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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.
Short run
in macroeconomics: The period of time in which prices do not change or do not change very much.
full employment
When the economy is producing below or potential output, the process works in reverse.
Keynes
argued that there could be situations in which total demand fell short of total production in the economy for extended periods of time.
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.
Tax cuts
initially will increase consumer spending and lead to a higher level of GDP.
Liquidity trap
: A situation in which nominal interest rates are so low, they can no longer fall; also known as the zero lower bound.
GDP
Wages and prices will all tend to increase together during booms when exceeds its full- employment level or potential output.
Lower interest rates
stimulate investment spending and push the economy back toward full employment.
Classical economics
is often associated with Says law, the doctrine that "supply creates its own demand ..
Long run
in macroeconomics: The period of time in which prices have fully adjusted to any economic changes.
GDP
Wages and prices will fall together during periods of recessions when falls below full employment or potential output.
full employment
Prices are lower and output returns to .
full employment
If output exceeds , prices will rise and output will fall back to .
Aggregate Demand Curve
_: A curve shows the relationship between the level of prices and the quantity of real GDP demanded.
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.
Wage-price spiral
: The process by which changes in wages and prices cause further changes in wages and prices.
Long run in macroeconomics
____: The period of time in which prices have fully adjusted to any economic changes.