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Chapter 19: Q3. (page 404)

Briefly describe the difference between a so-called real business cycle and a more traditional 鈥渟pending鈥� business cycle.

Short Answer

Expert verified

The real business cycles are caused by real factors that affect aggregate supply. At the same time, the traditional spending business cycles are caused by factors that affect aggregate demand.

Step by step solution

01

Explanation

In real-business-cycle theory, business fluctuations result from significant changes in technology and resource availability.Those changes affect productivity and, thus, the long-run growth trend of aggregate supply; for example, the adverse supply shock creates a recession.

On the other hand, the recession created by the reduced purchasing power (that is, reduced aggregate demand) is a part of the traditional spending business cycle; for example, a traditional spending business cycle can be created because of changing income tax structure which affects the disposable income and, therefore, the aggregate demand.

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Most popular questions from this chapter

If the money supply fell by 10 per cent, a monetarist would expect nominal GDP to __________.

a. rise

b. fall

c. stay the same

Place 鈥淢ON,鈥� 鈥淩ET,鈥� or 鈥淢AIN鈥� beside the statements that most closely reflect monetarist, rational expectations, or mainstream views, respectively:

a. Anticipated changes in aggregate demand affect only the price level; they have no effect on real output.

b. Downward wage inflexibility means that declines in aggregate demand can cause a long-lasting recession.

c. Changes in the money supply M increase PQ; at first only Q rises, because nominal wages are fixed, but once workers adapt their expectations to new realities, P rises and Q returns to its former level.

d. Fiscal and monetary policies smooth out the business cycle.

e. The Fed should increase the money supply at a fixed annual rate.

Use an AD-AS graph to demonstrate and explain the price-level and real-output outcome of an anticipated decline in aggregate demand, as viewed by RET economists. (Assume that the economy initially is operating at its full-employment level of output.) Then demonstrate and explain on the same graph the outcome as viewed by mainstream economists.

Craig and Kris were walking directly toward each other in a congested store aisle. Craig moved to his left to avoid Kris, and at the same time, Kris moved to his right to avoid Craig. They bumped into each other. What concept does this example illustrate? How does this idea relate to macroeconomic instability?

An economy is producing at full employment when AD unexpectedly shifts to the left. A new classical economist would assume that as the economy adjusts back to producing at full employment, the price level will ________.

a. increase

b. decrease

c. stay the same
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