MAC_1E_Study_Guide_Chap_9 - Chapter9...

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9-1 Chapter 9 Aggregate Demand and Economic Fluctuations Macroeconomics In Context (Goodwin, et al.) Chapter Overview This chapter first introduces the analysis of business cycles, and introduces you to the two stylized facts of the business cycle. The chapter then presents the Classical theory of savings-investment balance through the market for loanable funds. Next, the Keynesian aggregate demand analysis in the form of the traditional "Keynesian Cross" diagram is developed. You will learn what happens when there’s an unexpected fall in spending, and the role of the multiplier in moving to a new equilibrium. Chapter Objectives After reading and reviewing this chapter, you should be able to: 1. Describe how unemployment and inflation are thought to normally behave over the business cycle. 2. Model consumption and investment, the components of aggregate demand in the simple model. 3. Describe the problem that “leakages” present for maintaining aggregate demand, and the classical and Keynesian approaches to leakages. 4. Understand how the equilibrium levels of income, consumption, investment, and savings are determined in the Keynesian model, as presented in equations and graphs. 5. Explain how, in the Keynesian model, the macroeconomy can equilibrate at a less-than-full-employment output level. 6. Describe the workings of “the multiplier,” in words and equations. Key Terms Okun’s “law” “full-employment output” ( Y* ) aggregate demand ( AD ) behavioral equation Active Review Fill in the Blank 1. The macroeconomic goal that involves keeping the rate of unemployment and inflation at acceptable levels over the business cycle is the goal of _________________.
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9-2 2. The _________________ economists believe that aggregate demand needs active guidance, whereas the _____________ economists believe that aggregate demand can take care of itself. 3. The recurrent fluctuations in the level of national production is called the __________________. 4. When economic activity declines, usually measured by a fall of real GDP for two consecutive quarters, the economy is said to be in a _____________. 5. The equation that expresses the inverse relationship between the unemployment rate and the rapid growth of real GDP is known as _______________. 6. The level of output that occurs when the economy is not suffering from an unemployment problem (that is, when any unemployment that exists is just transitory), is called ______________output. 7. In the traditional macro model (with no government or foreign sector), what households and firms intend to spend on consumption and investment is called _________________. 8. The equation AD = C + II is a(n) _______________, because it reflects a theory about the behavior of one or more economic agents or sectors. The equation Y = C + I is a(n) _______________, because it represents the actual level of aggregate spending that in fact occurs. 9. In the Keynesian consumption function, C = C+ mpc Y , C represents ___________, the mpc is the _____________, and
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This note was uploaded on 01/21/2012 for the course ECON 100.2 taught by Professor Prof. during the Spring '11 term at Harvard.

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MAC_1E_Study_Guide_Chap_9 - Chapter9...

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