Chapter 11 Flashcards
(74 cards)
Say’s Law
Supply creates its own demand. If you supply a good, you demand something of equal value in return.
Even in 1850, Say and Bastiat dismissed the idea that there was what?
A great deal of money under the mattress– nearly all savings was in the banking system
1850… In loanable funds market, the interest rte adjusts so that all saved funds are loaned out at?
Equilibrium interest rate… 6% in the graph
Say’s Law holds in a money economy because?
Interest rate adjusts to eliminate shortages or surpluses of funds
With a higher supply of loanable funds, what happens to interest rate?
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.
Say’s Law relies on free market…
Adjustments of interest rates, guarantees that there cannot be a general overproduction or underproduction of goods.
Overproduction of goods would necessitate that workers be laid off until?
Inventories were sold, thus a recession would occur
Potential GDP
Points on the production possibilities frontier, where output is at its maximum given our inputs and technology.
Since wages adjust to eliminate shortages and surpluses…
We must always be at our potential
Some economists contended that there were times when we observe inventories building up, causing?
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
Classical economists in the 1700s up to the early 1900s hypothesized that any gluts of goods happened because?
Markets might not adjust quickly to huge systemic changes, such as earthquakes or war
Real Business Cycle Theory
Chicago School, said much of the business cycle comes from real shocks to productivity
Both the Chicago school and the Austrians also looked towards government as a creator of?
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.
Keynes, writing about the GD, hypothesized that?
Labor markets might not reach equilibrium quickly
(Keynes) If an imbalance in the economy gave us a labor surplus, then a higher-than-equilibrium wage gave us?
Unemployment– the wage may not fall quickly
Keyes said that unemployment would persist until…
Something from the outside the labor force market changed
Animal Spirits (Keynes)
Irrationally pessimistic feelings spread throughout the economy.
Animal Spirits cause?
People to want fewer goods and services (demand falls) causing prices to fall.
Keynes changed the pizza place example by?
Supposing that prices of output adjust first, but 2 things prevent resource prices, including wage, from changing quickly.
When output falls, price falls, so firms must cut wages and their output is now worth less. What else?
Workers get paid less, so they quit because they want a job paying the old salary, but those don’t exist anymore.
Workers might have labor contracts, which means?
Pizza place owner must shut down or cut back on output, firing workers.
Keynes first point is dumb, because? (Workers want jobs at old salary)
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.
Keynes 2nd point is also dumb (Labor contracts)
People are fired anyways, they get other jobs, and the economy is fixed.
Recessionary Gap
Keynes called the difference between potential GDP and this recessionary equilibrium’s GDP
