Chapter 5: Introduction to Macroeconomics

Question 1

Pax Britanica dates

Answer 1

1820s-1930s

1870-1914 (Height)

Question 2

Levels of Pax Britanica

Answer 2

Domestic Level: Business Cycle (supply and demand specifically in the labor market)
International Level: Gold Standard (supply and demand)
Ideology: Say’s Law
Periphery: Coercion

Question 3

Gross Domestic Product (GDP) All Output is either…

Answer 3

Consumption: Goods consumed immediately

Investment goods: Goods used to make other goods

Question 4

Zero sum game

Answer 4

Increase in one side occurs at the cost of the other side

Question 5

Business cycle

Answer 5

Period of ups and downs through peaks, upturns and downturns

Question 6

Contraction

Answer 6

Peak to trough

Question 7

Expansion

Answer 7

Through to peak

Question 8

Steps of Business Cycle

Answer 8

1: Wages are falling
2: Trough: Not much economic activity, unemployment is up, wages are down, zero sum game
3: Investment by private business owners pulls you out because wages are low enough to invest. (business demands labor) expansion/boom
4: Peak: Economic growth, wages up, output up
5: Recession/contraction: Investment starts to decline because wages are too high, sticky prices

Question 9

2 Political Assumptions of the Business Cycle/Gold Standard

Answer 9

1: Perfectly flexible prices (especially with wages)
2: Automatic (no government intervention)

Question 10

Sticky prices

Answer 10

Prices that don’t change with supply and demand

Question 11

The Gold Standard

Answer 11

Money linked to gold
Equilibrium between trade:
1) Countries are at an equilibrium
2) Country 1 imports more than exports and pays in gold when money runs out (prices down, amount imported down, amount exported up)
3) Country 2 starts importing more (because the price is down) and exports less because domestic prices rise
4) Countries are at an equilibrium

Question 12

Why the Gold Standard Failed

Answer 12

1) Not enough gold to keep up with international trade

2) Prices will just keep falling as wages increase

Question 13

Pax Americana dates

Answer 13

1944 to 1971

Question 14

Levels of Pax Americana

Answer 14

Domestic Level: Keynesian Productivity Deal
International Level: Breton woods system
Ideology: Keynesianism (Government should intervene)
Periphery: Economic Development

Question 15

In the Breton Woods. System, all countries agreed to…

Answer 15

1) Fix exchange rate
2) Hold reserves in central bank
3) International Monetary Fund (If any country imports more than exports, they can borrow money from the IMF but must allow government intervention)
4) Devalue (devalue currency with approval by IMF)

Question 16

Keynesian Productivity Deal

Answer 16

Assumes that wage is sticky downward
Deal: Tie the rate of growth of wages to the rate of growth of productivity
- Fix shares, wages go up as long as productivity goes up
- Private Business allows productivity to increase, businesses can also pay more -> wages go up, with increased profits

Question 17

Kanes wrote what book in what year?

Answer 17

“The General Theory of Employment, Interest, and money” 1936 Now called macroeconomics

Question 18

Fine-tuning

Answer 18

The prose used by Walter Heller to refer to the government’s role in regulating inflation and unemployment

Question 19

Monetary Policy

Answer 19

The tools used by the Federal Reserve to control the quantity of money, which in tern affects interest rates

Question 20

Stagflation

Answer 20

A situation of both high inflation and high employment

Question 21

Fiscal Policy

Answer 21

Government policies concerning taxes and spending

Question 22

National Bureau of Economic Research

Answer 22

Calculates the Business Cycle expansions and contractions

Question 23

Bureau of Labor Statistics

Answer 23

Calculate the unemployment rate, output per hour of all persons and real compensation per hour in the business economy graph

Question 24

John Maynard Keynes is from where?

Answer 24

Great Britain (He’s a British economist)

Question 25

French economist Jean-Baptist Say, the first professor of political economy on the European continent, published a book called A Treatise on on Political Economy in 1803 in which he argued that…

Answer 25

The act of producing a commodity immediately creates demand for another (supply and demand)