Economics Chapter 32: Business Fluctuations

Factors that cause the Long-Run Aggregate Supply (LRAS) curve to shift to the left, decreasing potential output.

Factors that cause the Long-Run Aggregate Supply (LRAS) curve to shift to the right, increasing potential output.

Higher taxes or regulations can discourage businesses from investing and producing, leading to a decrease in potential output.

The Short-Run Aggregate Supply (SRAS) curve shows the relationship between inflation and real growth when prices and wages are sticky.

A rapid and unexpected shift in the Aggregate Demand (AD) curve, causing changes in spending.

Fluctuations in the growth rate of real GDP around its trend growth rate. These fluctuations can cause periods of economic expansion or contraction, pushing the economy above or below its long-run growth path. The upward trend represents a period of economic growth, while the downward trend represents a recession.

A significant, widespread decline in real income and employment. This usually involves a drop in real GDP for two consecutive quarters, leading to an economic downturn and a decrease in production and spending.

Shows all the combinations of inflation and real growth that are consistent with a specified rate of spending growth. It captures the relationship between the overall price level in the economy and the quantity of goods and services demanded, assuming all other factors affecting demand constant.

This curve represents the relationship between the price level and the quantity of goods and services supplied in a specific period when all resources are fully employed. It's a vertical line indicating that there's no long-run trade-off between inflation and real GDP. The economy can produce any amount of output at this full-employment level of resources.

Shocks to the economy that affect the potential output or the supply of resources. Examples include changes in technology, natural disasters, population growth, or new government regulations that affect the long-run production capacity.

A curve that shows the relationship between the price level and the quantity of output supplied in the short run. This curve slopes upward because in the short run, firms can increase output by raising prices due to sticky wages and prices.

A sudden unexpected significant drop in real GDP and employment, such as the Great Recession (2007-2009) or the COVID-19 Recession (2020). These events highlight the importance of understanding how aggregate demand and aggregate supply interact to cause economic downturns, highlighting the role of factors such as housing market crashes, financial crises, government policies, and global economic conditions in driving these recessions.

The dynamic quantity theory of money equation shows the relationship between the growth rate of the money supply, velocity, inflation, and real GDP growth.

The growth rate of the money supply (M), plus the growth in velocity (v), equals the sum of the inflation rate (p) and the growth rate of real GDP (YR).

The rate at which the average dollar changes hands in the economy.

Any combination of inflation and real growth that adds up to the specified money growth rate, represents a point on the Aggregate Demand (AD) curve.

A 1 percentage point increase in real growth reduces inflation by 1 percentage point.

An increase in spending creates upward pressure on either inflation or real growth.

The AD curve shifts upward and to the right when spending growth increases due to either money supply growth or velocity growth.

The Aggregate Demand (AD) curve shows the relationship between inflation and real growth for a given level of spending.

The costs associated with changing prices of goods and services.

When workers respond to their nominal wage instead of their real wage, they focus on the number on their paycheck rather than its buying power.

The real growth rate in the long run is determined by the Solow rate and isn't influenced by inflation.

An increase in the money supply (M) leads to both increased inflation and growth rate in the short run.

As prices increase, workers demand higher wages to compensate for inflation, leading to a cycle of rising wages and prices.

After the initial short-term effects of increased aggregate demand wear off, the growth rate eventually returns to the Solow rate.

The initial phase of an aggregate demand shock sees workers mistaking nominal wage increases for real wage increases due to sticky prices.

The costs associated with changing the prices of goods and services, often in response to inflation or changing market conditions.

A decrease in aggregate demand (AD) can lead to a prolonged recession due to the stickiness of prices and wages.

Factors that can increase or decrease the rate at which people spend money.

Factors that can increase the growth rate of spending, leading to a higher aggregate demand.

Factors that can decrease the growth rate of spending, leading to a lower aggregate demand.

A situation where prices and wages are slow to adjust to changes in economic conditions.

A reduction in the growth rate of the money supply leads to a decrease in aggregate demand (AD). A slower money supply means less credit available for spending, leading to lower overall spending in the economy.

Shadow banks are financial institutions that operate outside the traditional banking system, often with less regulation and deposit insurance. They handle loans and investments, but lack the same protections for depositors as traditional banks.

The subprime mortgage market involved lending loans to borrowers with lower credit scores and a higher risk of default, thus making investors cautious and contributing to the financial crisis.

A run on a bank occurs when many depositors withdraw funds simultaneously, fearing that the bank might become insolvent. This can be triggered by concerns about the bank's financial health, leading to a loss of confidence and a potential bank failure.

Securitization is the process of packaging and selling financial assets, like mortgages, into securities. This makes it difficult to identify which institutions hold the most exposure in a specific sector, like the subprime mortgage market.

The Great Recession was a severe global economic downturn that began in 2007, characterized by a decline in economic activity, increasing unemployment, and widespread financial instability. It was triggered by a series of factors, including the subprime mortgage crisis and the collapse of the shadow banking system.

The COVID-19 pandemic, characterized by significant disruptions to businesses and supply chains, led to a decline in worker productivity and a shift in aggregate demand.

A decrease in productivity, leading to a reduction in potential output and shifting the LRAS curve to the left. During the COVID-19 pandemic, this resulted from worker safety measures, supply chain disruptions, and remote work challenges.