Chapters 26,36,37 Flashcards
Growth promoting structures
Strong property rights, patents and copyright, efficient financial institutions, literacy and education, free trade, competitive market system
Economic Growth
- an increase in GDP over some amount of time
- an increase in GDP per capita over some amount of time
Determinants of growth
- increase in quantity or quality of natural resources
- increase in the quantity or quality of human resources
- increase in the supply or stock of capital goods
- improvements in technology
- (demand factor)
Long run AS represents
full employment
Classical View
Government does not need to get involved because the economy will fix itself
Vertical AS
Keynesianism
-Prices and wages are sticky so the price level will not fall if output is below full employment
-Horizontal AS
(mainstream model)
Two views of macroeconomics
Mainstream macro and new classical economics
Mainstream Macroeconomics view of the private economy
The private economy is potentially unstable because investment plans are unequal to saving plans (AS shocks)
Mainstream Macro on price and wage stickiness in the short run
Immediate short run: prices and wages are sticky
Short run: wages are sticky prices are inflexible downward but flexible upward
Mainstream Macro on appropriate macro policies
active fiscal and monetary policy
How does a change in the money supply effect the economy acording to mainstream economics?
By changing the interest rate, which changes investment and real gdp
Mainstream economics on velocity of money
Unstable
Mainstream Macro on how fiscal policy affects the economy
Changes AD and GDP via the multiplier process
Mainstream macro on cost-push inflation
Possible
New classical economics types
Monetarism and rational expectations
Monetarism and rational expectations view of the private economy
stable in the long run at natural rate of unemployment
Monetarism: cause of the observes instability of the private economy
inappropriate monetary policy
Monetarism: short run price and wage stickiness
Prices flexible upward and downward in the short run, wages are sticky in the short run
Monetarism and rational expectations: appropriate macro policies
Monetary rule
Monetarism on how changes in the money supply affect the economy
By directly changing AD, which then changes GDP
Monetarism view on the velocity of money
Stable
Monetarism view on how fiscal policy affects the economy
No effect unless money supply changes
Monetarism and rational expectations view of cost push inflation
Impossible in the long run in the absence of excessive money supply growth
Rational expectations: cause of the the instability of the private economy
Unanticipated AD and AS shocks in the short run
Rational expectations: short run price stickiness
Prices and wages flexible both upward and downward in the short run
Rational expectations on how changes in the money supply affect the economy
No effect on the output because price level changes are anticipated
Rational expectations view of the velocity of money
No consensus
Rational expectations on how fiscal policy affects the economy
No effect because price level changes are anticipated
Mainstream view
Economic instability comes from price stickiness and unexpected shocks to AD or AS
-focuses on aggregate spending and its components (c+i+x+g=gdp)
Monetarism view
1) focuses on money supply
2) holds that markets are highly competitive
3) says that a competitive market system gives the economy a high degree of macroeconomic stability
Rational expectations theory
The idea that households and people will anticipate fiscal and monetary policies and by acting in their own self interest will make these policies ineffective
Equation of exchange
MV=PQ
Laffer Curve
Percent tax rate and tax revenue, curve is horizontal and at 0 tax revenue when tax rate is 0 and 100
Fiscal Policy
The government changes government spending or tax policies (which change consumption) by laws (discretionary)
Aims to shift aggregate demand to fix problems
Monetary policy
The fed controls the money supply and either changes the reserve requirement, discount rate, or open market operations to change the interest rate in order to change investment
Expansionary monetary policy
Government buys bonds—the bank reserves increase—banks loan more money(increase in the money supply)—interest rate goes down—investment goes up—AD goes up
