Chapter 36: Current Issues in Macro Theory and Policy

Monetarism

(1) focuses on the money supply, (2) holds that markets are highly competitive, and (3) says that a competitive market system gives the economy a high degree of macroeconomic stability

Equation of exchange

Supply of monetary times the velocity of money equals the price level times the physical volume of all goods and services produced

Significant increases

________ in investment can produce demand- pull inflation.

Real-business-cycle theory

Business fluctuations result from significant changes in technology and resource availability

Coordination failures

Occur when people fail to reach a mutually beneficial equilibrium because they lack a way to coordinate their actions

predictable relationship

There is a(n) ________ between the money supply and nominal GDP.

Rational expectations theory

Businesses, consumers, and workers expect changes in policies or circumstances to have certain effects on the economy and, in pursuing their own self-interest, take actions to make sure those changes affect them as little as possible

reduction of aggregate demand

If a(n) ________ is expected, both firms and households will cut back their investment spending.

Velocity

________ in the equation of exchange is relatively stable.

New classical economics

When the economy occasionally diverges from its full-employment output, internal mechanisms within the economy will automatically move it back to that output

Price-level surprises

Unanticipated changes in the price level

Efficiency wage

A wage that minimizes the firm’s labor cost per unit of output

Insider-outsider theory

Outsiders may not be able to underbid existing wages because employers may view the nonwage cost of hiring them to be prohibitive

Monetarists

________ believe that shifts in short- run aggregate supply may not occur for 2 or 3 years or even longer.

Monetarists

________ argue that a monetary rule would tie increases in the money supply to the typical rightward shift of long- run aggregate supply.

Monetarists

________ are particularly strong in their opposition to expansionary fiscal policy.

Mainstream view

The prevailing macroeconomic perspective of the majority of economists

Monetarism

(1) focuses on the money supply, (2) holds that markets are highly competitive, and (3) says that a competitive market system gives the economy a high degree of macroeconomic stability

Exchange of exchange

Supply of monetary times the velocity of money equals the price level times the physical volume of all goods and services produced

Real-business-cycle theory

Business fluctuations result from significant changes in technology and resource availability

Coordination failures

Occur when people fail to reach a mutually beneficial equilibrium because they lack a way to coordinate their actions

Rational expectations theory

Businesses, consumers, and workers expect changes in policies or circumstances to have certain effects on the economy and, in pursuing their own self-interest, take actions to make sure those changes affect them as little as possible

New classical economics

When the economy occasionally diverges from its full-employment output, internal mechanisms within the economy will automatically move it back to that output

Price-level surprises

Unanticipated changes in the price level

Efficiency wage

A wage that minimizes the firms labor cost per unit of output

Insider-outsider theory

Outsiders may not be able to underbid existing wages because employers may view the nonwage cost of hiring them to be prohibitive

Inflation targeting

The Fed would be required to announce a targeted band of inflation rates for some future period

Inflation targeting

The Fed would be required to announce a targeted band of inflation rates for some future period