Chapter 15 - Modern Macroeconomics: From the Short Run to the Long Run

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18 Terms

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Political business cycle

: The effect on the economy of using monetary or fiscal policy to stimulate the economy before an election to improve reelection prospects.

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Short run

in macroeconomics: The period of time in which prices do not change or do not change very much.

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full employment

When the economy is producing below or potential output, the process works in reverse.

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Keynes

argued that there could be situations in which total demand fell short of total production in the economy for extended periods of time.

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Long run

aggregate supply curve: A vertical aggregate supply curve that reflects the idea that in the , output is determined solely by the factors of production and technology.

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Tax cuts

initially will increase consumer spending and lead to a higher level of GDP.

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Liquidity trap

: A situation in which nominal interest rates are so low, they can no longer fall; also known as the zero lower bound.

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GDP

Wages and prices will all tend to increase together during booms when exceeds its full- employment level or potential output.

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Lower interest rates

stimulate investment spending and push the economy back toward full employment.

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Classical economics

is often associated with Says law, the doctrine that "supply creates its own demand ..

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Long run

in macroeconomics: The period of time in which prices have fully adjusted to any economic changes.

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GDP

Wages and prices will fall together during periods of recessions when falls below full employment or potential output.

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full employment

Prices are lower and output returns to .

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full employment

If output exceeds , prices will rise and output will fall back to .

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Aggregate Demand Curve

_: A curve shows the relationship between the level of prices and the quantity of real GDP demanded.

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Short-run aggregate supply curve

: A relatively flat aggregate supply curve that represents the idea that prices do not change very much in the short run and that firms adjust production to meet demand.

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Wage-price spiral

: The process by which changes in wages and prices cause further changes in wages and prices.

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Long run in macroeconomics

____: The period of time in which prices have fully adjusted to any economic changes.