Macroeconomic Policy and Aggregate Demand and Supply Analysis

A comprehensive set of flashcards covering key concepts related to macroeconomic policy, focusing on aggregate demand and supply analysis.

Objectives of Macroeconomic Policy

To stabilize economic activity and stabilize inflation around a low level.

Natural Rate of Unemployment

The unemployment rate consistent with the maximum sustainable level of employment.

Frictional Unemployment

Unemployment that exists when workers and firms need time to match skills and jobs.

Structural Unemployment

Unemployment due to a mismatch between job skills and worker availability.

Price Stability

A policy goal pursued by central banks to maintain low and stable inflation.

Hierarchical Mandate

Requires stable prices as a condition for pursuing other goals, adopted by certain central banks.

Dual Mandate

Requires co-equal objectives of price stability and maximum sustainable employment, as in the Federal Reserve.

Aggregate Output Gap

The difference between actual output (Y) and potential output (YP).

Divine Coincidence

The scenario where there is no conflict between stabilizing inflation and economic activity.

Taylor Rule

A guideline for the Federal Reserve to set the real federal funds rate based on inflation and output gaps.

Demand-Pull Inflation

Inflation that occurs when demand for goods and services exceeds supply, often due to expansionary policies.

Cost-Push Inflation

Inflation that arises from increased costs of production, such as wages or raw materials.

Nonconventional Monetary Policy

Measures used when conventional policy is ineffective, such as liquidity provision and asset purchases.

Liquidity Provision

Central bank action to ensure adequate liquidity in financial markets during shortages.

Quantitative Easing

Expanding the central bank's balance sheet through asset purchases to stimulate the economy.

Management of Expectations

The strategy of influencing market expectations for future interest rates and inflation.

Zero Lower Bound

The situation when the central bank's policy rate cannot be lowered below zero.