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52 Cards in this Set
- Front
- Back
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_________ Economics believes the long-run, natural state of the economy is full employment.
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Classical
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Classical Economics believes that recessions are temporary because prices, wages, and interest rates (through _________ and _________) automatically adjust to clear markets and restore jobs. Therefore, _________ intervention is unnecessary.
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supply, demand, government
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Classical Economics = _________ Capitalism
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Adam Smith
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_________ law states that supply creates it's own demand.
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Say's
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J.B. Say, an early 19th century economist says that long-term recessions are impossible, because the production of goods/services (_________) creates an equal amount of spending (_________).
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supply, demand
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A British Economist that challenged classical economics and believed that in certain circumstances, demand may never go up enough to get the economy back to _________ employment. Therefore, the _________ must get involved to stimulate demand.
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John Maynard Keyes, full, government
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Equation for Real GDP=
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C + I + G + (X-M)
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The Consumption Function
CF: Savings = _____-_____ S= ____ - ____ Yd= ____ + ____ |
Real Disposable Income - Consumption, Yd-C, C+S
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When real disposable income is less than consumption, a period of _________ (saving/dissaving) occurs. When Real Disposable Income is greater than consumption, a period of _________ (saving, dissaving) occurs.
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dissaving, saving
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Consumption that is independent of Real Disposable Income, Consumption that occurs even when Real Disposable Income = 0
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Autonomous Consumption
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When Consumption = Real Disposable Income, that is the _________ (break-even) point.
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equilibrium
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MPC = Change in __/ Change in __
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C, Yd
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MPC + MPS = __
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1
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MPS = Change in __/ Change in __
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S, Yd
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Equation for the Keynesian Consumption Function
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C = a+b(Yd)
where a = autonomous consumption b= MPC Yd= real disposable income |
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In the original consumption function, it starts above 0, because you still have to _________ a little just to survive (savings, credit, etc.)
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spend
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Consumption Function: A change in real disposable income causes _________, whereas a change in a nonincome determinant causes _________.
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movement along the consumption curve/line, a shift in the consumption function
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Nonincome Determinants and how they shift the consumption function:
1. Consumer Expectations - Confidence - ____ - Pessimism - ____ 2. Wealth (value of investments, home 401k) - Increase - ____ - Decrease - ____ 3. Price level (absent- extreme situations) - Increase - ____ - Decrease - ____ 4. Interest Rates - Decrease - ____ - Increase - ____ 5. Stock of Durable Goods (something that lasts for 1 yr or more) - Shortage - ____ |
1. Up, Down
2. Up, Down 3. Up, Down 4. Up, Down 5. Down |
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Investment:
Classical Economics emphasized _________, whereas Keynes though expectations of _________ were more important. |
interest rates, future profits
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Investment has a _________ sloping function.
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downward
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A change in _________ causes movement along the investment curve, whereas _________ causes a shift.
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interest rate, some other change
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Things that Change Investment:
1. Expectations - Confidence - ____ - Pessimism - ____ 2. Technology - Technology Advances - ____ 3. Capacity Utilization - Weak Economy - ____ - Strong Economy - ____ 4. Business Taxes After-tax profits - Increase - ____ - Decrease - ____ |
1. Right, Left
2. Right 3. Left, Right 4. Left, Right |
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What is called when people tend to really overreact to good/bad news?
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"Animal Spirits"
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If none of the factors that change investment change, then investment is considered _________ in the short-run. (no defined period for short-run).
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autonomous
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The Government portion of real GDP is influenced by _________ decisions and independent of _________, or in other words, _________.
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political, GDP, autonomous
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The (X-M) portion of real GDP is influenced by _________ conditions in other nations, and is independent of _________, or in other words, _________.
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economic, GDP, autonomous
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Government and net exports are _________ amounts in the short-run.
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fixed
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When real GDP (Y) is $0, and aggregate expenditures is $2.5, there is an unplanned inventory _________ (depletion, accumulation). If real GDP (Y) is 8.0 and aggregate expenditures is $6.5, there is an unplanned inventory _________ (depletion, accumulation). When Real GDP (Y) is 5.0 and aggregate expenditures is 5.0, that is the _________.
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depletion, accumulation, equilibrium
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Inventory _________ is a sign that you need to produce more things.
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depletion
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Inventory _________ is a sign that too much is being produced. It causes jobs to be _________ to bring down _________ to get _________.
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accumulation, reduced, output, equilibrium
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When there is inventory Depletion, _________ are created to replace inventory that is being used up.
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jobs
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The equilibrium point of aggregate expenditures and output, may be an equilibrium point with high _________. However, the spending pattern never intersects with the _________ equilibrium on its own.
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unemployment, full employment
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Keynes explanation for the Great Depression: Contrary to classical economic theory, once an equilibrium is established between aggregate expenditures and aggregate output, there is no tendency for the economy to change, even when equilibrium is well below _________. The solution Keynes offered was to shift the AE line upward until the _________ equilibrium is reached. Otherwise, prolonged _________ persists indefinitely, ad the economy never _________.
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full-employment, full-employment, unemployment, self-corrects
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Keynes: When you shift the aggregate expenditure line to get to full-employment, that is done by increasing _________ expenditures. The government should do this.
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autonomous
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The amount by which aggregate expenditures fall short of the amount necessary for the economy to operate at full-employment real GDP. To eliminate negative GDP gap, the Keynesian solution is to increase autonomous spending by an amount equal to the recessionary gap and operate through the multiplier to increase equilibrium output and income
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recessionary gap
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The Spending Multiplier Effect: Assume the government increases spending by 500 billion on bridges, national defense, etc.. The increases AE by .5 trillion. This move depletes inventories by _________, so business increase output by this amount to replace inventory. Assume MPC=.5. Workers now have $500 billion more income. This means there is _________ billion more spending by workers on houses, cars, food, etc. The additional spending by workers depletes inventories by $250 billion. To replace this inventory, businesses increase output by $250 billion. Realtors, autoworkers, grocers, etc. have $250 billion more income. This means there is _________ billion more spending by workers, which results in a $125 billion inventory depletion that businesses must replace. This process of spending/output/spending continues through an infinite number of rounds until output reaches the full-employment equilibrium of $6 trillion.
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$500 billion, $250 billion, $125 billion
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Aggregate Demand is demand for the overall _________.
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economy
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Movement along the aggregate demand curve is caused by a change in _________.
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CPI
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A shift in the aggregate demand curve is caused by a change in _________.
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Consumption, Investment, Government Spending, Net Exports
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With aggregate demand if real GDP goes up, CPI goes _________. If real GDP goes down, CPI goes _________.
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down, up
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Aggregate supply - Classical approach. With the classical approach aggregate supply is a _________ line.
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vertical
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Aggregate supply classical approach: explains over the long-run adequately how the economy works. You will eventually end up at E2, but with lower prices (full employment).Price level dictated by where _________ intersects with _________. For this to work, you have to have downwardly flexible _________ (not possible).
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AD, AS, prices
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Order of the Parts of the Aggregate Supply Curve:
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1. Keynesian
2. Intermediate 3. Classical Range |
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When we have a strong economy, the government worries and increases _________ rate etc. because they want to keep _________ growing at the same rate as _________.
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interest, demand, supply
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Equation(s) for finding the spending Multiplier:
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1/1-MPC= SM
MPC will be given in the problem 1/MPS = SM |
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The _________ the spending multiplier, the better, greater effect it will have on economy.
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higher
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Equation for change in aggregate demand:
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ΔAD= Δ in G x SM
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Equation for Tax Multiplier =
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1-SM= TM (always a negative number)
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ΔTax x TM = ____
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AD
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If you use tax cuts to correct the economy, you have to come up with more $ because people will _____.
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save
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Supply-Side Principles (Full employment achieved with _____ CPI)
1. ______ Advances 2. ______ Cuts 3. ______- a payment from government to behave a certain way, produce a certain product 4. Decrease in ______ Regulations |
lower, Technological, Tax, Subsidies, Government
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With supply-side economics, the ______ curve moves and the ______ curve is constant. With this there is ______ low prices.
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supply, demand, permanently
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