no effect on spending and national saving because consumers are forward looking, so when taxes are cut they save their increase in disposable income because they recognize that today's tax cuts means higher taxes tomorrow |
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Definition
| how does the Ricardian equivalence view the effects of tax cuts and budget deficits? |
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Term
| when consumers recognize tax cuts make them no richer, they do not spend more |
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Definition
| which of the following is true of the Ricardian equivalence view? |
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Term
| during the 2000s, existing large budget deficits and a large fiscal stimulus of the Obama administration will likely cause the ratio to fall |
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Definition
| which of the following factors has not influenced the debt-to-gdp ratio in the United States since 1940? |
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Term
-wages and prices will rise more rapidly and the AS curve will shift to the left
-there is excess tightness in the labor market
-output is above its potential level |
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Definition
| if the unemployment rate is below its natural rate, then... |
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Term
| quantity demanded equals quantity supplied at a point where inflation equals expected inflation |
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Definition
| in the Ad-AS framework, long run equilibrium implies that |
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Term
-an eventual increase in aggregate supply for any inflation rate if the central bank does not respond by lowering interest rates
-a permanently lower equilibrium inflation rate if the central bank does not respond by lowering interest rates
-a short run decrease in output |
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Definition
| a negative shock in aggregate demand will likely result in |
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Term
| output is permanently lowered whether the central bank reacts or not to a short run decrease in output |
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Definition
| when a permanent negative supply shock hits the economy in the long run... |
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Term
| will tend to have little economic effect |
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Definition
| according to Ricardian Equivalence theory, a tax cut... |
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