Business Cycle and Inflation

These flashcards cover key concepts from the lecture on business cycles, inflation, fiscal policy, and their interrelations.

What leads to business cycle events according to real business cycle theory?

Changes in the growth rate in productivity.

What can start inflation?

An increase in aggregate demand.

What defines demand-pull inflation?

It starts with an increase in aggregate demand.

Increases in the quantity of money can start a inflation, and an increase in government expenditure can start a inflation.

Demand-pull; cost-push.

Which of the following does NOT start demand-pull inflation?

An increase in taxes.

What is the result of an initial increase in aggregate demand that is NOT followed by an increase in the quantity of money?

A higher price level but the same real GDP.

Why does demand-pull inflation persist?

Continuing increases in the quantity of money.

What happens when the AD and SAS curves intersect above potential GDP and no government policy is undertaken?

The SAS curve shifts leftward because the money wage rate rises.

What are the main sources of cost-push inflation?

Increases in money wage rates and the cost of raw materials.

What could cause cost-push inflation if GDP equals potential GDP?

A large crop failure that boosts the prices of raw food materials.

An increase in the money wage rate shifts the SAS curve , and an increase in the price of raw materials shifts the SAS curve .

Leftward; leftward.

What is stagflation?

A combination of rising inflation rate and decreasing real GDP.

What will happen if the Fed responds with increases in the quantity of money to repeated decreases in short-run aggregate supply?

Continuous inflation.

If the velocity of circulation and potential GDP both grow by 2 percent, what will the trend inflation rate be if money supply grows by 0 percent?

Zero.

To end deflation, what must the government do?

Increase the quantity of money.

What do Phillips curves show the relationship between?

Unemployment rate and the inflation rate.

How does the short-run Phillips curve slope?

Downward.

What indicates moving along the short-run Phillips curve?

A tradeoff between inflation and unemployment.

Where do the short-run and long-run Phillips curves intersect?

At the expected inflation rate and the natural unemployment rate.

What was the purpose of the federal budget prior to the Great Depression?

Finance the activities of the government.

What does fiscal policy include?

Decisions related to government expenditure on goods and services, transfer payments, and tax revenue.

Which of the following is NOT part of fiscal policy?

Controlling the money supply.

The largest source of government revenues is?

Personal income taxes.

What is the largest item of government outlays?

Transfer payments.

The budget of the U.S. government has mostly been in what state during the past 30 years?

Deficit.

When tax revenues exceed outlays, what does the government have?

A budget surplus.

If the government has a balanced budget, what is the total amount of government debt?

Constant.

If the government runs a surplus, what is the total amount of government debt?

Decreasing.

What characterizes automatic fiscal policy?

Requires no legislative action by Congress to be effective.

What is discretionary fiscal policy?

Requires action by Congress.

Which fiscal policy is exemplified by the stimulus package passed in 2009?

Discretionary fiscal policy.

What can the government do to minimize effects of spending fluctuations?

All of these.

Why does the government budget deficit tend to decrease during the expansion phase?

Tax revenues increase and government transfer payments decrease.

What effect do increases in government expenditure have on the AD curve?

Shifts it rightward.

What fiscal policies can increase real GDP if it is less than potential GDP?

An increase in government expenditure and/or a decrease in taxes.

Which fiscal policies would decrease real GDP and the price level if real GDP is greater than potential GDP?

An increase in taxes.

If the economy initially is at point A and government expenditure increases, where will it move?

To point B.

What limits the use of fiscal policy?

Time lags associated with fiscal policy may cause the policy to take effect too late.

What are the limitations of fiscal policy?

I only, II only, I and II, I, II, and III.