Chapter 11 Concepts and Terms Flashcards
supply creates its own demand. If you supply a good, you demand something of equal value in return.
Say’s Law
In this way, there can never be an overproduction or an underproduction of goods.
If you produce twice as much lumber as usual, it might be the case that the price of your lumber would fall, in terms of how much beef you could get per board foot of lumber. In this case, you might only get half as much beef. But it is still the case that supply brings forth an equal value of goods to trade, because, although the value of the lumber has fallen, there is more of it.
The chapter on production developed the idea of combining resources to produce output and noted that if resources were fully employed then output was the highest possible—that is, a point on the production possibilities frontier. We can now call these points on the production possibilities frontier, where output is at its maximum given our inputs and technology
potential GDP
since wages adjust to eliminate shortages and surpluses
we must always be at our potential
that much of the business cycle comes from real shocks to productivity
real business cycle theory
Chicago School and the Austrians also looked toward government as a creator of recessions, either through misdirection of resources because of regulation, due to a government laboring under the calculation problem, or through errors made in the money supply.
hey
Keynes said that the macroeconomy could fall into a bad short run equilibrium that lasted a long time and had high unemployment—a recession that employers and employees could not cure. Keynes called the difference between potential GDP and this recessionary equilibrium’s GDP…
a recessionary gap, In this recessionary gap, unemployment would be higher than the natural rate of 5.5%.
Keynes also said that an economy could get stuck with output above its potential, due to labor shortages, though he said these shortages would not last long, because wages would rise and eliminate the labor shortage. Keynes called the difference between potential GDP and the actual GDP in this situation an…
inflationary gap, In this in ationary gap, unemployment would be lower than the natural rate, of 5.5%.
Keynes called the policy of using spending and taxes to cure in ationary and recessionary gaps…He said that when the economy slumped into a recessionary gap, the government should spend more than it taxes, running a de cit, putting money into the economy to create employment and end the
recession. In an inflationary gap, the government should tax more than it spends, running a surplus, taking money out of the economy to end the in ation….
scal policy
the time it takes to realize there is a problem. If politicians only act when there is a recession, then they will act seven months after the recession starts—two quarters of decline have to be measured and it takes the data an extra month to come in.
The Data Lag
politicians do not agree on spending and taxes and, even if they think there
is a problem, will ght about it. Generally, any remedies will be in the next year’s budget, which is scheduled to be passed by Congress by October 1st. If legislators realize there is a problem in April, perhaps their remedy can be applied six months later. However, if legislators begin their ght in November of one year and pass a remedy in the budget the next October, it will have taken a year.
The Legislative Lag
Once the policy goes into effect, it takes time to execute. If politicians agree to spend $200 billion on highways, beginning January 1st, the workers will not be hired on January 2nd or even November 2nd.
The Transmission Lag
a completed project or policy does not instantly have its full effect. For instance, it may take investors a year or two to adjust to a new tax cut. It may take people a year or two to nd out about a new consumer loan program.
The Effectiveness Lag
Robert Higgs’s research focuses on government changes that shocked the economy during The Great Depression, making it impossible for households and businesses to plan for the future. Higgs calls the confusion surrounding these shocks…
“regime uncertainty.”
a long run policy in which the government reduces the cost of value creation through production and trade in order
to promote more value creation. Government may lower the cost of value creation by reducing taxes and reducing regulation, increasing the ability and incentives to produce and trade.
Supply side economics
