Econ-Chapter 11

Question 1

Say’s Law

Answer 1

supply creates its own demand,
if you supply a good, you demand something of equal value in return
works in a barter economy

Question 2

Say’s law holds even in a money economy because

Answer 2

the interest rate adjusts to eliminate shortages or surpluses of funds

Question 3

say’s law relies on

Answer 3

free market adjustments of interests rates that guarantees that there cannot be a general overproduction or underproduction of goods

Question 4

potential GDP

Answer 4

where output is at its maximum given our inputs and technology

Question 5

the relationship between potential output and unemployment

Answer 5

since wages adjust to eliminate shortages and surpluses, we must always be at our potential

Question 6

gut of goods

Answer 6

happens because market might not adjust quickly to huge systemic changes-such as earthquakes or war

Question 7

real business cycle theory

Answer 7

much of business cycle comes from real shocks to productivity

Question 8

keynes beliefs that markets might not

Answer 8

reach equilibrium quickly

Question 9

keynes idea of animal spirits

Answer 9

the economy starts at full employment then , irrationally pessimistic feelings that are called this spread throughout the economy, now people want fewer goods causing prices to fall

Question 10

keynes addition to the “pizza place example”

Answer 10

prices of output adjust first, but two things prevent resource prices , including wage, form changing quickly

Question 11

The output (pizza) price falls

Answer 11

firms cut wages

mistake nominal wage cuts for real wage cuts

Question 12

Workers might have contracts

Answer 12

have to eventually fire workers

Question 13

however, when output of pizza falls ..

Answer 13

keynes left out how people could search of nonexistent higher paying wages for over a decade

Question 14

keyenes fails to explain with labor contracts

Answer 14

people who loose their job could then find lower paying jobs leaving no unemployment

Question 15

recessionary gap

Answer 15

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

Question 16

in a recessionary gap

Answer 16

unemployment is higher than the natural rate of 5.5%

Question 17

inflationary gap

Answer 17

the difference between potential GDP and the actual GDP this

Question 18

inflationary gap unemployment would be

Answer 18

lower than the natural 5.5%

Question 19

Keynes said

Answer 19

the great depression as because labor markets refused to adjust and the gov. needed to spend more, tax cut policies, and direct gov. spending

Question 20

fiscal policy

Answer 20

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

Question 21

in a recessionary gap the gov. should

Answer 21

spend more than it taxes, to create employment

Question 22

in an inflationary gap the gov. should

Answer 22

tax more than it spends, to create a surplus

Question 23

James Buchanan

Answer 23

keyenes ideas for running recessionary gaps-would be followed

but the idea for inflationary gaps-would not be followed

Question 24

Where does the money come from to run deficits to cure recessionary gaps

Answer 24

• taxes, redirects spending
• money creation,leaves output unchanged
• borrowing,increased demand for loanable funds which will raise interest rates

Question 25

friedman and schwartz's 1971 book

Answer 25

is an unchallenged claim that money creation fuels inflation without increasing long run growth

Question 26

if demand increases, the new equilibrium is only half that

Answer 26

businesses and firms are now crowded out of the loanable funds market

Question 27

no free lunch when

Answer 27

borrowing locally, and borrowing domestically won't have to pay back until long run)

Question 28

Greece

Answer 28

spent a lot financed through foreign sources | germans were able to pay and greece

Question 29

Keynes fits under the make-work fallacy rule

Answer 29

the idea that jobs have value other than the value of goods and services that the labor produces

Question 30

The economic stimulus Act of 2008

Answer 30

authorized sending checks to taxpayers-calling the payments "tax rebates" people who didn't even pay taxes could receive this "rebate" takes nine months to elapse

Question 31

HOWEVER

Answer 31

- most recessions are shorter than the time-lapse of nine months - politicians don't usually know when an economic problem begins

Question 32

Fiscal policy is subject to the following lags

Answer 32

The data lag, the legislative lag,the transmission lag,the effectiveness lag

Question 33

The data lag

Answer 33

the time it takes to realize there is a problem

Question 34

the legislative lag

Answer 34

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

Question 35

the transmission lag

Answer 35

once the policy goes into affect, it takes time to go into affect.

Question 36

transmission lag exampple

Answer 36

``` highways- surveying must be done property purchased environmental surveys bids must be taken for the construction construction company must build road ```

Question 37

Effectiveness lag

Answer 37

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

Question 38

It takes how long for a fiscal policy to be full in affect

Answer 38

2 and a half years, happens after the problem is resolveed

Question 39

2009 stimulus package

Answer 39

was counterproductive, money was not spent on roads and bridges to put people to work shovel-ready jobs

Question 40

three issues

Answer 40

- not understanding how the fiscal policy could help the economy - make-work fallacy and dismiss gov. calculation problem - how the lags in the process are not relevant to fiscal policy

Question 41

paul Krugman

Answer 41

displayed his love of broken windows as an economic stimulus after 9/11 attacks by referring to the damage caused to New York

Question 42

Keyens theory on the great depression could only work if

Answer 42

workers must refuse to work at lower paying jobs for years in order for his theory to explain the great depression

Question 43

the chain of economical events

Answer 43

- milton freidman and anna schwartz-TGD- the fed destroyed money supply - the monetary and banking crises led to the stock market crash in 1929, us wealth down hill - prez. herbert-raised gov. spending to reduce unemployment - roosevelt-paper money, backed by gold - roosevelt-new deal

Question 44

robert higgs

Answer 44

his research showed how the economy during the great depression made it impossible to save for the future, this was referred to as " regime uncertainty"

Question 45

Effects after the new deal, and war starts..

Answer 45

- economy focused more on the troops, which caused shortages to the ppl. - predication of economic disastor - cut business taxes

Question 46

Supply Side Economics (SSE)

Answer 46

is 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 47

affects of SSE

Answer 47

demand for labor increases supply of labor leads to expansion

Question 48

SSE concentrates on

Answer 48

value creation, not on spending, ad keynesian economics does. spending happens due to value creation depends on creative ppl to help the economy

Question 49

keynesian economics focuses on

Answer 49

governments overcoming the calculation problem to plan the economy

Question 50

friedmans's Permanent Income Hypothesis in designing tax cuts

Answer 50

he showed that tax cuts would affect someones behavior if it is permanent. aka- SSE would not be good

Question 51

marginal rates - only recommends changes in marginal tax rates which means

Answer 51

those that change as income, investment, or the other desired value creation activities change.

Question 52

lump sum tax cut

Answer 52

this would not affect her willingness to expand her practice.

Question 53

SSE likes- broad based tax cuts

Answer 53

affect a wide range of economic activity, not targeted tax cuts , that only affect narrow categories , and give no incentive to value.

Question 54

SSE disliked

Answer 54

electric cars

Question 55

Laffer curve

Answer 55

show the relationship between tax rates-the percentage paid-tax reveunes-the dollars the government receives.

Question 56

if we are to the right of the man of the curve..

Answer 56

we cut taxes and tax revenues rise