Chapter 9: The Self-regulating Economy Flashcards
What does Say’s Law imply?
There can neither be a general overproduction nor underproduction of goods.
Say’s Law
Supply creates its own demand
Aggregate Supply = Aggregate Demand
What is needed for Say’s Law to hold in a money economy
Funds saved must give rise to an equal amount invested.
Interest rates will adjust to equate savings and investment.
Classical economists on prices and wages
- most - if not all - markets are competitive
- prices and wages will adjust quickly to any surpluses or shortages. Equilibrium will be reestablished quickly.
Three possible states of real- and natural real GDP
- Inflationary Gap
- Recessionary Gap
- Long-term equilibrium
Inflationary gap i.t.o. GDP
Real GDP > Natural real GDP
Recessionary gap
Real GDP < Natural Real GDP
Long-term equilibrium i.t.o. GDP
Real GDP = Natural Real GDP
Adjustments from a recessionary gap
Real GDP < Natural Real GDP U > U(N) Surplus in the labour market Wages fall SRAS shifts to the right Economy moves to the long-run equilibrium
Adjustments from an inflationary gap
Real GDP > Natural Real GDP U < U(N) Shortage in Labour market Wages rise SRAS shifts to the left Economy moves to long-run equilibrium
Lassez-faire implications on public policy
Public policy should not interfere with market activities in the economy. Government should not facilitate normal market outcomes.
Government should not impose trade restrictions, price ceilings/floors, product regulation etc.
Lassez-afire literal mening
Comes from “Lassez-nous faire” - meaning ‘Let us be’
Policy implications of a view of self-regulation
Full employment is the norm.
The economy always returns to Q(N) / U(N) due to flexible wages and prices.
Business Cycle Macroeconomics
Changes in real GDP with respect to a fixed LRAS -curve
Economic growth macroeconomics
Deals with the rightward shift of the LRAS-curve