Business Cycles Study Guide (1)

Aggregate Demand Shock

An economic event that triggers a corresponding opposite response in aggregate supply, affecting prices and output.

Short-Run Aggregate Supply (SRAS) Shock

A short-term shift in the supply curve which reflects immediate changes in production costs, affecting inflation and real growth.

Long-Run Aggregate Supply (LRAS)

The supply level at which the economy can sustainably operate in the long-run, where all resources are fully employed.

Inflation

A general increase in prices and fall in the purchasing value of money, often resulting from positive demand shocks.

Contractionary Policy

Economic policy aimed at reducing aggregate demand, often through higher taxes or lower public spending.

Expansionary Policy

Policy measures aimed at increasing aggregate demand, typically through tax cuts, increased government spending, or lower interest rates.

Liquidity Trap

A situation where monetary policy becomes ineffective because people hoard cash instead of spending, causing low demand.

Fiscal Policy

Government adjustments to spending levels and tax rates to influence a nation's economy.

Monetary Policy

The process by which the central bank manages the money supply to achieve specific goals such as controlling inflation.

Moral Hazard

A situation in which one party is able to take risks because another party bears the costs of those risks.

Austrian School

A school of economic thought emphasizing the importance of individual choice, subjective value, and the limitations of central planning.

Spontaneous Order

The natural emergence of order out of seeming chaos through individual actions, rather than through central planning.

Malinvestment

Investment in projects that lack genuine demand or utility, often resulting from distorted pricing signals.

Business Cycle

The fluctuations in economic activity that an economy experiences over a period of time, typically marked by periods of expansion and contraction.

Positive Demand Shock

An event that increases aggregate demand in the economy, leading to higher output and prices.

Negative Demand Shock

An event that decreases aggregate demand in the economy, resulting in lower output and prices.

Keynesianism

An economic theory advocating for government intervention to stabilize economic fluctuations, particularly during recessions.

Natural Disaster Impact on Keynesianism

Keynesian policies may be ineffective during natural disasters, as they do not create the economic slack needed for expansionary policies to work.

Crowding Out Effect

A situation where increased government spending leads to a reduction in private sector spending.

Quantity Theory of Money

An economic theory suggesting that the amount of money in an economy determines the level of spending and prices.

Crisis Management by Central Banks

The actions taken by central banks to stabilize the economy during financial crises, often including measures like quantitative easing.

Emergency Quantitative Easing

The unconventional monetary policy used by central banks to stimulate the economy when standard monetary policy becomes ineffective.

Creative Destruction

A concept in economics where old ways of doing things are destroyed and replaced with new, more productive methods.

Emergent Order

Order that arises naturally out of complex systems, without a central authority directing it.

Cheat Credit

A situation where loans are issued at very low-interest rates, often leading to increased risk in the economy.

Expansionary Fiscal Policy

Government fiscal policy aimed at stimulating the economy by increasing spending or decreasing taxes.

Real Business Cycle Theory

A school of thought that emphasizes real (not nominal) shocks to productivity as the primary driver of economic fluctuations.

Procyclical Policy

Economic policies that amplify economic fluctuations, typically worsening recessions or booms when implemented.