Econ-Chapter 11 Flashcards Preview

Fall 2016 > Econ-Chapter 11 > Flashcards

Flashcards in Econ-Chapter 11 Deck (56):

Say's Law

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


Say's law holds even in a money economy because

the interest rate adjusts to eliminate shortages or surpluses of funds


say's law relies on

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


potential GDP

where output is at its maximum given our inputs and technology


the relationship between potential output and unemployment

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


gut of goods

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


real business cycle theory

much of business cycle comes from real shocks to productivity


keynes beliefs that markets might not

reach equilibrium quickly


keynes idea of animal spirits

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


keynes addition to the "pizza place example"

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


The output (pizza) price falls

firms cut wages
mistake nominal wage cuts for real wage cuts


Workers might have contracts

have to eventually fire workers


however, when output of pizza falls ..

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


keyenes fails to explain with labor contracts

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


recessionary gap

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


in a recessionary gap

unemployment is higher than the natural rate of 5.5%


inflationary gap

the difference between potential GDP and the actual GDP this


inflationary gap unemployment would be

lower than the natural 5.5%


Keynes said

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


fiscal policy

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


in a recessionary gap the gov. should

spend more than it taxes, to create employment


in an inflationary gap the gov. should

tax more than it spends, to create a surplus


James Buchanan

keyenes ideas for running recessionary gaps-would be followed

but the idea for inflationary gaps-would not be followed


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

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


friedman and schwartz's 1971 book

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


if demand increases, the new equilibrium is only half that

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


no free lunch when

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



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


Keynes fits under the make-work fallacy rule

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


The economic stimulus Act of 2008

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



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


Fiscal policy is subject to the following lags

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


The data lag

the time it takes to realize there is a problem


the legislative lag

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


the transmission lag

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


transmission lag exampple

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


Effectiveness lag

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


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

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


2009 stimulus package

was counterproductive, money was not spent on roads and bridges to put people to work

shovel-ready jobs


three issues

-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


paul Krugman

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


Keyens theory on the great depression could only work if

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


the chain of economical events

-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


robert higgs

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"


Effects after the new deal, and war starts..

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


Supply Side Economics (SSE)

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.


affects of SSE

demand for labor increases
supply of labor
leads to expansion


SSE concentrates on

value creation, not on spending, ad keynesian economics does.

spending happens due to value creation

depends on creative ppl to help the economy


keynesian economics focuses on

governments overcoming the calculation problem to plan the economy


friedmans's Permanent Income Hypothesis in designing tax cuts

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


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

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


lump sum tax cut

this would not affect her willingness to expand her practice.


SSE likes- broad based tax cuts

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


SSE disliked

electric cars


Laffer curve

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


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

we cut taxes and tax revenues rise