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the aggregate supply curve is vertical and is the sole determinant of the level of real output; The macroeconomic generalizations accepted by most economists before the 1930s that led to the conclusion that a capitalistic economy was self-regulating and therefore would usually employ its resources
The macroeconomics generalizations that lead to the conclusion that a
capitalistic economy is characterized by macroeconomic instability and that fiscal policy and monetary policy can be used to promote full employment, price-level stability, and economic growth.
The macroeconomic view that the main cause of changes in aggregate output and the
price level is fluctuations in the money supply; espoused by advocates of a monetary rule
MV=PQ, in which M is the supply of money, V is the velocity of
money, P is the price level, and Q is the physical volume of final goods and
equation of exchange
The number of times per year that the average dollar in the money supply is spent for final goods and services; nominal GDP divided by the money supply
A theory that business cycles result from changes in technology and resource availability, which affect productivity and thus increase or decrease long-run aggregate supply.
real-business cycle theory
A situation in which people do not reach a mutually beneficial outcome
because they lack some way to jointly coordinate their actions; a possible
cause of macroeconomic instability
The hypothesis that firms and households expect monetary and fiscal policies to have certain effects on the economy and (in pursuit of their own self-interests) take actions that make these policies ineffective.
rational expectations theory
the theory that, although unanticipated price-level changes may create macroeconomic instability in the short run, the economy is stable at the full-employment level of domestic output in the long run because prices and wages adjust automatically to correct movements away from the full employment, noninflationary output
new classical economics
unanticipated changes in the price-level
A wage that minimizes wage costs per unit of output by encouraging greater effort or reducing turnover.
The hypothesis that nominal wages are inflexible downward because firms are aware that workers (“insiders”) who retain employment during recession may refuse to work cooperatively with previously unemployed workers (“outsiders”) who offer to work for less than the current wage
The rule suggested by monetarism . As traditionally formulated, the rule says that the money supply should be expanded each year at the same annual rate as the potential rate of growth of the real gross domestic product; the supply of money should be increased steadily between 3 and 5 percent per year.(Also see Taylor rule.)