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1
Q

Say’s Law

A

Supply creates its own demand. If you supply a good, you demand something of equal value in return.

2
Q

Even in 1850, Say and Bastiat dismissed the idea that there was what?

A

A great deal of money under the mattress– nearly all savings was in the banking system

3
Q

1850… In loanable funds market, the interest rte adjusts so that all saved funds are loaned out at?

A

Equilibrium interest rate… 6% in the graph

4
Q

Say’s Law holds in a money economy because?

A

Interest rate adjusts to eliminate shortages or surpluses of funds

5
Q

With a higher supply of loanable funds, what happens to interest rate?

A

It falls until all saved funds are loaned out. The rate falls from 6% to 5%, and at that rate, all of the decreased consumption, due to savings becomes investment and consumption fueled by borrowing.

6
Q

Say’s Law relies on free market…

A

Adjustments of interest rates, guarantees that there cannot be a general overproduction or underproduction of goods.

7
Q

Overproduction of goods would necessitate that workers be laid off until?

A

Inventories were sold, thus a recession would occur

8
Q

Potential GDP

A

Points on the production possibilities frontier, where output is at its maximum given our inputs and technology.

9
Q

Since wages adjust to eliminate shortages and surpluses…

A

We must always be at our potential

10
Q

Some economists contended that there were times when we observe inventories building up, causing?

A

general unemployment, that is, at least for a while there was a surplus of labor and we were below the PPF. “Glut of goods” = recession

11
Q

Classical economists in the 1700s up to the early 1900s hypothesized that any gluts of goods happened because?

A

Markets might not adjust quickly to huge systemic changes, such as earthquakes or war

12
Q

Real Business Cycle Theory

A

Chicago School, said much of the business cycle comes from real shocks to productivity

13
Q

Both the Chicago school and the Austrians also looked towards government as a creator of?

A

Recessions, either through misdirection or resources because of regulation, due to a government laboring under the calculation problem, or through errors made in the money supply.

14
Q

Keynes, writing about the GD, hypothesized that?

A

Labor markets might not reach equilibrium quickly

15
Q

(Keynes) If an imbalance in the economy gave us a labor surplus, then a higher-than-equilibrium wage gave us?

A

Unemployment– the wage may not fall quickly

16
Q

Keyes said that unemployment would persist until…

A

Something from the outside the labor force market changed

17
Q

Animal Spirits (Keynes)

A

Irrationally pessimistic feelings spread throughout the economy.

18
Q

Animal Spirits cause?

A

People to want fewer goods and services (demand falls) causing prices to fall.

19
Q

Keynes changed the pizza place example by?

A

Supposing that prices of output adjust first, but 2 things prevent resource prices, including wage, from changing quickly.

20
Q

When output falls, price falls, so firms must cut wages and their output is now worth less. What else?

A

Workers get paid less, so they quit because they want a job paying the old salary, but those don’t exist anymore.

21
Q

Workers might have labor contracts, which means?

A

Pizza place owner must shut down or cut back on output, firing workers.

22
Q

Keynes first point is dumb, because? (Workers want jobs at old salary)

A

He didn’t explain how workers who mistook nominal wage cuts for real wage cuts could search for jobs at a nonexistent higher paying wages for over a decade.

23
Q

Keynes 2nd point is also dumb (Labor contracts)

A

People are fired anyways, they get other jobs, and the economy is fixed.

24
Q

Recessionary Gap

A

Keynes called the difference between potential GDP and this recessionary equilibrium’s GDP

25
Q

If potential GDP is $18T, and our actual GDP is $16T, in Keynes language, we have how much recessionary gap?

A

$2T. Unemployment would be higher than the natural rate of 5.5%

26
Q

Inflationary Gap

A

Keynes called the difference between potential GDP and the actual GDP

27
Q

If potential GDP is $18T and our actual GDP is $19T, then we have how much inflationary gap?

A

$1T. Unemployment would be lower than the natural rate of 5.5%

28
Q

Keynes said the Great Depression was an example of labor markets that did what?

A

Refused to adjust and that the most important way to remedy the economy was for the government to spend, in order to hire the unemployed workers.

29
Q

Keynes said that one could use tax cut policies to help, leaving people what?

A

More of their income to spend on output, causing more hiring.

30
Q

Fiscal Policy

A

Keynes called the policy of using spending and taxes to cure inflationary and recessionary gaps

31
Q

In an inflationary gap, the government should tax more than it spends, running a?

A

Surplus, taking money out of the economy to end inflation.

32
Q

James Buchanan, showed that Keynes remedy of deficit spending during recessionary gaps WOULD be followed, but?

A

His policy of running surpluses during inflationary gaps WOULD NOT be followed.

33
Q

If government acquires the funds through taxes, it does what to spending?

A

Merely redirects is as Bastiat says

34
Q

If govt acquires funds by money creation, then what happens to the money supply?

A

Increases, merely increases prices in the long run, leaving output unchanged.

35
Q

What did Friedman and Schwartz’s 1991 book, A Monetary History of the United States claim?

A

Money creation fuels inflation without increasing long run growth

36
Q

If govt acquires funds by borrowing, then their increased demand for loanable funds will?

A

Raise interest rates. At higher interest rates, there will be less private borrowing by businessses to invest

37
Q

If govt spending is domestically financed, when are resources withdrawn from the economy?

A

Immediately

38
Q

If govt spending is financed by foreign borrowers, when are resources withdrawn from the foreign country?

A

Immediately, so crowding out only affects the domestic economy later, when the bonds are paid off.

39
Q

How much of the population did Greece support?

A

40%

40
Q

The Economic Stimulus Act of 2008

A

Authorized sending checks to taxpayers, calling the payments “tax rebates”

41
Q

The Data Lag

A

Time it takes to realize there is a problem

42
Q

The Legislative Lag

A

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

43
Q

The Transmission Lag

A

Once the policy goes into effect, it takes time to execute.

44
Q

The Effectiveness Lag

A

Completed project or policy does not instantly have its full effect.

45
Q

A relatively quick fiscal policy project might last how long?

A

7 month data lag, 6 month legislative lag, 12 month transmission lag, plus a 5 month effectiveness lag. 2 1/2 yrs

46
Q

2009 stimulus package

A

$778B, not much spent before US was out of a recession in June ‘09.

47
Q

The Congressional Budget office estimated that __ of the stimulus would be spent in all of ‘09, and __ in ‘10, and __ over the next 8 yrs.

A

24%; 51%, 25%

48
Q

Most of the 24% spent in ‘09 involved handing money to states to do what?

A

Pay unemployment benefits, enroll people for food stamps, and pay Medicaid bills.

49
Q

Paul Krugman

A

9/11, broken windows dude.

50
Q

What did Robert Clower say?

A

“There is no need to explain why the economy failed during the Great Depression because government failures explain it all”

51
Q

What did the Smoot-Hawley trade tariffs do?

A

1930; set off a world-wide trade war during the Great Depression

52
Q

Regime Uncertainty

A

Robert Higgs. Making it impossible for households and businesses to plan for the future.

53
Q

Congress cut business taxes after WW2 from?

A

90% to 38%.

54
Q

What did Kenneth Roose say in 1954?

A

Outlook was uncertain after the war, “but one of these uncertainties is not the type of economy in which business decisions are to be made”

55
Q

Higgs cites a poll during the New Deal era that showed that businesspersons said FDR was doing what?

A

Harming the economy by a margin of 65% to 26%.

56
Q

93% of businessmen expected less freedom after the war than before the war and….

A

40% expected that govt would dominate the economy, leaving a minor role for private business

57
Q

Supply Side Economics (SSE)

A

Long run policy in which the govt reduces the cost of value creation through production and trade in order to promote regulation, increasing the ability and incentives to produce and trade.

58
Q

Why does the supply of labor increase?

A

Since lower payroll taxes and income taxes give households greater rewards from work.

59
Q

If Supply Side economics work, we should see what?

A

Gains in employment, new business creation, and business expansion that persists in the long run.

60
Q

SSE concentrates on what?

A

Value creation, not on spending, as Keynesian economics does.

61
Q

In view of SSE, spending is?

A

What happens as a result of value creation– spending does NOT cause value creation.

62
Q

What did Daniel Webster say?

A

“The power to tax is the power to destroy”

63
Q

What did Calvin Coolidge’s Secretary of the Treasury say?

A

Andrew Mellon recommended a large tax cut to spur economic growth, which it did during the 1920’s.

64
Q

Permanent Income Hypothesis

A

Milton Friedman; Change in someone’s after-tax income will affect their behavior if the increase is permanent, but not if the increase is temporary.

65
Q

SSE would not have recommended the ‘08 stimulus “tax rebate” because?

A

It was a 1 time change that would not seriously change individual behavior.

66
Q

Marginal Tax Rates

A

SSE recommends this; those that change as income, investment, or the other desired value creation activities change.

67
Q

Lump Sum Tax Cut

A

Not affect her willingness to expand her practice

68
Q

SSE advocates broad based tax cuts,

A

which affect a wide range of economic activity

69
Q

Targeted Tax Cuts

A

Only affect narrow categories activities that may or may not give incentives to create value

70
Q

SSE would NOT have recommened Bush’s?

A

Tax credit for having a fucker.

71
Q

What did Arthur Gaffer point out?

A

In some circumstances, tax cuts do not even increase deficits.

72
Q

What does the Gaffer Curve show?

A

The relationship between tax rates- the % paid- and tax revenues- the dollars the govt receives.

73
Q

Around 40% tax rate, what happens?

A

$ the govt gets goes down

74
Q

SSE relies on assumptions like?

A

“People respond to incentives” “lower cost per unit encourages business to expand” “as business expands, more labor is hired” “people are willing to work more as the rewards to work increase” &