Chapter 10 Flashcards
Say’s Law is
supply creates its own demand. If you supply a good, you demand something of equal value in return.
potential GDP
a point on the production possibilities frontier
below PPF= unemployed resources
a recessionary gap
the difference between potential GDP and this recessionary equilibrium’s GDP
inflationary gap
the difference between potential GDP and the actual GDP
the policy of using spending and taxes to cure inflationary and recessionary gaps
fiscal policy
The Data Lag
the time it takes to realize there is a problem
The Legislative Lag
- politicians do not agree on spending and taxes and, even if they think there is a problem, will fight about it
The Transmission Lag
Once the policy goes into effect, it takes time to execute.
The Effectiveness Lag
- a completed project or policy does not instantly have its full effect
regime uncertainty
the situation when government actions create great uncertainties for households and business, so that it becomes impossible to plan, resulting in economic stagnation
Supply Side Economics
a long run policy in which the government reduces the cost of value creation through production and trade in order to promote more value creation. SSE concentrates on value creation, not on spending, as Keynesian economics does. In the view of supply side economists, spending is what happens as a result of value creation–spending does not cause value creation.
Permanent Income Hypothesis
a change in someone’s after-tax income will affect their behavior if the increase is permanent, but not if the increase is temporary.
marginal tax rates
those that change as income, investment, or the other desired value creation activities change
broad based tax cuts
affect a wide range of economic activity
targeted tax cuts
only affect narrow categories activities that may or may not give incentives to create value
