Flashcards in Chapter 11 Deck (32):
What did Jean-Baptiste Say reason about the economy?
When someone offers something, they demand something in return.
What is Say's Law?
Supply creates its own demand because when we offer something, we demand something in return.
What does Say's Law mean about production?
There can never be an overproduction or underproduction of goods, therefore prices adjust because of production.
What would Say say about lumber being sold in the market for $1000 , then the lumber yard saving $400 and spending only $600?
Unless the lumber yard puts the $400 under their mattress, there is still an equal number of supply/demand because the $400 still touches the economy because it goes into banks and is then lent and spent.
Since this saved money is "spent", what does that mean about the interest rate on loaned money?
The interest rate is adjusted in a money economy so that there is not a surplus or shortage of funds.
What would an overproduction mean for the labor market?
There will be an increase in unemployment, because firms will lay off employees to meet the cost of production.
What is potential GDP?
The points on the PPF where output is maximized given inputs and technology.
What does a point below the curve mean?
There are unemployed resources, making a surplus of labor.
What did early economists learn about the link between potential output and unemployment?
Since wages adjust to eliminate labor surpluses and shortages, we must be at our potential.
What is the real business cycle theory?
A theory from the Chicago school of economics that attributed the business cycle to shocks of productivity.
What is the "real" reason that the Chicago and Austrian school thought about recessions?
They are caused by government regulation and inefficiencies, the calculation problem, and errors in the money supply.
What did Keynes think about the speed of the labor market?
He thought it might not adjust that quickly, that if there was overproduction, wages might not drop fast enough and unemployment would persist until something caused it to drop.
What did Keynes label as "animal spirits"?
Irrationally pessimistic feelings that spread through an economy, causing consumers to want fewer goods (demand falls), causing prices to fall.
How did Keynes modify the pizza place example to fit his idea about the labor market?
As the price of pizza falls, wages fall at the same rate. Everyone is still as well off, yet, people leave their now low-paying jobs to find higher paying jobs, but there aren't higher paying jobs, so they just are unemployed as their old jobs get filled. Or, if the pizza place has a labor contract, and pizza prices half, wages can't be cut in half for the price cut, so pizza production slows.
What are the critiques of Keynes idea on recession?
How did it take so long? and Labor contracts are hard to defend because if firms go under, people will just settle for less-paying jobs.
What did Keynes call the "recessionary gap"?
The gap potential potential GDP and actual GDP caused by a recession?
What did Keynes call the "inflationary gap"?
The gap between the potential GDP and inflated GDP.
What did Keynes call "fiscal policy"?
the policy of using spending and taxes to cure recessionary or inflationary gaps.
How did employees experience a lag in 2008?
Checks were sent to taxpayers as a "rebate", which was actually a stimulus plan, but, the checks didn't make it to individuals until 9 months after the beginning of the recession. Most recessions don't last past two quarters.
List and explain the different types of lag related to fiscal policy.
The Data Lag: it takes time to realize there is a recession, and if politicians wait until after the recession, they've waited too long. The Legislative Lag: even if legislators realize there is a recession, they might not agree on how to solve it. The Transmission Lag: the recession could have been noticed, and legislation passed, but it might not have affected the economy because of the time it takes to enact legislation. Effectiveness lag: policies might not take effect that soon.
Why is lag problematic?
By the time the legislation reaches, is agreed upon, and enacted, it might be two years after the recession.
What does Robert Higgs call "regime uncertainty"?
The government policies shocked the U.S. population, increasing uncertainty with civilians on how to approach the economy.
What is supply side economics?
A policy in which the government reduces the cost of value creation through production and trade to create more value, done through decreasing taxes and regulation
What happens if supply side economics works?
Gains in employment, new business creation, and business expansion that persists in the long run
How does SSE differ from Keynesian economics?
SSE focus on value creation instead of spending. SSE thinks spending happens because of value creation.
What is Friedman's Permanent income hypothesis?
If an increase in someone's income is permanent, their economic behavior will change.
What type of changes do SSE like?
Changes in marginal tax rates-- those that change as income, investment, and other value creation behaviors change.
What are lump-sum tax cuts?
Tax cuts by a certain number that will likely not change behavior of the taxed.
What is the difference between broad based tax cuts and targeted tax cuts?
Broad based tax cuts cut across a broad spectrum of economic activity, whereas targeted tax cuts do not.
What do opponents of SSE think about tax cuts?
THey think they create government budget deficits,
What is the Laffer curve?
the relationship between tax rates and tax revenues, showing how much the government earns from taxation.