Ch 11

Question 1

What does Say’s Law say?

Answer 1

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

Question 2

What does Say, say different about money economies?

Answer 2

In money economies there can be an imbalance in the overall supply and demand, so there can be an overproduction of goods (Say still says that his law still holds)

Question 3

Why does Say’ law still hold in money economies?

Answer 3

because the interest rate adjusts to eliminate shortages or surpluses of funds

Question 4

What is potential GDP?

Answer 4

the points at which output is at its maximum given inputs and technology

Question 5

What did early economist realize about the potential output and unemployment?

Answer 5

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

Question 6

What is a “glut of goods” compared to?

Answer 6

a recession

Question 7

Who created the “real business cycle theory”?

Answer 7

The Chicago School

Question 8

What is the real business cycle theory?

Answer 8

it says that much of the business cycle comes from real shocks of productivity

Question 9

Which two schools think that the government is the only creator of recessions?

Answer 9

Austrians and The Chicago School

Question 10

What did John Keynes hypothesized when writing about The Great Depression?

Answer 10

labor markets might not reach equilibrium quickly

Question 11

What are “animal spirits”?

Answer 11

pessimistic feelings according to Keynes.

Question 12

What do animal spirits cause?

Answer 12

people to want fewer goods and serves causing prices and the demand to fall

Question 13

What are nominal wage cuts?

Answer 13

cuts to wages because the prices of everything else are cut. For example, when someone receives a pay cut that doesn’t know its nominal. they quit their job to find a higher paying job, but then realize that it is everywhere

Question 14

What does Keynes not address?

Answer 14

1) he did not explain how employees who mistook the wage cuts for real wage cuts and not nominal wages cuts how they searched for higher paying jobs for a decade
2) there is not enough support for his employee contract theory

Question 15

What do Keynes people do about jobs?

Answer 15

Instead of accepting lower wages, they decide to be unemployed

Question 16

What did Keynes call a Recessionary gap?

Answer 16

the difference between potential GDP and recessionary equilibriums GDP

Question 17

So if our potential GDP is 18 trillion and our actual GDP is 16 trillion than?

Answer 17

Keynes would say we have a 2 trillion recessionary gap, in this recessionary gap the unemployment rate would be higher than the natural rate of 5.5%

Question 18

What did Keynes believe about the macroeconomy?

Answer 18

He believed that it could fall into a bad short run equilibrium that lasted a long time and had high unemployment and that the economy could also get stuck with output above its potential due to labor shortages

Question 19

How did Keynes describe the inflationary gap?

Answer 19

the difference between potential GDP and the actual GDP

Question 20

So if the potential GDP is 18 trillion and our actual GDP is 19 trillion than?

Answer 20

We have a 1 trillion inflationary gap which then would make the unemployment rate lower than the average rate of 5.5%

Question 21

What did Keynes believe the best way to get out of the Great depression?

Answer 21

make the government spend in order to hire unemployed workers (direct government spending because he was scared people would save tax revenue from the government if handed to them)

Question 22

What did Keynes call the fiscal policy?

Answer 22

the policy of spending and taxing to cure inflationary and recessionary gaps

Question 23

What are Keynes three problems?

Answer 23

1) Where does the money come from?
2) Keynes suffers from make work fallacy
3) Lags

Question 24

What are the four lags?

Answer 24

1) The data lag
2) The legislative lag
3) The transmission lag
4) The effectiveness lag

Question 25

What is the data lag?

Answer 25

is the time it takes to realize that there is a problem, once politicians realize there is a problem, it is already seven months past. Once the problem is found and actions are taken, most recessions have already ended by then.

Question 26

What is the legislative lag?

Answer 26

politicians fight on how to spend tax payers money when problems occur even when they all agree there is a problem and by the time a decision has been decided upon and is sent to Congress, it has already been a year

Question 27

What is the transmission lag?

Answer 27

it is once the policy goes in to effect and the time in which it finally starts and finishes. It takes forever, due to many policies, actions and steps in which must be taken

Question 28

What is the effectiveness lag?

Answer 28

Even when there is a completed policy, it takes a while for people to adjust to the new idea. Investors take some time to the new tax cut and it may take people a year or two to find out about a new consumer loan program

Question 29

What is regime uncertainty?

Answer 29

Called by Robert Higgs, it is the confusion in which surrounded the shocks of the great depression which made it impossible for households and businesses plan for the future

Question 30

How many pieces did Higgs list?

Answer 30

40

Question 31

After WW2 what did congress do about taxes?

Answer 31

they cut taxes from 90% to 38%

Question 32

What is supply side economics?

Answer 32

a long run policy in which the government reduces the COSTS of value creation through production and trade in order to promote more value creation, they could do this by lowering taxes,reducing regulation, increasing the ability and incentives to produce or trade

Question 33

What does supply side economics do to the work force and supply and demand?

Answer 33

the demand for labor increases with more freedom, the supply of labor increases because there is more of a reward to work. Both of these lead to an expansion in employment at a stable wage rate

Question 34

What is Milton Friedman’s Permanent Income Hypothesis?

Answer 34

it is a design in tax cuts. It says that people will likely not take action when tax cuts are temporary, but only when they are permanent

Question 35

What does supply side economics only recommend changes in?

Answer 35

marginal tax rates

Question 36

What are marginal tax rates?

Answer 36

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

Question 37

What is a lump sum tax cut?

Answer 37

A tax cut in which is not a percentage that is taken away but a specific number. This will not encourage workers.

Question 38

What are broad based tax cuts?

Answer 38

they are cuts that effect a wide range of economic activity (they are more likely to create incentives to create value)

Question 39

What are targeted tax cuts?

Answer 39

they are cuts that effect a specific area in the economy and these may or may not give incentives to create value

Question 40

What is the Laffer Curve?

Answer 40

it shows the relationships between tax rates, the percentage paid, and tax revenues (the dollar the government receives)

Question 41

What is important to watch in the Laffer Curve?

Answer 41

it is important to watch the tax rates because at a certain point, if too much of the peoples taxes are being taken away than the worker is going to be discouraged from creating value

Question 42

If we are right of the maximum of the Laffer curve, then?

Answer 42

as we cut taxes, tax revenue rises

Question 43

Who presented this in 1980?

Answer 43

Ronald Reagan

Question 44

Who called Ronald Reagan theories, the voodoo economics?

Answer 44

George Bush