Chapter 11 Notes Flashcards
True, False, Explain: Says 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 says 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 some money, instead.
Which process can guarantee that Say’s Law works in a money economy?
When people save at interest, either by direct or indirect finance, the money goes to 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 amount of GDP called “potential GDP.”
True, False, Explain: If we are at a point below the PPF, there must be a shortage of labor.
False: To be at a point 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 from government failure.
What two reasons does Keynes give for saying that wages do not easily fall? Explain.
Workers mistake nominal wage cuts from deflation for real wage cuts and reduce their labor supply. Labor contracts keep wages from falling.
What criticism can be made of Keynes’ assertion that workers quit jobs at low nominal wages and stay unemployed, looking for jobs at the higher nominal wage?
Workers must remain ignorant, not learning that labor market conditions have changed–for a long time, if this is to be a large problem.
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 the contracts. Then workers look for jobs at the lower wages.
What is a recessionary gap?
Potential GDP minus 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 must increase spending or cut taxes.
Why did Keynes’ consider tax cuts as a weaker tool than spending increases?
People might save the 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, but would never run surpluses, so deficits would always involve redirecting spending, rather than increasing spending, ala Bastiat.
