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Real Gross Domestic product measures total output in the U.S. adjusted for changes in the price level. The easiest way to calculate a real statistic is to use a constant set of prices across every year. ©2013 Pearson Education, Inc. […]

©2013 Pearson Education, Inc. Publishing as Prentice Hall 104 This change in regime will lead to lower actual inflation and, moving along the Phillips curve in the short-run, higher unemployment. However, once the public realizes that inflation will be lower […]

The new classical policy ineffectiveness proposition states that systematic monetary and fiscal policy actions that change aggregate demand do not have any effect on output and employment, even in the short run. If the public has better information, it will […]

These developments are likely to increase the costs of labor turnover and increase the benefits of hiring people with special skills. In an efficiency wage model, this should increase efficiency wages and increase equilibrium unemployment. In the classical and real […]

The classical and real business cycle models assert that falls in aggregate supply lead to recessions. As a result, they predict price level should rise during recessions. Likewise, changes in output are driven by changes in inputs, which drives down […]

A flexible exchange rate system will eliminate the conflicts that arise in a fixed rate system between internal and external balance. In a flexible rate system, the exchange rate will adjust to clear the foreign exchange market. Monetary and fiscal […]

Monetary policy is completely ineffective within a fixed exchange rate regime. Fiscal policy is highly effective within a fixed exchange rate regime. The BP schedule is upward sloping in the case of imperfect capital mobility. The BP schedule is horizontal […]

The money supply is $1.2 billion, or $1,200 million. The money supply falls by $16 million. The money supply would increase to $1.5 billion. There would be no change in the money supply. The monetary base totals $2,800. The money […]

Monetary policy is less effective. Targeting interest rates makes the LM curve flatter, meaning that changes in the IS curve have a larger effect on income. Thus, the costs of not offsetting changes in the IS curve by targeting interest […]

©2013 Pearson Education, Inc. Publishing as Prentice Hall Policy makers are viewed as ideologically motivated leaders of competing parties. Two parties exist, a liberal party and a conservative party exist. Price stability is highly valued by the conservatives while the […]

©2013 Pearson Education, Inc. Publishing as Prentice Hall First, output growth in the intermediate run is mostly supply determined by rates of growth in factor supplies and the rate of technological change. Second, the rate of growth of the capital […]

The GDP deflator measures the change in prices of all goods and services included in GDP while the CPI measures the change in price of a basket of goods that typical households consume. Because the CPI uses a fixed basket […]

©2013 Pearson Education, Inc. Publishing as Prentice Hall According to Edward Denison, the main sources of growth were growth in the quantity of the labor input and four other factors that cause labor productivity to grow (i.e., education per worker, […]

An decrease in the demand for leisure would shift the labor supply curve to the right (up), which would decrease the real wage and increase the quantity of labor. This increase in the quantity of labor would lead to a […]

According to the quantity theory, countries with a higher level of output will have a lower price level holding the money supply and velocity constant. As a result, the faster growing country will experience lower inflation. ©2013 Pearson Education, Inc. […]

©2013 Pearson Education, Inc. Publishing as Prentice Hall 39 a. Which points show an unintended inventory shortfall? An unintended inventory shortfall takes place at points below Y , such as point YL. b. When is unintended inventory investment taking place? […]

Below the IS curve, for a given interest rate income is lower than equilibrium income. As a result, unplanned inventories would be positive. ©2013 Pearson Education, Inc. Publishing as Prentice Hall The LM curve is the schedule depicting all levels […]

©2013 Pearson Education, Inc. Publishing as Prentice Hall If expectations drive business cycles, then higher expectations will increase investment and shift the IS curve to the right. This means that interest rates and output should be positively correlated. 65 CHAPTER […]

©2013 Pearson Education, Inc. Publishing as Prentice Hall Prices and output fell. Money wages rose, but not as much as the price level fell so that real wages fell. This is consistent with the Keynesian flexible-price model in which money […]

©2013 Pearson Education, Inc. Publishing as Prentice Hall Monetarist see the economy as inherently stable except for the fact that policymakers insist on using discretionary policy, which makes the economy unstable. They would prefer to tie the hands of policymakers […]