econ ch15-16 notes

Recession

A period of declining real incomes and rising unemployment.

Depression

A severe recession.

Aggregate-demand curve

A curve that shows the quantity of goods and services that households, firms, the government, and customers abroad want to buy at each price level.

Aggregate-supply curve

Shows the quantity of goods and services that firms produce and sell at each price level.

Natural level of output

The production of goods and services that an economy achieves in the long run when unemployment is at its normal rate.

Sticky-Wage Theory

The short-run aggregate-supply curve slopes upward because nominal wages are slow to adjust to changing economic conditions.

Stagflation

A period of falling output and rising prices.

The wealth effect

A lower price level raises the real value of households' money holdings, stimulating consumer spending and increasing the quantity of goods and services demanded.

The interest-rate effect

A lower price level reduces the amount of money people want to hold, leading to a fall in interest rates and stimulating investment spending and the quantity of goods and services demanded.

The exchange-rate effect

A lower price level reduces the interest rate, causing investors to move funds overseas, leading to a fall in the domestic currency's value and stimulating spending on net exports and the quantity of goods and services demanded.

Theory of Liquidity Preference

Keynes's theory that the interest rate adjusts to bring money supply and money demand into balance.

Fiscal Policy

The setting of the levels of government spending and taxation by government policymakers.

The multiplier effect

The additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending.

Crowding-Out effect

The offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending.

Automatic stabilizers

Changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession but occur without policymakers having to take any deliberate action.