Ch 36 – Current Issues in Macro Theory and Policy – Flashcards
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people fail to reach a mutually beneficial equilibrium because they lack a way to coordinate their actions.
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coordination failures
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businesses, consumers, and workers expect changes in policies and circumstances to have certain effects on the economy and, in self interest, take actions to make sure those changes affect them as little as possible
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rational expectations theory
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when the economy occasionally diverges from its full-employmentwill automatically move it back to that output.
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new classical economics
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unanticipated changes in the price level
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price level surprises
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wage that minimizes the firms labor cost per unit output
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efficiency wage
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outsiders may not be able to underbid existing wages because employers may view the nonwage cost of hiring them to be prohibitive
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insider-outsider theory
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rule that states the Fed should expand the money supply each year at the same annual rate as the typical growth of the economy's production capacity.
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monetary rule
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Fed would be required to announce a targeted band of inflation rates, such as 1 to 2 percent for the following 2 years. It would then use monetary policy to keep inflation rates within that range. In the event of failure, the Fed must explain why it failed.
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inflation targeting
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Rule specifies how the Fed should alter theFederal funds rate under differing economic circumstances
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Taylor Rule
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