Chapter 11 Flashcards
True, False. Say’s law says that the reason that “supply creates its own demand” is that when someone wants a good, business has an incentive to produce that good
False. Say’s law sats that when people offer goods for sale in a barter economy, they must demand bartered goods in return
What can go wrong with Say’s Law in a money economy?
Someone can sell a good, then not spend all the money they get for it, saving money instead.
Which process can guarantee that Say’s law will work in a money economy?
When people save at interest, either by direct or indirect finance, the money goes somewhere and is spent
How does the concept of potential GDP relate to the PPF model?
If all our resources are employed, we are on the PPF, producing the “potential GDP”
True, False. If we are at a point below the PPF, there must be a shortage of labor
False. To be below the PPF there must be unemployment, which is consistent with a surplus of labor
How did Keynes view recessions? How did the Chicago and Austrian schools view recessions?
Keynes viewed recessions as coming from problems with labor markets.
Austrian and Chicago school economists viewed recessions as coming from real shocks to the economy or government failure
What two reasons does Keynes give for saying that wages do not easily fall?
Workers mistake nominal wage cuts from deflation with real wage cuts and reduce their labor supply. labor contracts keep wages from falling
What criticism can be made of Keynes’ assertion that labor contracts cause unemployment?
If the contracts are a large problem, then firms go out of business which dissolves contracts. Then workers look for jobs at lower wages
What criticism can be made of Keynes’ assertion that workers quit jobs at low nominal wages, stay unemployed, looking for jobs at a higher nominal wage?
Workers must remain ignorant, not learning that labor markets have changed, for along time in order for this to be a problem
What is a recessionary gap?
Potential GDP - Actual GDP
during a downturn
How do recessionary gaps and inflationary gaps relate to the natural rate of unemployment?
If output is lower than potential, unemployment is above the natural rate. If output is higher than potential, unemployment is below the natural rate.
What is Keynes’ remedy for a recession?
Government increase spending or cut taxes
Why did Keynes consider tax cuts as a weaker tool than spending increases?
People may save a tax cut rather than spend it
How would Bastiat reply to Keynes’ emphasis on spending over saving?
When we save at interest, someone spends the money
What did James Buchanan say about Keynes’ “fiscal policy?”
Politicians would run deficits rather than surpluses, so deficits would always involve redirecting spending, rather than increasing spending
