Chapter 9 and 11 Flashcards
In the long run, the economy will approach _____ employment.
• full
In the short-run, economic coordination is _____.
• pronounced
_____ leads to depressions and recessions according to Keynes, so the government ought to _____.
- insufficient demand
* buy stuff
Auction prices are those that _____, while sticky / custom prices _____.
- adjust quickly / on a daily basis
* adjust slowly; like industrial commodities where changes in demand don’t immediately lead to price changes.
For most firms, _____ is the largest cost; since this tends to be a _____, so the prices of firm products usually reflect that
- wages
* sticky price
Sticky prices lead to a _____ economy where supply/demand fails to quickly _____.
- hampered
* bring prices and production into equilibrium
Short-run macroeconomics is _____.
• period of time when prices don’t change or change very slowly
Aggregate demand curve shows _____. It slopes _____.
- relationship between real GDP and prices
* downward
The wealth effect _____; interest effect _____; and the international trade effect _____. These are all to _____ the AD curve.
- means that increases in spending result from falling price levels or increases in the real value of money
- says low interest rates lead to more consumption, more demand for goods / services
- says an open economy will lead to lower price levels and increased demand for goods
- move along.
Factors that shift the AD curve to the right or left without changes in prices include _____.
• changes in supply of money, taxes, gov’t spending, and all other changes in demand.
Increases in the supply of money will _____, leading to the AD curve shifting to the _____.
- increase aggregate demand
* right
Decrease in taxes lead to _____, thereby shifting the AD curve _____.
- increased demand
* to the right
At any price level, increases in gov’t spending shift AD _____
• to the right
Any kind of _____ will generally shift the AD curve to the right.
• increase in demand without an increase in price
The multiplier effect means that when the gov’t spends, the AD curve _____.
Multiplier = _____.
- Shifts to the right by a factor more than the original amount spent.
- 1 / (1 - MPC)
A multiplier is _____.
• ratio between the total shift in aggregate demand to the initial shift.
The consumption function is _____. The marginal propensity to consume is _____ and marginal propensity to save is _____. MPC + MPS = _____.
- C = C_a + by where C is total spending, C_a is the autonomous spending, b is the marginal propensity to consume, and y is the output of the economy.
- MPC = additional consumption / additional income
- MPS = additional savings / additional income
- 1
Recessions are the result of sharp _____.
• increases in demand or decreases in supply
Equilibrium output is _____ and the savings function is _____.
- y* = (C_a + I) / (1 - b)
* S = y - C; y = C + I; S = I
Fiscal multiplier function is _____.
• C + I + G
Both increases in gov’t spending and taxes will _____, although _____ will have a smaller multiplier effect.
- increase total planned expenditures for goods / services.
* taxes
The broken window fallacy says _____.
• Keynes’ model means that breaking a window will help GDP and therefore society. The fallacy asks whether this is actually good for society.
Automatic stabilizers are _____.
• welfare, taxes, unemployment insurance, “automatic” things that control GDP fluctuations
Progress tax rates are automatic stabilizers in that _____.
• they stabilize income as it goes up and down
An increase in tax rate will _____ MPC.
• decrease
The permanent income mindset means _____. Lack of inventory cycle means _____. Both of these are factors of _____.
- stable income leads to spending habits based on the average.
- firms overproduce what is demanded need so their products sit on the shelves, leading to lags in the economy.
- economic stability
To account for exports and imports in the expenditures vs. output graph, _____.
• Exports are (X) added to C_a+I+X+G that all contribute to the expenditure-intercept of the line, while the slope of this line is b-m where b is MPC and m is the marginal propensity to import.
A reduction of income will change the expenditure-output chart by _____. This is because _____.
- flattening the line, or reducing its slope.
* a reduction in income means a reduction in the MPC, and MPC is slope.
The locomotive effect means _____.
• When rich countries import crap from 3rd world countries, it tends to a situation where rich countries, in their development, “drag” developing countries with them.
