chapter 11 Flashcards
Say’s Law
supply creates its own demand.
What can go wrong with says law in a money economy?
someone can sell a good, then not spend all the money they get for it, saving some instead.
What process can guarantee that Say’s law will work in a money economy.
When people save at interest, either by direct or indirect finance, the money goes to somewhere, and is spent.
How does the concept of potential GDP relate to the PPF model?
If all our resources are employed we are on the PPF, producing the amount of GDP called “potential GDP.”
True, False, Explain: If we are at a point below the PPF, there must be a shortage of labor.-
False: To be at a point below the PPF, there must be unemployment, which is consistent with a surplus of labor.
How did Keynes view recessions? How did the Chicago and Austrian schools view recessions?
Keynes viewed recessions as coming from problems with labor markets. Austrian and Chicago school economists viewed recessions as coming from real shocks to the economy or from government failure
What two reasons does Keynes give for saying that wages do not easily fall? Explain
Workers mistake nominal wage cuts from deflation for real wage cuts and reduce their labor supply. Labor contracts keep wages from falling.
a recessionary gap exists when
there is a surplus in the labor market. Potenial GDP minus actual GDP in a downturn
Keynesian fiscal policy would dictate
running deficits during recession
the problem with financing gov’t spending by foreign borrowing is that
economic activity declines in the future
the spending done by the 2009 Stimulus package was done in
none of the above
supply side economics
aims for long run growth; 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. Government may lower the cost of value creation by reducing taxes and reducing regulation, increasing the ability and incentives to produce and trade.
regime uncertainty
extend the gov’t’s calculation problem to the rest of the economy; When government actions create great uncertainties for households and business, it becomes impossible to plan, resulting in economic stagnation.
Keynesians worried that
after WW2 ended, decreases in gov’t spending would cause an even greater depression to begin
What criticism can be made of Keynes’ assertion that workers quit jobs at low nominal wages and stay unemployed, looking for jobs at the higher nominal wage?
Workers must remain ignorant, not learning that labor market conditions have changed–for a long time, if this is to be a large problem.
What criticism can be made of Keynes’ assertion that labor contracts cause unemployment?-
If the contracts are a large problem then firms go out of business, which dissolves the contracts. Then workers look for jobs at the lower wages.
How do recessionary gaps and inflationary gaps relate to the natural rate of unemployment?
If output is lower than potential, unemployment is above the natural rate. If output is higher than potential, unemployment is below the natural rate.
What is Keynes’ remedy for a recession?
What is Keynes’ remedy for a recession?
Why did Keynes’ consider tax cuts as a weaker tool than spending increases?-
?- People might save the tax cut, rather than spend it.
How would Bastiat reply to Keynes’ emphasis on spending over saving?
When we save at interest, someone spends the money.
What did James Buchanan say about Keynes’ “fiscal policy?
Politicians would run deficits, but would never run surpluses, so deficits would always involve redirecting spending, rather than increasing spending, ala Bastiat.
What is wrong with financing Keynesian fiscal policy by money creation
it is inflationary
When Keynes discusses filling bottles with money and burying them in mine shafts so that people will dig them up and spend the money, what is his error in thinking?
he had succumbed to the make work fallacy.
What is Bastiat’s criterion for which public works should be constructed?
Those which have value in excess of their cost. Since their construction moves resources from a productive area, they should only be moved to more productive areas.
