104 – Macroeconomics – Flashcards
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The equation underlying the mainstream view of macroeconomics is
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Ca + Ig + Xn + G = GDP
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According to mainstream macroeconomists, U.S. macro instability has resulted from
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investment "booms" and "busts" and, occasionally, adverse aggregate supply shocks
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The mainstream view of macro instability is that
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changes in investment shift the aggregate demand curve and thus cause changes in real GDP
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Economist Milton Friedman is most closely associated with
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monetarism
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Monetarists believe that
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the economy is more stable when active fiscal and monetary policy are used
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According to monetarists
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changes in the money supply are the primary cause of changes in the price level
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The basic equation of monetarism is
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MV = PQ
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According to the equation of exchange, changes in the money supply can affect
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both the price level and real output.
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The velocity of money is the
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number of times per year the average dollar is spent on final goods and services.
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Monetarists say that the relationship between the amount of money which households and businesses want to hold and the level of national output and income
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is relatively stable.
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Monetarist say
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a change in the money supply will change aggregate demand and therefore the nominal GDP
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As monetarists view the equation of exchange
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V is quite stable
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Monetarists believe the private economy is inherently
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stable and that the government sector should be small
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In the equation of exchange the nominal GDP is designated by
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PQ
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According to monetarists, a change in the money supply changes
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aggregate demand which in turn changes the nominal GDP
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According to monetarists, the Great Depression in the United States largely resulted from
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inappropriate monetary policy.
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According to real business cycle theory
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recessions result from declines in long-run aggregate supply, rather than decreases in aggregate demand
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Assume that many households and businesses reduce their spending only because they expect other households and consumers to reduce their spending. Also suppose that all households and consumers would be better off if they did not reduce their spending. This situation best describes the
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idea of coordination failures.
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New classical economists
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hold that, left alone, the economy gravitates to its full employment level of output
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Rational expectations theory implies that the
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long-run aggregate supply curve is vertical
