A drop in the rate at which the price level rises, while prices are still going up, is called disinflation.
Missing Word
disinflation
Disinflation is a slowdown in the rate of price increases while prices are still rising. It differs from deflation, which is an actual fall in the price level; the neoclassical model's lower price level after a demand drop usually shows up in practice as disinflation.
Category: Price Level
Question 2
A sustained fall in the overall price level across the economy is called deflation.
Missing Word
deflation
Deflation means the general price level is falling. In the neoclassical model a negative demand shock lowers the price level, though in practice this usually appears as slower price growth.
Category: Price Level
Question 3
When aggregate demand keeps growing faster than potential GDP, the neoclassical model predicts a persistent rise in the price level, which is called inflation.
Missing Word
inflation
Inflation is a sustained rise in the overall price level. With a vertical long-run supply curve, demand growth beyond potential raises prices rather than output.
Category: Price Level
Question 4
In the AD/AS model, the combination of output and price level at which aggregate demand equals short-run aggregate supply is the economy's short-run equilibrium.
Missing Word
equilibrium
Equilibrium is the point where the aggregate demand and short-run aggregate supply curves cross, so the quantity of output demanded equals the quantity supplied at that price level. In the neoclassical model a short-run equilibrium away from potential GDP does not last, because wages and prices adjust and move the economy to a new equilibrium at potential.
Category: Aggregate Supply
Question 5
In the neoclassical model, the long-run aggregate supply curve is a vertical line at potential GDP, so shifts in aggregate demand change only the price level in the long run.
Missing Word
vertical
A vertical long-run aggregate supply curve means long-run output does not depend on the price level. Output is fixed at potential GDP, so demand shifts move only prices once wages and prices have adjusted.
Category: Aggregate Supply
Question 6
The nominal interest rate minus the expected rate of price increases gives the real interest rate, which measures the lender's return in purchasing power.
Missing Word
real
The real interest rate is the nominal rate adjusted for expected inflation. A lender charging 7% who expects 3% inflation expects a real return of 4%, which is why expected inflation is built into the rates on mortgages and car loans.
Category: Expectations
Question 7
The graph that relates the rate at which prices rise to the unemployment rate is called the Phillips curve.
Missing Word
Phillips
The Phillips curve shows how inflation and unemployment relate. The neoclassical view holds that it slopes downward in the short run but is vertical at the natural rate of unemployment in the long run.
Category: Unemployment
Question 8
The approach that stresses aggregate demand and sticky wages and prices as the keys to short-run fluctuations is known as Keynesian economics.
Missing Word
Keynesian
Keynesian economics, named for John Maynard Keynes, holds that shifts in aggregate demand drive short-run changes in output and unemployment. It favors active policy to close recessionary gaps.
Category: Comparing the Models
Question 9
Unemployment that persists even at potential GDP because workers' skills or locations do not match the jobs available is called structural unemployment.
Missing Word
structural
Structural unemployment comes from a mismatch between workers' skills or locations and the jobs on offer. It is part of the natural rate of unemployment, so neoclassical economists address it with retraining and mobility rather than with more aggregate demand.
Category: Unemployment
Question 10
Unemployment that exists while people search for work or move between jobs, even when the economy is at potential GDP, is called frictional unemployment.
Missing Word
frictional
Frictional unemployment is the short-term joblessness of people who are between jobs or just entering the labor force. Together with structural unemployment it makes up the natural rate, which is why that rate is above zero.
Category: Unemployment
Question 11
Advances in technology and more physical capital per worker shift the long-run aggregate supply curve to the right, raising potential GDP.
Missing Word
right
A rightward shift of long-run aggregate supply means the economy can produce more at full employment. Neoclassical economists see this growth in productive capacity, not demand, as the source of lasting increases in output.
Category: Aggregate Supply
Question 12
If workers permanently lose skills during a long period out of the labor force, potential GDP falls and the long-run aggregate supply curve shifts to the left.
Missing Word
left
Lost skills mean less human capital per worker, which lowers the economy's productive capacity. A lower potential GDP is shown as a leftward shift of the vertical long-run aggregate supply curve.
Category: Aggregate Supply
Question 13
Under the theory of rational expectations, home prices near a newly announced factory jump as soon as the news breaks, because buyers use all available information about the area's future.
Missing Word
rational
Rational expectations theory says people form the most accurate forecasts they can using all available information. Buyers anticipate the factory's effect on demand for housing, so prices adjust before the factory opens.
Category: Expectations
Question 14
According to adaptive expectations theory, people base their forecasts of future price increases on past experience and revise them only gradually.
Missing Word
adaptive
Adaptive expectations describe people who learn from experience and adjust step by step as circumstances change. Under this view wages and prices adjust in increments, so the economy takes longer to return to potential GDP than under rational expectations.
Category: Expectations
Question 15
Unemployment that rises when output falls below its potential level during a recession is called cyclical unemployment.
Missing Word
cyclical
Cyclical unemployment is caused by downturns in the business cycle and disappears when output is at potential. Neoclassical economists focus more on the natural rate, which includes only frictional and structural unemployment.
Category: Unemployment