Chapter 9: The Self-regulating Economy Flashcards

0
Q

What does Say’s Law imply?

A

There can neither be a general overproduction nor underproduction of goods.

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1
Q

Say’s Law

A

Supply creates its own demand

Aggregate Supply = Aggregate Demand

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2
Q

What is needed for Say’s Law to hold in a money economy

A

Funds saved must give rise to an equal amount invested.

Interest rates will adjust to equate savings and investment.

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3
Q

Classical economists on prices and wages

A
  • most - if not all - markets are competitive

- prices and wages will adjust quickly to any surpluses or shortages. Equilibrium will be reestablished quickly.

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4
Q

Three possible states of real- and natural real GDP

A
  • Inflationary Gap
  • Recessionary Gap
  • Long-term equilibrium
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5
Q

Inflationary gap i.t.o. GDP

A

Real GDP > Natural real GDP

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6
Q

Recessionary gap

A

Real GDP < Natural Real GDP

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7
Q

Long-term equilibrium i.t.o. GDP

A

Real GDP = Natural Real GDP

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8
Q

Adjustments from a recessionary gap

A
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
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9
Q

Adjustments from an inflationary gap

A
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
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10
Q

Lassez-faire implications on public policy

A

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.

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11
Q

Lassez-afire literal mening

A

Comes from “Lassez-nous faire” - meaning ‘Let us be’

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12
Q

Policy implications of a view of self-regulation

A

Full employment is the norm.

The economy always returns to Q(N) / U(N) due to flexible wages and prices.

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13
Q

Business Cycle Macroeconomics

A

Changes in real GDP with respect to a fixed LRAS -curve

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14
Q

Economic growth macroeconomics

A

Deals with the rightward shift of the LRAS-curve

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