Chapter 11

Question 1

Say’s Law

Answer 1

supply creates its own demand

Question 2

if you supply a good,

Answer 2

gvt demands something of equal value in return

Question 3

Equilibrium interest rate

Answer 3

6%

Question 4

Higher supply of loanable funds,

Answer 4

interest rates fall

Question 5

Pontential GDP

Answer 5

output is at maximum given out inputs and technology

Question 6

Real Business Cycle Theory

Answer 6

Much of business cycle comes from real shocks to productivity

Question 7

Animal Spirits

Answer 7

Irrational pessimistic feelings that spread throughout economy

Question 8

Animal spirits cause fall in …

Answer 8

demand and prices

Question 9

Recessionary Gap

Answer 9

Difference between potential GDP and recessionary equilibrium’s GDP

Question 10

Inflationary Gap

Answer 10

Difference between potential GDP and actual GDP

Question 11

Fiscal Policy

Answer 11

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

Question 12

In recessionary gap,

Answer 12

gvt should spend more than it taxes

Question 13

In inflationary gap,

Answer 13

gvt should tax more than it spends

Question 14

The Data Lag

Answer 14

Time it takes to realize there is a problem

Question 15

The Legislative Lag

Answer 15

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

Question 16

The Transmission Lag

Answer 16

Time to execute policy

Question 17

The Effectiveness Lag

Answer 17

Completed project or policy does not instantly have its full effect

Question 18

Relatively quick fiscal policy is…

Answer 18

2.5 years: 7mon data lag, 6mon legislative, 12mon tansmission, 5mon effectiveness

Question 19

Regime Uncertainty

Answer 19

Confusion surrounding gvt changes that shocked economy during Great Depression, which made it impossible for households and businesses to plan the future

Question 20

Supply Side Economics (SSE)

Answer 20

Long run policy in which gvt reduces cost of value creation through production and trade in order to promote more value creation

Question 21

gvt can reduce SSE by…

Answer 21

reducing taxes and regulation

Question 22

SSE concentrates on …

Answer 22

value creation, not spending

Question 23

Permanent Income Hypothesis

Answer 23

Change in someone’s after-tax income will affect their behavior if the increase is permanent

Question 24

Marginal Tax Rates

Answer 24

Those that change as income, investment, or other desires value creation activities change

Question 25

Lump Sum Tax Cut

Answer 25

Cutting tax rate by an amount instead of percentage

Question 26

Broad Based Tax Cut

Answer 26

Affect narrow categories activities that may or may not give incentives to create value

Question 27

Laffer Curve

Answer 27

Relationship between tax rates (% paid) and tax revenues ($ gvt receives)