Term
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Definition
| upward sloping b/c nominal wages are sticky in the SR. Changes in commodity prices, nominal wages, and productivity lead to changes in producers’ profits and shifts the SRAS |
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Term
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Definition
All prices and nominal wages are flexible in the LR. –Aggregate output exceeds potential output, nominal wages will eventually rise in response to low unemployment and aggregate output will fall.
-If potential output exceeds actual aggregate output, nominal wages will eventually fall in response to high unemployment and aggregate out put will rise. LRAS is vertical potential output. |
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Term
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Definition
| Relationship between aggregate price level and the quantity of aggregate output supplied |
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Term
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Definition
Relationship between the aggregate price level and the quantity of aggregate output demanded. Downward sloping for two reasons:
-Wealth effect of a change in the aggregate price level – a higher aggregate price level reduces the purchasing power of households’ wealth and reduces consumer spending.
-Interest rate effect of a change in the aggregate price level – a higher aggregate price level reduces the purchasing power of households’ and firms’ money holdings, leading to a rise in interest rates and a fall in investment spending and consumer spending
-Shifts because of changes in expectations, changes in wealth not due to changes in the aggregate price level, and changes in the stock of physical capital. |
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Term
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Definition
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Term
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Definition
| The fraction of an additional dollar of disposable income spent on consumption |
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Term
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Definition
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Term
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Definition
| Intersection of the SRAS and the aggregate demand curve is the SR macroeconomic equilibrium. It determines the SR equilibrium price level and the level of SR equilibrium aggregate output. |
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Term
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Definition
| Causes the aggregate price level and aggregate output to move in opposite directions as the economy moves along the aggregate demand curve |
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Term
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Definition
| Inflation and falling aggregate output – negative supply shock. |
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Term
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Definition
| Causes aggregate price level and aggregate output to move in the same direction as the economy moves along the SRAS. |
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Term
| Demand shocks have only SR effects on aggregate output because the economy is self-correcting in the LR |
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Definition
| Demand shocks have only SR effects on aggregate output because the economy is self-correcting in the LR |
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Term
| Recessionary Gap an eventual fall in nominal wages moves the economy to LR macro-equilibrium where aggregate out put is equal to potential output. |
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Definition
| Recessionary Gap an eventual fall in nominal wages moves the economy to LR macro-equilibrium where aggregate out put is equal to potential output. |
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Term
| Inflationary Gap an eventual rise in nominal wages moves the economy to LR macro-equilibrium. |
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Definition
| Inflationary Gap an eventual rise in nominal wages moves the economy to LR macro-equilibrium. |
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Term
| Fiscal policy affects aggregate demand directly through government purchases and indirectly through changes in taxes or government transfers that affect consumer spending. |
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Definition
| Fiscal policy affects aggregate demand directly through government purchases and indirectly through changes in taxes or government transfers that affect consumer spending. |
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Term
| Monetary policy affects aggregate demand indirectly through changes in the interest rate that affect consumer and investment spending. |
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Definition
| Monetary policy affects aggregate demand indirectly through changes in the interest rate that affect consumer and investment spending. |
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Term
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Definition
| shows how an individual household’s consumer spending is determined by its current disposable income |
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Term
| Aggregate consumption function |
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Definition
| shows the relationship for the entire economy |
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Term
| Planned investment spending |
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Definition
| depends negatively on the interest rate and on existing production capacity; it depends positively on expected future real GDP. |
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Term
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Definition
| says that investment spending is greatly influenced by the expected growth rate of real GDP |
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Term
| Actual investment spending |
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Definition
| is the sum of planned investment spending and unplanned inventory investment. |
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Term
Income-expenditure equilibrium/
Planned aggregate spending |
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Definition
| in a simplified model with no government and no trade is the sum of consumer spending and planned investment spending, is equal to real GDP. |
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Term
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Definition
| Y*, unplanned inventory investment is zero. When planned aggregate spending is larger than Y*, unplanned inventory investment is negative. When planned aggregate spending is less than Y*, unplanned inventory investment is positive |
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Term
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Definition
| shows how the economy self-adjusts to income-expenditure equilibrium through inventory adjustments |
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Term
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Definition
| the use of taxes, government transfers, or government purchases of goods and services to shift the aggregate demand curve. |
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Term
| Expansionary fiscal policy |
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Definition
| shift the aggregate deman curve right |
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Term
| contractionary fiscal policy |
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Definition
| shift the aggregate demand curve left |
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Term
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Definition
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Term
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Definition
| rules governing taxes and some transfers that reduce the size of fluctuations automatically. |
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Term
| Discretionary fiscal policy |
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Definition
| arises from deliberate actions by policy makers rather than from the business cycle |
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Term
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Definition
| Social security, medicare, and medicaid, the costs of which are increasing due to the aging of the population and rising medical costs |
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Term
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Definition
| any asset that can easily be used to purchase goods and services |
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Term
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Definition
| medium of exchange, store of value, and unit of account |
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Term
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Definition
| consists of goods possessing value aside from their role as money |
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Term
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Definition
| paper currency backed by gold, silver, salt, cigarettes, etc. |
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Term
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Definition
| money whose value derives solely from its official role |
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Term
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Definition
| composed of both currency held in vaults and deposits at the Fed, to meet demands for cash |
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Term
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Definition
| the ratio of bank reserves to bank deposits. |
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Term
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Definition
| consists of currency in circulation |
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Term
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Definition
| the ratio of the money supply to the monetary base |
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Term
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Definition
| where banks borrow to meet Fed reserve requirements |
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Term
| Federal funds rate / discount rate |
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Definition
| the rate that banks are charged to loan money from the Fed |
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Term
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Definition
| the Fed's principal tool of monetary policy: the Fed can increase or decrease the monetary base by selling or buying treasury bonds (respectively) |
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Term
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Definition
| arises from a trade-off between the opportunity cost of holding money and the liquidity the money provides. The opportunity cost of holding money depends on short-term interest rates, not long-term interest rates. |
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Term
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Definition
| Other things equal, the nominal quantity of money demanded is proportional to the aggregate price level. |
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Term
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Definition
MV=PY
the real quantity of money demanded is proportional to the real aggregate spending, where the constant of proportionality is one over the velocity of money. |
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Term
| Liquidity preference model of the interest rate |
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Definition
| says that the interest rate is determined in the money market by the money demand curve and the money supply curve |
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Term
| Target federal funds rate |
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Definition
| the goal of the Fed by using open-market operations, which other interest rates generally track |
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Term
| Expansionary monetary policy |
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Definition
| reduces the interest rate and increases aggregate demand by increasing the money supply, is used to close recessionary gaps |
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Term
| Contractionary monetary policy |
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Definition
| increases the interest rate and reduces aggregate demand by decreasing the money supply, used to close inflationary gaps |
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Term
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Definition
| changes in the money supply have no real effect on the economy in the LR. Monetary policy is ineffectual in the LR. |
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Term
| In the LR, the equilibrium interest rate matches the supply and demand for loanable funds that arise at potential output in the market for loanable funds. |
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Definition
| In the LR, the equilibrium interest rate matches the supply and demand for loanable funds that arise at potential output in the market for loanable funds. |
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