Flashcard Set Preview
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| 1 |
Economic fluctuations and Key Characteristics
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the cyclical behaviour of the economy over timeBusiness cycles are not regular cycles; they...
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Recession
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the economy is growing at a rate below normal-Unemployment rises sharply in a recession and...
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Expansion
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the economy is growing at a rate above normal
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Potential output
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measures the amount of GDP (output) when resources (capital and labour, technology) are being...
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output gap, recessionary and expansionary gap
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When Output Y does not equal potential output Y*Recessionary Gap: Y* - Y > 0;...
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Four types of unemployment:
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1. Frictional - looking for work; looking for workers (job matching takes time).2. Structural...
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Natural rate of unemployment
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= frictional + structural + seasonal unemployment; - - denoted u*.
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Cyclical unemployment
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u - u*(total unemployment - natural rate of unemployment)- Cyclical unemployment varies closely...
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Okun's Law
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100 x ((Y* - Y) / Y*) = 2 x (u - u*)- An estimate of Y* and Okun's Law...
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basic Keynesian model
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Objective: to set down a simple model of aggregate demand that explains departures from potential(full...
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Menu Cost
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it is costly to change prices; in the short-run it may be best to set prices and meet...
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Planned Aggregate Expenditure (PAE)
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- At any point in time, consumers, rms, and governments have expenditure plans; what theywould...
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Investment and planned investment
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I = Ip + unplanned inventory investment
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Aggregate Expenditure
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Y - PAE = I - Ip = unplanned inventory investment
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Major component of PAE?
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Consumption Function:C = C + c (Y - T)- C is the autonomous or exogenous component...
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Aggregate Saving
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S = (Y - T) C = - C + (1 - c) (Y - T)Basis reasoning: all else equal, a rise in disposable...
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Short Run Equilibrium
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where Y = PAEPAE = C + Ip + G + NX = YPAE = C + c(Y - T) + Ip +...
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Income-Expenditure Multiplier
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Principle: changes in autonomous expenditure give rise to larger changes in output. This is...
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Fiscal Policy: Stabilizing Expenditure
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If output Y is below potential output Y* (a recessionary gap) then an increase in governmentspending...
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Qualifications of Fiscal Policy
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both taxes and expenditure, can a ffect actual output Y as well as potential output Y*-...
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Automatic Stabilizers
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changes in government spending and taxation that happen automatically and work to stabilize...
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Reduce the size of the multiplier effect
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savingsbut also, taxes and imports (leakage effect)
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