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18 Cards in this Set
- Front
- Back
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Classical Economists Explanation |
Economy would fix itself if there was a recessionary or inflationary gap. |
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Classical Economists Assumptions |
1. People are predictable 2. Prices need to be flexible 3. Wages need to be flexible 4. Interest rates need to be flexible |
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People are rational |
● If prices go up, people will buy less of that product, always. ● If you have too much of a product, lower the price, always. ● If they don't drop the price, they will produce too much over and over (RGDP produced > RGDP consumed) ● They may even go out of business even if they "should" succeed. |
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Why would prices not be flexible? |
● Irrational/Dumb people ● Government regulation (Power, New York rent, etc) ● Men's Cost: Cost associated with producers changing its prices. (Cheap for gas stations because price is right outside for everyone to see. But places like Kohls and Target have to send out Catalogs) |
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Why would wages not be flexible? |
Minimum Wage, Efficiency Funds |
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Interest Rate Flexibility |
● Really important that this market is at EQUILIBRIUM |
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Above Equilibrium |
Interest Rates are too high.● More money saved than borrowed ♢ Money wasted: Startups or even full grown companies could be using the money to expand. |
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Interest Rates at equilibrium |
● Every dollar saved is borrowed ● No $ wasted |
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Recessionary Gap |
● RGDP < NRGDP |
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Natural vs Real TERMS |
Natural: Where we could be Real: Where we are |
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How to fix a recessionary gap? |
● Unemployment Rates are too high (Why RGDP is low) ● If unemployment rate is high, it is hard to get a job. People become desperate and wages drop. ● Since wages drop, it is easier to produce goods, so the SRAS shifts right because of lower costs. ● CPI must drop to meet the new equilibrium. Then we reach the long-run equilibrium. |
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Recessionary Gap |
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Inflationary Gap |
● RGDP > NRGDP |
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RGDP < NRGDP |
Recessionary Gap |
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RGDP > NRGDP |
Inflationary Gap |
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How to fix inflationary Gap? |
● Unemployment rate is to low. Less than 5% (we know this because production is beyond our capabilities) ● If unemployment rate is low, it will be easy to get a job. So, wages will increase. Business can't find anyone unless they offer more money. ● As wages increase, it is harder to produce goods. SRAS shifts left=less production ● CPI must increase. RGDP can then decrease. We then reach long-run equilibrium. |
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Inflationary Gap |
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Says Law |
The idea that supply creates it's own demand. There would be no need to worry about excess supply or excess demand |
