Ch 36 – Current Issues in Macro Theory and Policy

question

monetarism
answer

macroeconomic view that the main cause of changes in aggregate output and price level is fluctuations in the money supply, espoused by advocates of a monetary rule
question

equation of exchange
answer

fundamental equation of monetarism: MV = PQ, where M is the supply of money, V is the velocity of money, P is the price level, and Q is the physical volume/quantity of all goods and services produced
question

velocity
answer

average number of times per year that a dollar is spent on final goods and services
question

real-business-cycle theory
answer

theory that holds business fluctuations result from significant changes in technology and resource availability. These changes affect productivity and thus the long-run growth trend of aggregate supply.
question

coordination failures
answer

people fail to reach a mutually beneficial equilibrium because they lack a way to coordinate their actions.
question

rational expectations theory
answer

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
question

new classical economics
answer

when the economy occasionally diverges from its full-employmentwill automatically move it back to that output.
question

price level surprises
answer

unanticipated changes in the price level
question

efficiency wage
answer

wage that minimizes the firms labor cost per unit output
question

insider-outsider theory
answer

outsiders may not be able to underbid existing wages because employers may view the nonwage cost of hiring them to be prohibitive
question

monetary rule
answer

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.
question

inflation targeting
answer

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.
question

Taylor Rule
answer

Rule specifies how the Fed should alter theFederal funds rate under differing economic circumstances

Get instant access to
all materials

Become a Member