Chapter 11 Flashcards
Define Say’s Law
Supply creates its own demand. If you supply a good, you demand something of equal value in return
What did Say observe in a money economy?
There could be an imbalance between the overall supply and demand, so there could be an overproduction of goods
Same as Bastiat, what does Say believe in?
To save is to spend
What is the role of interest rates?
Interest rates adjust to eliminate shortages or surpluses of funds
With a higher supply of loanable funds, what happens to interest rates?
Interest rates fall until all the saved funds are loaned out
In Say’s Law, is it possible for an overproduction or underproduction of goods to occur?
No
What is the effect of an overproduction of goods?
Workers would be laid off until the inventories were sold, a recession would occur
Define potential GDP
Where output is at its maximum given our inputs and technology
When a point is below the PPF, what happens?
Workers are looking for jobs and more labor is being supplied than is being demanded
What is the role of wages?
To eliminate shortages and surpluses
Define real business cycle theory
Much of the business cycle comes from real shocks to productivity
Keynes believed that two things prevent resource prices, including the wage, from changing quickly. What are they?
The output of price falls and workers might have labor contracts
In following Keynes, what would the individuals rather do?
They would rather stay unemployed with zero income than take a job earning less than they previously did
Define recessionary gap
The difference between potential GDP and this recessionary equilibrium’s GDP
Define inflationary gap
The difference between potential GDP and the actual GDP
