Q: Why is economic growth not smooth?
A: Because U.S. GDP fluctuates widely, causing business cycles and recessions.
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| Term | Definition |
|---|---|
| Q: Why is economic growth not smooth? | A: Because U.S. GDP fluctuates widely, causing business cycles and recessions. |
| Q: Why do recessions matter? | A: Unemployment rises during recessions. |
| Q: What are the three curves in the AD–AS model? | A: Aggregate Demand (AD), Long-Run Aggregate Supply (LRAS), Short-Run Aggregate Supply (SRAS). |
| Q: What does the AD curve represent? | A: Inflation–real GDP growth combinations consistent with M + V = π + Y. |
| Q: Why does AD slope downward? | A: Higher real growth means lower inflation for fixed spending. |
| Q: What shifts AD to the right? | A: Higher money growth, higher velocity, more confidence, more wealth, higher gov spending, higher exports. |
| Q: What shifts AD to the left? | A: Lower money growth, lower velocity, drops in confidence/wealth, higher taxes, higher imports. |
| Q: What determines LRAS? | A: Technology, capital, labor force, human capital, and institutions. |
| Q: What shifts LRAS right? | A: Positive real shocks (e.g., tech improvements). |
| Q: Why does SRAS slope upward? | A: Wages/prices are sticky; firms increase output when actual inflation > expected. |
| Q: What shifts SRAS up? | A: Higher expected inflation. |
| Q: What is the short-run effect of a negative AD shock? | A: Lower inflation and lower real GDP (recession). |
| Q: What happens in the long run after an AD shock? | A: Output returns to potential; only inflation changes. |
| Q: What do real shocks shift? | A: LRAS. |
| Q: What are examples of real shocks? | A: Oil shocks, financial crises, natural disasters, tech changes. |
| Q: What is the first step in AD–AS analysis? | A: Determine which curve shifts. |
| Q: What are the three functions of money? | A: Medium of exchange, unit of account, store of value. |
| Q: What is commodity money? | A: Money with intrinsic value (e.g., gold). |
| Q: What is fiat money? | A: Money with no intrinsic value; government declares it legal tender. |
| Q: What is the monetary base (MB)? | A: Currency + reserves. |
| Q: What is M1 made of? | A: Currency + demand deposits. |
| Q: What is M2? | A: M1 + savings deposits + money market funds. |
| Q: What is the Fed’s dual mandate? | A: Maximum employment and stable prices (~2% inflation). |
| Q: What is fractional reserve banking? | A: Banks hold only a fraction of deposits as reserves. |
| Q: Formula for the money multiplier? | A: 1 / Reserve Ratio (R). |
| Q: What increases the money supply in open-market operations? | A: The Fed buying bonds. |
| Q: What decreases the money supply in open-market operations? | A: The Fed selling bonds. |
| Q: What is the federal funds rate? | A: Interest rate banks charge each other for overnight loans of reserves. |
| Q: When is monetary policy most effective? | A: When recessions are caused by negative AD shocks. |
| Q: What is the main benefit of monetary policy? | A: Speed of recovery. |
| Q: What are two problems with using monetary policy? | A: Poor data and time lags. |
| Q: What happens if the Fed overstimulates during a recession? | A: It must later decrease money supply, causing disinflation and possible recession. |
| Q: Why is disinflation painful? | A: It typically causes higher unemployment and lower output. |
| Q: What is the Fed’s role as a “confidence manager”? | A: Influence expectations and calm markets. |
| Q: Why is monetary policy ineffective for real shocks? | A: Productivity falls, so AD stimulation cannot restore output without causing high inflation. |
| Q: What happens when interest rates are kept too low for too long? | A: Asset bubbles (e.g., 2000s housing bubble). |
| Q: What is the argument for rules over discretion? | A: Rules reduce policy mistakes and increase stability. |