Chapter 10: Economic Fluctuations

These flashcards cover key concepts from Chapter 10 on economic fluctuations, including the business cycle, GDP growth, unemployment, and the aggregate demand and supply model.

What is the average GDP growth rate over the long run?

3 to 3.5% per year.

How does consumption and investment fluctuate with GDP?

Consumption tends to be less volatile, while investment is more volatile than GDP.

What happens to unemployment during recessions and expansions?

Unemployment rises during recessions and falls during expansions.

What does O'Connor's Law state?

There is a negative relationship between GDP and unemployment.

What is the purpose of the Index of Leading Economic Indicators (LEI)?

To forecast changes in economic activity six to nine months in the future.

Name a component of the LEI index.

Initial claims for unemployment insurance.

In the long run, how do prices respond to changes in supply or demand?

Prices are flexible.

What is the impact of sticky prices on the economy?

The economy behaves differently; classical theories do not hold.

What is coordination failure in terms of sticky prices?

Firms hold back on price changes waiting for others to go first.

What is one reason firms might delay price increases?

Cost-based pricing with lags.

What does the classical macroeconomic theory suggest regarding output in the long run?

Output is determined by the supply side.

What does the aggregate demand curve represent?

The relationship between the price level and the quantity of output demanded.

What happens during an inward shift of the aggregate demand curve?

It represents a reduction in the money supply.

In the long run, what determines output?

Factor supplies and technology.

What is the long run aggregate supply (LRAS) curve?

The LRAS curve is vertical at the full employment level of output.

How is the short run aggregate supply (SRAS) curve characterized?

The SRAS curve is horizontal when prices are fixed at a predetermined level.

What occurs if output exceeds fixed output in the short run?

Prices will rise over time.

What defines economic shocks?

Exogenous changes in aggregate supply or demand.

What is a supply shock?

A change that alters production costs and prices that firms charge.

What does stabilization policy aim to do?

Reduce the severity of short run economic fluctuations.