Chapter 5 foundations of macroeconomics

1. Aggregate Demand

curve

1. Cycles are caused by outside disturbances.

2 business cycles

2. Can be caused by technological advances.

3 wealth effect

3. Believes government can counter business cycles by adjusting Aggregate Demand.

4 Joseph Schumpeter

4. One reason why the Aggregate Demand curve is negatively sloped.

5 external shock theories

5. Declines in output precipitate rising prices.

6 classical economics

6. Major innovations partly explain long cycles.

7. Aggregate Supply

curve

7. A positive relationship between goods available economy-wide and the price level.

8 Keynesian economics

8. Alternating expansion and contraction.

9 stagflation

9. A negative relationship between economy-wide domestic production and the price level.

10 increase in Aggregate

Supply

10. Market forces ensure long-run full employment.

1 Aggregate Supply

shifts leftward

1. May be caused by interest rate hikes.

2. Aggregate Supply

shifts rightward

2. Increased preference for leisure by labor.

3. Aggregate Demand

shifts leftward

3. Reductions in monopoly power.

4. Aggregate Demand

shifts rightward

4. May be caused by an increase in planned government purchases.

5 contraction

5. Marxian view that business cycles would become more severe.

6. foreign sector

substitution effect

6. The low point of a cyclical downturn.

7 recovery

7. Typically follows a peak.

8 trough

8. Typically follows a trough.

9 “capitalistic crisis”

9. Lasted from 1929 until World War II.

10 the Great Depression

10. A reason why Aggregate Demand is negatively sloped.