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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

Use the equation of exchange to explain the rationale for a monetary rule. Why will such a rule run into trouble if V unexpectedly falls because of, say, a drop in investment spending by businesses?

You have just been elected president of the United States, and the present chair of the Federal Reserve Board has resigned. You need to appoint a new person to this position, as well as a person to chair your Council of Economic Advisers. Using Table 19.1 and your knowledge of macroeconomics, identify the views on macro theory and policy you would want your appointees to hold. Remember, the economic health of the entire nation鈥攁nd your chances for reelection鈥攎ay depend on your selection.

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b. \(4 trillion.

c. \)5 trillion.

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a. AD; right

b. AD; left

c. AS; right

d. AS; left

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:

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

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