Disposable income is the income a household has left after paying taxes to federal, state, and local governments.
Missing Word
taxes
Taxes are the payments that separate total income from disposable income. Disposable income is the single most powerful determinant of consumption for most people, so a tax cut raises consumption by raising disposable income.
Category: Components of Demand
Question 2
Consumption spending covers durable goods, nondurable goods, and services bought by households.
Missing Word
services
Services are intangible items such as haircuts, health care, and education. Together with durable and nondurable goods, they make up consumption, the household spending component of aggregate demand.
Category: Components of Demand
Question 3
Changes in inventories, the stocks of goods that firms have produced or bought but not yet sold, are one of the four categories of spending on new capital goods.
Missing Word
inventories
Inventories are goods firms hold before selling them. Changes in inventories count as investment, along with equipment and software, nonresidential structures, and residential structures.
Category: Components of Demand
Question 4
Business investment, the spending by firms on new capital goods and the most variable component of aggregate demand, is the I in C + I + G + X - M.
Missing Word
investment
Investment depends heavily on expected future profits and interest rates, and expectations can change quickly. That makes it the most variable part of aggregate demand, and swings in it are a major source of recessions in the Keynesian view.
Category: Components of Demand
Question 5
If U.S. goods become relatively cheaper than foreign goods, U.S. exports tend to rise, shifting aggregate demand to the right.
Missing Word
exports
Exports are domestically produced goods and services sold to buyers in other countries. Lower relative prices for U.S. goods make them more attractive abroad, and higher foreign income has a similar effect.
Category: Components of Demand
Question 6
Higher domestic income tends to raise imports, the purchases of output produced in other countries, which are subtracted from aggregate demand.
Missing Word
imports
Imports are spending on foreign-produced output. As domestic income rises, households buy more of everything, including foreign goods, so imports rise and net exports fall.
Category: Components of Demand
Question 7
In the simplified Keynesian model, the aggregate supply curve is flat below potential GDP and turns vertical at potential GDP, so the two pieces form a right angle.
Missing Word
vertical
A vertical line means real GDP cannot rise further whatever happens to the price level. In the simplified model, sticky wages and prices make the curve flat below potential, so a change in demand there moves only output, while at potential a change in demand moves only the price level. Research suggests the real-world curve is more gradually curved than this right angle.
Category: Phillips Curve
Question 8
Firms may avoid cutting pay because it can hurt morale, the confidence and enthusiasm of the workforce, and so reduce the productivity of existing workers.
Missing Word
morale
Morale is the spirit and motivation of workers. Firms fear that wage cuts will lower it and reduce productivity, which is one reason wages tend to be sticky downward in a recession.
Category: Sticky Wages and Prices
Question 9
When labor demand falls but wages do not adjust, the quantity of labor supplied exceeds the quantity demanded, and the result is unemployment.
Missing Word
unemployment
Unemployment is the excess of workers willing to work over the jobs available at the going wage. With sticky wages, a fall in labor demand creates that excess rather than a lower wage.
Category: Sticky Wages and Prices
Question 10
Because one person's spending becomes another person's income, which is partly spent again, an initial rise in spending has a larger final effect on GDP, an idea known as the multiplier.
Missing Word
multiplier
The multiplier is the Keynesian concept that a change in autonomous spending causes a more than proportionate change in real GDP. It works in both directions, so a fall in spending also shrinks GDP by more than the initial drop.
Category: Expenditure Multiplier
Question 11
In the 1960s, many economists treated the Phillips curve as a policy menu, like a list of dishes at a restaurant, from which a nation could pick its preferred mix of joblessness and rising prices.
Missing Word
menu
A policy menu is a set of options a government can choose from. Read that way, the downward-sloping Phillips curve let a nation accept higher inflation for lower unemployment, or the reverse. The idea broke down in the 1970s, when the curve shifted and inflation and unemployment rose together.
Category: Phillips Curve
Question 12
The 1970s mix of high joblessness and rapidly rising prices, which the older demand-focused theory struggled to explain, is called stagflation.
Missing Word
stagflation
Stagflation is an unhealthy combination of high unemployment and high inflation. It contradicted the simple Phillips curve tradeoff and was linked to supply shocks such as the mid-1970s oil crisis and to changing inflation expectations.
Category: Phillips Curve
Question 13
In the Keynesian view, too little aggregate demand causes cyclical joblessness, while too much aggregate demand pushes the economy past potential output and causes inflation.
Missing Word
inflation
Inflation is a rise in the overall price level. In the Keynesian view, demand beyond what the economy can produce at potential shows up as rising prices, so policy aims for a level of aggregate demand that is neither too high nor too low.
Category: Keynesian Perspective
Question 14
Keynes stressed the coordination argument: even if lower pay across the whole economy would help, a market economy has no obvious way to get every employer and worker to accept wage cuts at the same time.
Missing Word
coordination
The coordination argument is the reason Keynes emphasized for downwardly sticky wages. No single firm or group of workers wants to take a pay cut first, and nothing in a market economy arranges for everyone to cut together, so wages stay up while output and employment fall.
Category: Sticky Wages and Prices
Question 15
Keynesian economists recommend fiscal policy, meaning changes in government spending and tax rates, to move aggregate demand toward the level that matches potential GDP.
Missing Word
fiscal
Fiscal policy is the use of government spending and taxes to influence the economy. In the Keynesian view, expansionary fiscal policy, such as tax cuts or higher spending, fights a recession by shifting aggregate demand right, while contractionary fiscal policy, such as tax increases or spending cuts, fights inflation by shifting it left.
Category: Keynesian Perspective