Chapter 10: Introduction to Economic Fluctuations

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Recession
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One of the phases of a business cycle. A period of falling output and rising unemployment. It is a period of at least two consecutive quarters of declining Real GDP (6 months). Also defined as a period of significant decline in total output, income, employment, and trade, usually lasting form 6 months to a year and marked by widespread contractions in many sectors of the economy
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A term used to describe short-run fluctuations in output and employment
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business cycle
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Peak
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One of the turning points of a business cycle. The starting date of each recession
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Trough
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is a low turning point or a local minimum of a business cycle. One of the turning points of a business cycle. The ending date of each recession
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Expansion
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One of the phases of a business cycle. When the economy is doing well
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Okun’s Law
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The negative relationship between unemployment and Real GDP, according to which a decrease in unemployment of 1% point is associated with additional growth in Real GDP by 2%. Mathematically, it is seen as 3% – 2%(change in unemployment). It serves as a reminder that the forces that govern the short-run business cycle are very different from those that shape long-run economic growth
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Leading Indicators
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Economic variables that fluctuate in advance of the economy’s output and thus signal the direction of economic fluctuations
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Index of Leading Indicators
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A collection of 10 data series that are used to forecast changes in economic activity about 6-9 months into the future. Some include average workweek of production workers in manufacturing, average initial weekly claims for unemployment insurance, and vendor performance
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Model of Aggregate Supply and Aggregate Demand
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A model that allows us to study how the aggregate price level and the quantity of aggregate output are determined in the short run. It provides a way to contrast how the economy behaves in the long run and how it behaves in the short run (framework to analyze economic fluctuations).
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Aggregate Demand (AD)
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The relationship between the quantity of output demanded and the aggregate price level
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Aggregate Supply (AS)
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The relationship between the quantity of goods and services supplied and the aggregate price level
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Long-Run Aggregate Supply Curve
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is vertical because, output depends on technology and factor supplies, but not prices. are flexible, Because this curve is vertical, it satisfies the classical dichotomy, as the level of output is independent of the money supply
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Natural Level of Output
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The point at which the economy’s resources are fully employed or, more realistically, at which unemployment is at it’s natural level. Graphically, this is where the long-run aggregate supply curve crosses the x-axis
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Short-Run Aggregate Supply Curve
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is horizontal because, prices are sticky at predetermined levels. At these prices, firms are willing to sell as much as their customers are willing to buy, and they hire just enough labor to produce the amount demanded
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Shocks
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Exogenous changes in economic relationships, such as the aggregate demand or aggregate supply curve
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Demand Shocks
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Exogenous events that shift the aggregate demand curve
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Supply Shocks
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Exogenous events that shift the aggregate supply curve. They are sometimes referred to price shocks. There are two types of these; adverse (which push costs and prices upward) and favorable (which reduce costs and prices)
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Stabilization Policy
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Public policy aimed at reducing the severity of short-run economic fluctuations
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Stagflation
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is a situation in which the inflation rate is high and the economic growth rate slows down and unemployment remains steadily high.
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North American Free Trade Agreement:
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an agreement signed by the governments of Canada, Mexico, and the US, creating a trilateral trade bloc in North America.
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Business cycle:
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Refers to economy-wide fluctuations in production or economic activity over several months or years. Occur around a long-term growth trend, and economic growth (an expansion or boom), and periods of relative stagnation or decline (a contraction or recession).
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Unemployment
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defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks.
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Unemployment rate
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calculated as a percentage by: # of unemployed individuals/ all individuals currently in the labor force.
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Economic indicator
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is a statistic about the economy. Allow analysis of economic performance and predictions of future performance. -study of the business cycle
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Classical dichotomy
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refers to an idea attributed to classical and pre-Keynesian economics that real and analyzed variables can be analyzed separately.
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economy exhibits the _____ if real variables such as output and real interest rates can be completely analyzed without considering what is happening to their nominal counterparts, the ____& _____
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Classical dichotomy, money value of output, and interest rate
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OPEC
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is a permanent, intergovernmental organization, created at the Baghdad Conference, by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. had its headquarters in Geneva, Switzerland, in the first five years of existence (1960-1965).
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Time horizon
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is a fixed point of time in the future at which point certain processes will be evaluated or assumed to end. Necessary so that alternatives can be evaluated for performance over the same period of time.
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Demand shock
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is a sudden event that increases or decreases demand for goods or services temporarily.
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A _____ increase demand and a _____ decreases demand. prices of goods and services are affected in both cases.
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positive demand shock, negative demand shock
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Supply shock
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is an event that suddenly changes the price of a commodity or service. it may be caused by a sudden increase or decrease in the supply of a particular good. -affects the equilibrium price.
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A term that combines economic stagnation (falling output, and, from Okun’s Law, rising unemployment) with inflation (rising prices).
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Stagflation
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using monetary policy to combat the effects of adverse supply shocks
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stabilization policy
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in which direction does the aggregate demand curve slope.
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downward
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Shocks to ____ & ____ cause fluctuations in GDP and employment in the short run.
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aggregate demand, supply
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The Fed can attempt to stabilize the economy with _____?
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monetary policy

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