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19 Cards in this Set

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Say's Law
Supply creates its own demand. Production creates demand sufficient to purchase all goods and services produced.
What are the three states of the economy?
-Recessionary Gap
-Inflationary Gap
-Long-run Equilibrium
Recessionary Gap
The condition where the Real GDP the economy is producing is less than the Natural Real GDP and the unemployment rate is greater than the natural unemployment rate.
Inflationary Gap
The condition where the Real GDP the economy is producing is greater than the Natural Real GDP and the unemployment rate is less than the natural unemployment rate.
Long-run Equilibrium
The condition where the Real GDP the economy is producing is equal to the Natural Real GDP and the unemployment rate is equal to the natural unemployment rate.
What happens if the economy is in a recessionary gap?
The unemployment rate is greater than the natural unemployment rate leading to a surplus in the labor market. Then leading to wages falling and the SRAS curve shifting to the right and then the economy will move into long-run equilibrium. YAY!
What happens if the economy is in an inflationary gap?
The unemployment rate is less than the natural unemployment rate which leads to a shortage in the labor market. Then leading to wages rising and the SRAS curve shifting to the left and then the economy will move into long-run equilibrium. YAY!
What happens if the economy is in long-run equilibrium?
Seems simple! Cause it is! There are no changes in wages and no changes in SRAS.
Laissez-faire
A public policy of not interfering with market activities in the economy.
What does a decrease in AD do in the short run? The long run?
-Short run= Decrease in price level and decrease in Real GDP.
-Long run= Decrease in price level and Real GDP does not change.
What does an increase in AD do in the short run? The long run?
-Short run= Increase in price level and increase in Real GDP.
-Long run= Increase in price level and Real GDP does not change.
Why does Say's Law hold in a barter economy?
Because there can be no general overproduction or underproduction of goods.
Why does Say's Law hold in a money economy?
Even if consumption drops and saving rises, economic forces are at work producing an equal and offsetting increase in investment. In other words, interest rates are flexible and equate the amount of saving and investment in an economy.
What do classical economists believe about markets?
They are competitive and that wages and prices are flexible.
What does the physical PPF illustrate?
Different combinations of goods the economy can produce given the physical constraints of (1) finite resources and (2) the current state of tecnology.
What does the institutional PPF illustrate?
Different combinations of goods the economy can produce given the physical constraints of (1) finite resources, (2) the current state of technology, and (3) any institutional constraints.
If an economy is operating on its institutional PPF, what does that mean?
It is operating at the natural unemployment rate: Long-run equilibrium.
If an economy is operating at a point beyond the institutional PPF but below the physical PPF, what does that mean?
It is operating at an unemployment rate less than the natural unemployment rate: Inflationary Gap
What do the classical economists think about the self-regulating economy?
They believe the economy is self-regulating. That it can eliminate both recessionary and inflationary gaps smoothly and quickly all by itself.