Economics: Aggregate Supply and Wages, Quizzes of Introduction to Macroeconomics

Download Economics: Aggregate Supply and Wages and more Quizzes Introduction to Macroeconomics in PDF only on Docsity! TERM 1 aggregate supply DEFINITION 1 -the relationship between the economy's price level and the amount of output firms are willing and able to supply, other things constant -when we read aggregate supply graphs we assume things like technology are constant TERM 2 labor DEFINITION 2 -the most important resource of aggregate supply - approximately 70% of production cost - quantity supplied depends on wage which in turn depends on price level. The higher the price level, the less attractive a certain wage is. TERM 3 nominal vs. real wage DEFINITION 3 nominal- measures wage in dollar of year in question real- measures wage in constant dollars based on the goods they are able to buy -workers and employers care more about real wage than nominal because real is what deals with price level. they negotiate wage based on expected price level. TERM 4 explicit vs implicit wages DEFINITION 4 explicit- wage agreement based on a labor contract implicit- wage agreement based on market practices ex. firms and workers may expect prive level to rise by 3% so they raise nominal wage by 4% for an expected increase in real wage by 1% TERM 5 potential output DEFINITION 5 the amount produced when there are no surprises about the price level. -at potential output, we reach the natural rate of unemployment TERM 6 potential output in the short run when price level is higher than expected DEFINITION 6 -fixed by a contract -firms yield a higher profit per unit of output so they increase production beyond the economy's potential. as output expands the cost of additional output increases (you might be paying workers overtime, etc) but usually price level rises faster than output costs and will continue 'outputting' until costs become too much. TERM 7 potental output in the short run when price level is lower than expected DEFINITION 7 -fixed by a contract -firms make less for each thing they produce than they had planned. they reduce quantity supplied, so the economy is below it's potential. some workers are laid off or work fewer hours so unemployment exceeds the natural rate. TERM 8 relationship between the actual price level and the real gdp supplied DEFINITION 8 in the short run, there is a DIRECT relationship between the actual price level and real GDP supplied. higher price level means higher employment and output TERM 9 long run DEFINITION 9 'long run' is long enough that firms and suppliers can renegotiate all agreements based on actual price levels TERM 10 expansionary gap DEFINITION 10 -the amount by which short run output exceeds the economy's potential output -the greater the gap, the stronger the UPWARD pressures on the price level. when the price level rises, workers ask for higher nominal wages, raising production costs for firms so SRAS curve shifts leftward, resulting in cost-push inflation -fixed by contractionary policies TERM 21 fiscal tax cuts DEFINITION 21 keep in mind that in direct government spending the entire amount goes right back into spending rounds... however with tax reductions, the full amount does not automatically go back in (if there's a $40 tax cut, not all 40 is spent- some is saved) how much is inserted back into the money flow depends on the marginal propensity to consume therefore, the aggregate expenditure line only rises as much as the marginal propensity to consume relative to the tax cut -an increase in government spending has a greater TERM 22 the steeper the SRAScurve... DEFINITION 22 the less of an impact a shift of the ADcurve has on real GDP and the more it has on the price level (smaller spending multiplier) if the economy is already producting at it's potential, the spending multiplier =0 TERM 23 classical approach DEFINITION 23 implied that the natural market forces would move the economy toward potential GDP through flexibility TERM 24 keynesian theory and policy DEFINITION 24 developed in response to problems of high unemployment during the Great Depression -argued that natural forces wouldn't necessarily close a contractionary gap- needs government help sometimes. our spending philosophies have not been the same since- after WW2 the objective of fiscal policy was no longer to balance the budget, but to promote full employment with price stability TERM 25 federal budget DEFINITION 25 annual in the US -outlays include transfer payments and government purchases medicare and social security spending are rising, defense is dropping -> shifting focus from defense spending to redistribution TERM 26 problems with the federal budget process DEFINITION 26 a) poorly conceived programs continue through sheer inertia, successful ones cannot expand because Congress doesn't meet timetables so they go by what was done previous years b) lengthy budget process- by the time Cong & the Pres agree on a fiscal remedy, the economy has usually recovered itself c) uncontrollable budget items- 3/4 of the federal budget outlays are determined by strong existing laws with powerful constituencies and congress is reluctant to mess with structure d) no seperate capital and opera TERM 27 possible reforms DEFINITION 27 -bienniel budgeting -allocating $ to agency heads and letting them figure out their own budgets -seperate capital and operating budgets TERM 28 deficits... DEFINITION 28 -worsen during recessions because tax revenues drop while transfer payments (unemployment benefits) rise= double whammy -usually fall and neutralize during the recovery stages of the business cycle TERM 29 'crowding out' DEFINITION 29 large federal deficits lead to a smaller supply of saved money and therefore less to lend out- intrest rates rise this 'crowds out' private investiment TERM 30 'crowding in' DEFINITION 30 the idea that government stimulus's put a 'sunny face' on business outlooks and expectations grow favorable, crowding in private investment- they would not want to invest in a seemingly lifeless economy.