Chapter 11

Question 1

Say’s Law

Answer 1

supply creates own demand

Question 2

Potential GDP

Answer 2

output is at maximum, given our inputs and technology

Question 3

Animal Spirits

Answer 3

causes people to want fewer goods and services, causing prices to fall

Question 4

Recessionary Gap

Answer 4

potential GDP - recessionary equilibrium GDP

Question 5

Keynes’ favored what method of government spending?

Answer 5

direct government spending

Question 6

Fiscal Policy

Answer 6

using taxes to cure inflationary and recessionary gaps

Question 7

Data Lag

Answer 7

the time it takes to realize there is a problem

Question 8

Legislative Lag

Answer 8

politicians do not agree on spending and taxes and, even if they think there
is a problem, will fight about it

Question 9

Transmission Lag

Answer 9

once the policy goes into effect, it takes time to execute

Question 10

Effectiveness Lag

Answer 10

a completed project or policy does not instantly have its full effect

Question 11

Supply Side Economics

Answer 11

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

Question 12

Supply Side Economics focuses on

Answer 12

value creation

spending is what happens as a result of value creation

Question 13

The Laffer Curve

Answer 13

shows the relationship between tax rates

Question 14

We reach our potential GDP when…

Answer 14

the labor market is in equilibrium

Question 15

A recessionary gap exists when…

Answer 15

there is a surplus in the labor market