macro chap 1 - deck 2

What sparked the birth of macroeconomics as a separate branch of economics and what are its primary concerns?

The mass unemployment experienced during the Great Depression, and macroeconomics is primarily concerned with long-run economic growth and short-run fluctuations in output and employment.

What does GDP measure and how is it related to economic health?

GDP measures the value of final goods and services produced within a country’s borders during a specific period, indicating overall economic health.

Define recession and unemployment.

A recession is the downward phase of the business cycle characterized by a contraction in economic output, while unemployment refers to the state of being unable to find a job despite actively seeking work.

What is inflation and its extreme form?

Inflation is the general increase in prices over time, with extreme inflation referred to as hyperinflation.

What is an open economy and its relationship to macroeconomic policies?

An open economy has extensive trading relationships with others and is influenced by fiscal and monetary policies.

Summarize Adam Smith's 'invisible hand' and Say's law.

Adam Smith's 'invisible hand' concept suggests that free markets lead to efficient outcomes when individuals act in their self-interest, while Say's law states that supply creates its own demand.

Who introduced the Keynesian approach and what is its main criticism?

John Maynard Keynes introduced the Keynesian approach through 'The General Theory of Employment, Interest, and Money,' criticized for neglecting structural problems and potentially leading to imbalances like simultaneous inflation and unemployment.

What does the quantity theory of money state?

According to monetarists, inflation is universally a monetary phenomenon, dependent on the relationship between the money supply and potential output.

Describe new classical and new Keynesian economics.

New classical economics believes that markets clear continuously, and any unemployment is voluntary; new Keynesian economics focuses on understanding aggregate supply and slow price adjustments after economic shocks.

What does DSGE stand for and its significance?

Dynamic Stochastic General Equilibrium is a model that combines ideas from both new classical and new Keynesian economics.

What characterized the emerging consensus in macroeconomics during the Great Moderation?

The Great Moderation was characterized by a combination of real business cycle theory and new Keynesian ideas, focusing on market imperfections and stochastic shocks.