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Fall 2016 > Econ-Chapter 11 > Flashcards

Econ-Chapter 11 Flashcards

1
Q

Say’s Law

A

supply creates its own demand,
if you supply a good, you demand something of equal value in return
works in a barter economy

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2
Q

Say’s law holds even in a money economy because

A

the interest rate adjusts to eliminate shortages or surpluses of funds

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3
Q

say’s law relies on

A

free market adjustments of interests rates that guarantees that there cannot be a general overproduction or underproduction of goods

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4
Q

potential GDP

A

where output is at its maximum given our inputs and technology

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5
Q

the relationship between potential output and unemployment

A

since wages adjust to eliminate shortages and surpluses, we must always be at our potential

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6
Q

gut of goods

A

happens because market might not adjust quickly to huge systemic changes-such as earthquakes or war

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7
Q

real business cycle theory

A

much of business cycle comes from real shocks to productivity

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8
Q

keynes beliefs that markets might not

A

reach equilibrium quickly

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9
Q

keynes idea of animal spirits

A

the economy starts at full employment then , irrationally pessimistic feelings that are called this spread throughout the economy, now people want fewer goods causing prices to fall

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10
Q

keynes addition to the “pizza place example”

A

prices of output adjust first, but two things prevent resource prices , including wage, form changing quickly

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11
Q

The output (pizza) price falls

A

firms cut wages

mistake nominal wage cuts for real wage cuts

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12
Q

Workers might have contracts

A

have to eventually fire workers

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13
Q

however, when output of pizza falls ..

A

keynes left out how people could search of nonexistent higher paying wages for over a decade

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14
Q

keyenes fails to explain with labor contracts

A

people who loose their job could then find lower paying jobs leaving no unemployment

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15
Q

recessionary gap

A

keynes called the difference between potential and GDP and the recessionary equilibrium’s GDP this

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16
Q

in a recessionary gap

A

unemployment is higher than the natural rate of 5.5%

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17
Q

inflationary gap

A

the difference between potential GDP and the actual GDP this

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18
Q

inflationary gap unemployment would be

A

lower than the natural 5.5%

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19
Q

Keynes said

A

the great depression as because labor markets refused to adjust and the gov. needed to spend more, tax cut policies, and direct gov. spending

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20
Q

fiscal policy

A

the policy of using spending and taxes to cure inflationary and recessionary gaps

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21
Q

in a recessionary gap the gov. should

A

spend more than it taxes, to create employment

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22
Q

in an inflationary gap the gov. should

A

tax more than it spends, to create a surplus

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23
Q

James Buchanan

A

keyenes ideas for running recessionary gaps-would be followed

but the idea for inflationary gaps-would not be followed

24
Q

Where does the money come from to run deficits to cure recessionary gaps

A
  • taxes, redirects spending
  • money creation,leaves output unchanged
  • borrowing,increased demand for loanable funds which will raise interest rates
25
Q

friedman and schwartz’s 1971 book

A

is an unchallenged claim that money creation fuels inflation without increasing long run growth

26
Q

if demand increases, the new equilibrium is only half that

A

businesses and firms are now crowded out of the loanable funds market

27
Q

no free lunch when

A

borrowing locally, and borrowing domestically won’t have to pay back until long run)

28
Q

Greece

A

spent a lot financed through foreign sources

germans were able to pay and greece

29
Q

Keynes fits under the make-work fallacy rule

A

the idea that jobs have value other than the value of goods and services that the labor produces

30
Q

The economic stimulus Act of 2008

A

authorized sending checks to taxpayers-calling the payments “tax rebates”
people who didn’t even pay taxes could receive this “rebate”
takes nine months to elapse

31
Q

HOWEVER

A
  • most recessions are shorter than the time-lapse of nine months
  • politicians don’t usually know when an economic problem begins
32
Q

Fiscal policy is subject to the following lags

A

The data lag, the legislative lag,the transmission lag,the effectiveness lag

33
Q

The data lag

A

the time it takes to realize there is a problem

34
Q

the legislative lag

A

politicians do not agree on spending and taxes and, even if they think there is a problem, they will fight about it

35
Q

the transmission lag

A

once the policy goes into affect, it takes time to go into affect.

36
Q

transmission lag exampple

A 
highways-
surveying must be done
property purchased
environmental surveys
bids must be taken for the construction
construction company must build road
37
Q

Effectiveness lag

A

a completed project or policy does not instantly have its full effect

38
Q

It takes how long for a fiscal policy to be full in affect

A

2 and a half years, happens after the problem is resolveed

39
Q

2009 stimulus package

A

was counterproductive, money was not spent on roads and bridges to put people to work

shovel-ready jobs

40
Q

three issues

A
  • not understanding how the fiscal policy could help the economy
  • make-work fallacy and dismiss gov. calculation problem
  • how the lags in the process are not relevant to fiscal policy
41
Q

paul Krugman

A

displayed his love of broken windows as an economic stimulus after 9/11 attacks by referring to the damage caused to New York

42
Q

Keyens theory on the great depression could only work if

A

workers must refuse to work at lower paying jobs for years in order for his theory to explain the great depression

43
Q

the chain of economical events

A
  • milton freidman and anna schwartz-TGD- the fed destroyed money supply
  • the monetary and banking crises led to the stock market crash in 1929, us wealth down hill
  • prez. herbert-raised gov. spending to reduce unemployment
  • roosevelt-paper money, backed by gold
  • roosevelt-new deal
44
Q

robert higgs

A

his research showed how the economy during the great depression made it impossible to save for the future, this was referred to as “ regime uncertainty”

45
Q

Effects after the new deal, and war starts..

A
  • economy focused more on the troops, which caused shortages to the ppl.
  • predication of economic disastor
  • cut business taxes
46
Q

Supply Side Economics (SSE)

A

is a long run policy in which the government reduces the cost of value creation through production and trade in order to promote more value creation.

47
Q

affects of SSE

A

demand for labor increases
supply of labor
leads to expansion

48
Q

SSE concentrates on

A

value creation, not on spending, ad keynesian economics does.

spending happens due to value creation

depends on creative ppl to help the economy

49
Q

keynesian economics focuses on

A

governments overcoming the calculation problem to plan the economy

50
Q

friedmans’s Permanent Income Hypothesis in designing tax cuts

A

he showed that tax cuts would affect someones behavior if it is permanent.
aka- SSE would not be good

51
Q

marginal rates - only recommends changes in marginal tax rates which means

A

those that change as income, investment, or the other desired value creation activities change.

52
Q

lump sum tax cut

A

this would not affect her willingness to expand her practice.

53
Q

SSE likes- broad based tax cuts

A

affect a wide range of economic activity, not targeted tax cuts , that only affect narrow categories , and give no incentive to value.

54
Q

SSE disliked

A

electric cars

55
Q

Laffer curve

A

show the relationship between tax rates-the percentage paid-tax reveunes-the dollars the government receives.

56
Q

if we are to the right of the man of the curve..

A

we cut taxes and tax revenues rise

Fall 2016 (32 decks)

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