Test One Cards

Question 1

Nominal GDP

Answer 1

Current purchasing power

Question 2

Real GDP

Answer 2

Purchasing power of a specific base year

Question 3

Classical Economics

Answer 3

“The market works”

Supply is vertical

Question 4

True or False: In classical economics, wages and price adjust together.

Answer 4

True

Question 5

Keynesian Economics

Answer 5

Reliance on government intervention

Response to the Great Depression

Question 6

Money Illusion

Answer 6

Workers thinking in nominal terms rather than real terms

‘Getting a pay increase of $1, when inflation went up $3, and thinking you’re still doing well’

Question 7

What is the problem with money illusion regarding wages?

Answer 7

Workers refuse to take pay cuts

Question 8

Long-Term Labor Contracts

Answer 8

Indexation clauses

Typically work upwards, rather than downwards –> layoffs when wages won’t fall

Question 9

Signal extraction problem

Answer 9

You don’t know if a demand decrease is permanent initially, so you keep prices firm, rather than lowering them

Question 10

How does Keynes say we should promote economic activity?

Answer 10

Rather than waiting for demand to increase, you need to stimulate the economy through the government.

Question 11

What is the equation for Ydisp?

Answer 11

y - T + TR

Question 12

C as a function of Ydisp?

Answer 12

C = Co + bYdisp

Question 13

C as a function of Y?

Answer 13

C = [Co - bTo + bTR] + b(1 - T)y