Macroeconomics Chapter 12: The Business Cycle, Inflation, and Deflation

This set of vocabulary flashcards covers theories of the business cycle, types of inflation, the causes and consequences of deflation, and the dynamics of the Phillips curve.

Mainstream business cycle theory

The theory that real G D P fluctuates around potential G D P because potential G D P grows at a steady pace while aggregate demand grows at a fluctuating rate.

Real business cycle theory (RBC)

A theory that regards random fluctuations in productivity, resulting mainly from fluctuations in the pace of technological change, as the main source of economic fluctuations.

R B C Impulse

The productivity growth rate that results from technological change.

Intertemporal substitution effect

The key feature of the R B C mechanism where the when-to-work decision depends on the real interest rate; a lower real interest rate results in a smaller supply of labor today.

Demand-pull inflation

An inflation that starts because aggregate demand increases, sustainable only by an ongoing increase in the quantity of money.

Cost-push inflation

An inflation that starts with an increase in costs, such as a rise in the money wage rate or the money price of raw materials like oil.

Stagflation

The combination of a rising price level and a decreasing real G D P.

Rational expectation

The best inflation forecast available based on all relevant information.

Deflation

A situation where an economy experiences a persistently falling price level, occurring if aggregate demand increases at a persistently slower rate than aggregate supply.

Phillips curve

A curve that shows the relationship between the inflation rate and the unemployment rate.

Short-run Phillips curve (S R P C)

A downward-sloping curve showing the tradeoff between the inflation rate and unemployment rate, holding the expected inflation rate and natural unemployment rate constant.

Long-run Phillips curve (L R P C)

A vertical curve at the natural unemployment rate showing the relationship between inflation and unemployment when the actual inflation rate equals the expected inflation rate.