Keynesian and Neoclassical Economics Flashcards

Questions and Answers

What is disposable income?

Income after taxes (correct)

Wages only

Total savings

Income before taxes

What is an inflationary gap?

Equilibrium at a level of output above potential GDP

What is the interest rate?

The payment for borrowed money

What is a recessionary gap?

Equilibrium at a level of output below potential GDP Signup and view all the answers

What is the coordination argument?

Downward wage and price flexibility requires perfect information about the level of lower compensation acceptable to other laborers and market participants Signup and view all the answers

What is the expenditure multiplier?

A Keynesian concept that asserts that a change in autonomous spending causes a more than proportionate change in real GDP Signup and view all the answers

What is a macroeconomic externality?

Occurs when what happens at the macro level is different from and inferior to what happens at the micro level Signup and view all the answers

What are menu costs?

Costs firms face in changing prices Signup and view all the answers

What are sticky wages and prices?

A situation where wages and prices do not fall in response to a decrease in demand, or do not rise in response to an increase in demand Signup and view all the answers

What is the Expenditure (or Spending) Multiplier?

The ratio of the change in GDP to the change in aggregate expenditure which caused the change in GDP; the multiplier has a value greater than one Signup and view all the answers

What is the Marginal Propensity to Consume?

Percentage of an increase (or decrease) in income which one spends (or reduces spending) Signup and view all the answers

What is the Marginal Propensity to Import?

Percentage of an increase (or decrease) in income which one spends (or reduces spending) on imported goods and services Signup and view all the answers

What is the Marginal Propensity to Save?

Percentage of an increase (or decrease) in income which one saves (or reduces saving) Signup and view all the answers

What is contractionary fiscal policy?

Efforts to decrease aggregate demand through tax increases or government spending cuts Signup and view all the answers

What is expansionary fiscal policy?

Efforts to increase aggregate demand through means such as tax cuts to stimulate consumption and investment, or direct increases in government spending Signup and view all the answers

What is the GDP gap?

The difference between actual and potential real GDP Signup and view all the answers

What is Classical economics?

Earliest of a number of neoclassical perspectives Signup and view all the answers

What is Neoclassical economics?

Any of a number of economic perspectives that believes that the macro economy is inherently stable and that government should not attempt to manage the economy Signup and view all the answers

What is Say's Law?

'Supply creates its own demand' Signup and view all the answers

What is human capital?

Education, training, and skills possessed by workers that make them more productive Signup and view all the answers

What is the natural rate of unemployment?

Rate that unemployment returns to in the long run, where there is no cyclical unemployment Signup and view all the answers

What is the neoclassical perspective?

Belief that the level of economic activity is determined primarily by aggregate supply Signup and view all the answers

What is physical capital per person?

The amount and kind of machinery and equipment available to help a person produce a good or service Signup and view all the answers

What is potential GDP?

Level of output that can be achieved when all resources (land, labor, capital, and entrepreneurial ability) are fully employed Signup and view all the answers

What is Keynes' law?

'Demand creates its own supply' Signup and view all the answers

Who are neoclassical economists?

Economists who generally emphasize the importance of aggregate supply in determining the size of the macroeconomy over the long run Signup and view all the answers

What is the intermediate zone?

Portion of the SRAS curve where GDP is below potential but not so far below as in the Keynesian zone Signup and view all the answers

What is the Keynesian zone?

Portion of the SRAS curve where GDP is far below potential GDP Signup and view all the answers

Study Notes

Core Economic Concepts

Disposable Income: Income remaining after taxes are deducted, influencing consumer spending.
Interest Rate: The cost incurred for borrowing money, impacting investment decisions.
Potential GDP: The maximum possible output when all resources are fully utilized.

Economic Gaps

Inflationary Gap: Occurs when the economy operates above its potential GDP, causing upward pressure on prices.
Recessionary Gap: Represents a situation where actual output is below potential GDP, suggesting economic underperformance.

Keynesian Theories and Principles

Expenditure Multiplier: A Keynesian concept indicating that a change in autonomous spending results in a more than proportional change in real GDP.
Keynes' Law: Asserts that "demand creates its own supply," emphasizing the role of aggregate demand in driving economic activity.
Marginal Propensity to Consume (MPC): The percentage of additional income that is spent on consumption, which directly influences economic growth.
Marginal Propensity to Save (MPS): The fraction of additional income that is saved rather than spent, impacting overall savings and investment in the economy.

Neoclassical Perspectives

Neoclassical Economics: Encompasses theories asserting that the economy is generally stable, advocating minimal government intervention.
Say's Law: The principle that supply creates its own demand, highlighting the proactive nature of production in the economy.
Natural Rate of Unemployment: The unemployment level achieved when the economy is operating at full potential, devoid of cyclical unemployment.

Costs and Flexibility

Menu Costs: Expenses incurred by firms when adjusting prices, potentially causing price stickiness.
Sticky Wages and Prices: Refers to the resistance of wages and prices to adjust in response to changes in supply and demand, complicating economic adjustments.

Fiscal Policies

Expansionary Fiscal Policy: Strategies aimed at increasing aggregate demand through tax reductions or increased government spending.
Contractionary Fiscal Policy: Measures intended to decrease aggregate demand via tax hikes or cuts in government expenditure.

Externalities and Economic Zones

Macroeconomic Externality: Arises when macro-level outcomes differ unfavorably from micro-level interactions; for example, a flat aggregate supply despite rising firm-level supply.
Intermediate Zone: Segment of the short-run aggregate supply curve where GDP is below potential but not severely, reflecting a state of economic recovery.
Keynesian Zone: The portion of the short-run aggregate supply curve where GDP significantly lags behind potential output.

Capital and Productivity

Human Capital: Skills, training, and education possessed by workers that enhance productivity and economic performance.
Physical Capital per Person: The quantity and quality of equipment and machinery available to individuals for producing goods and services.

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Explore essential terms from Keynesian and Neoclassical economics with this set of flashcards. Each card includes a key economic term along with its definition, providing a quick and effective study tool for students. Ideal for learners looking to grasp fundamental economic concepts and terminology.