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Questions and Answers
What is potential GDP?
What is potential GDP?
The level of GDP that an economy can sustain over the long term without leading to inflation.
In the long run, real GDP will be close to or on what part of the AS curve?
In the long run, real GDP will be close to or on what part of the AS curve?
The vertical part of the AS curve.
If real GDP is greater than potential GDP, what occurs?
If real GDP is greater than potential GDP, what occurs?
The unemployment rate is low and the price level is rising.
If real GDP is close to or at potential GDP, then ________ and if real GDP is much lower than potential GDP, then ________.
If real GDP is close to or at potential GDP, then ________ and if real GDP is much lower than potential GDP, then ________.
Which correctly describes the Aggregate Demand-Aggregate Supply model?
Which correctly describes the Aggregate Demand-Aggregate Supply model?
Aggregate demand represents total spending on ________.
Aggregate demand represents total spending on ________.
On the far left side of the AS curve, the economy is producing ________ potential, and on the far right of the curve, it is producing ________ potential.
On the far left side of the AS curve, the economy is producing ________ potential, and on the far right of the curve, it is producing ________ potential.
Using the aggregate demand (AD)-aggregate supply (AS) model, macro equilibrium occurs where?
Using the aggregate demand (AD)-aggregate supply (AS) model, macro equilibrium occurs where?
What does Keynesian economics argue is the cause of recessions?
What does Keynesian economics argue is the cause of recessions?
According to Keynes, a variety of factors affect consumption expenditure including ________.
According to Keynes, a variety of factors affect consumption expenditure including ________.
Why is business investment considered the most volatile component of aggregate demand according to Keynes?
Why is business investment considered the most volatile component of aggregate demand according to Keynes?
What action does the Keynesian perspective suggest if the government cuts taxes and increases spending during a recession?
What action does the Keynesian perspective suggest if the government cuts taxes and increases spending during a recession?
Since aggregate demand is defined as spending on domestic goods and services, then an increase in U.S. imports would ________ aggregate demand.
Since aggregate demand is defined as spending on domestic goods and services, then an increase in U.S. imports would ________ aggregate demand.
Which statement aligns with Say's Law during a recession?
Which statement aligns with Say's Law during a recession?
What happens when aggregate demand increases in the neoclassical zone, where supply is at its potential GDP?
What happens when aggregate demand increases in the neoclassical zone, where supply is at its potential GDP?
In the neoclassical zone, what effect do shifts of the AD curve have on GDP?
In the neoclassical zone, what effect do shifts of the AD curve have on GDP?
How does a leftward shift in AD relate to Keynes' law in the intermediate zone?
How does a leftward shift in AD relate to Keynes' law in the intermediate zone?
What area do both Keynesian and Neoclassical economics agree upon related to aggregate demand?
What area do both Keynesian and Neoclassical economics agree upon related to aggregate demand?
What is the state of the economy when prices are sticky and output can grow without inflationary pressures?
What is the state of the economy when prices are sticky and output can grow without inflationary pressures?
What is the shape of the intermediate zone of the AS curve?
What is the shape of the intermediate zone of the AS curve?
What does disposable income refer to?
What does disposable income refer to?
What does inflationary gap refer to?
What does inflationary gap refer to?
What is meant by interest rate?
What is meant by interest rate?
What is recessionary gap?
What is recessionary gap?
According to Keynesian economics, recessions happen when aggregate demand falls below ________ and ________.
According to Keynesian economics, recessions happen when aggregate demand falls below ________ and ________.
What kind of intervention would NOT involve the government or the federal reserve according to Keynes?
What kind of intervention would NOT involve the government or the federal reserve according to Keynes?
When the aggregate supply curve is flatter than the market supply curve for labor or goods and services, this is an example of a(n) ________.
When the aggregate supply curve is flatter than the market supply curve for labor or goods and services, this is an example of a(n) ________.
What is a principle assumption of the Keynesian economic framework?
What is a principle assumption of the Keynesian economic framework?
During recessionary times, it can be hard to coordinate lower wages for workers because of the ________.
During recessionary times, it can be hard to coordinate lower wages for workers because of the ________.
If prices change frequently, this cost is called ________.
If prices change frequently, this cost is called ________.
Which statement best represents the Keynesian Perspective?
Which statement best represents the Keynesian Perspective?
According to the Keynesian perspective, the government ________ play a role in managing the macroeconomy ________.
According to the Keynesian perspective, the government ________ play a role in managing the macroeconomy ________.
What does a Keynesian analysis of economics assume?
What does a Keynesian analysis of economics assume?
What might Keynesian economists predict happened after the housing market crash in 2007?
What might Keynesian economists predict happened after the housing market crash in 2007?
The cost of updating prices at which a business sells their goods is called ________.
The cost of updating prices at which a business sells their goods is called ________.
Which of the following is NOT considered a type of business investment expenditure?
Which of the following is NOT considered a type of business investment expenditure?
What does the coordination argument refer to?
What does the coordination argument refer to?
What is the expenditure multiplier?
What is the expenditure multiplier?
What is a macroeconomic externality?
What is a macroeconomic externality?
What are menu costs?
What are menu costs?
What does sticky wages and prices refer to?
What does sticky wages and prices refer to?
What kind of recession would a small multiplier effect likely lead to?
What kind of recession would a small multiplier effect likely lead to?
When considering the spending multiplier, which of the following statements is not true?
When considering the spending multiplier, which of the following statements is not true?
What does the Expenditure (or Spending) Multiplier represent?
What does the Expenditure (or Spending) Multiplier represent?
What is the Marginal Propensity to Consume?
What is the Marginal Propensity to Consume?
What is the Marginal Propensity to Import?
What is the Marginal Propensity to Import?
What is the Marginal Propensity to Save?
What is the Marginal Propensity to Save?
How can an economy operating under Say's law be described?
How can an economy operating under Say's law be described?
What does the neoclassical view suggest happens in the case of a recession?
What does the neoclassical view suggest happens in the case of a recession?
What type of economic viewpoint puts an emphasis on long-run economic performance?
What type of economic viewpoint puts an emphasis on long-run economic performance?
If aggregate supply is vertical, what does this imply about the long run?
If aggregate supply is vertical, what does this imply about the long run?
Why do Neoclassical economists focus more on long-term growth than on fighting recession?
Why do Neoclassical economists focus more on long-term growth than on fighting recession?
According to neoclassical thinking, what would increase the output of the country of Zambezi?
According to neoclassical thinking, what would increase the output of the country of Zambezi?
What should the government focus on according to the neoclassical viewpoint?
What should the government focus on according to the neoclassical viewpoint?
Which of the following is an example of Say's law?
Which of the following is an example of Say's law?
What does Say's Law state?
What does Say's Law state?
What do Neoclassical economists argue about the long-run aggregate supply curve?
What do Neoclassical economists argue about the long-run aggregate supply curve?
What would a major technological advancement shift according to Neoclassical economists?
What would a major technological advancement shift according to Neoclassical economists?
If someone says, 'If you build (produce) it they will come (purchase)', what economic law does this describe?
If someone says, 'If you build (produce) it they will come (purchase)', what economic law does this describe?
What is classical economics?
What is classical economics?
What does neoclassical economics encompass?
What does neoclassical economics encompass?
If an earthquake destroyed half the capital stock of a country, what would happen to its potential GDP?
If an earthquake destroyed half the capital stock of a country, what would happen to its potential GDP?
What must an economy operating at its maximum potential level of output do to improve its living standards?
What must an economy operating at its maximum potential level of output do to improve its living standards?
What does the neoclassical long-run aggregate supply curve imply about wages and prices?
What does the neoclassical long-run aggregate supply curve imply about wages and prices?
Why is the neoclassical long-run aggregate supply curve vertical at the potential level of output?
Why is the neoclassical long-run aggregate supply curve vertical at the potential level of output?
What is human capital?
What is human capital?
What does natural rate of unemployment refer to?
What does natural rate of unemployment refer to?
How does the neoclassical perspective define the level of economic activity?
How does the neoclassical perspective define the level of economic activity?
What is physical capital per person?
What is physical capital per person?
What is potential GDP?
What is potential GDP?
What does the neoclassical long-run aggregate supply curve imply about the relationship between aggregate prices and wages?
What does the neoclassical long-run aggregate supply curve imply about the relationship between aggregate prices and wages?
What do Neoclassical economists believe about expansionary fiscal policy?
What do Neoclassical economists believe about expansionary fiscal policy?
What would the owner of a firm do when anticipating increased demand?
What would the owner of a firm do when anticipating increased demand?
What does it mean when a firm exhibits adaptive expectations?
What does it mean when a firm exhibits adaptive expectations?
What do rational expectations refer to?
What do rational expectations refer to?
Which government policy could be described as a Keynesian response to a recession?
Which government policy could be described as a Keynesian response to a recession?
Which government policy could be described as a neoclassical response to a recession?
Which government policy could be described as a neoclassical response to a recession?
Which policy response to a recession is most consistent with Say's Law?
Which policy response to a recession is most consistent with Say's Law?
Which statement is most consistent with Keynes' Law?
Which statement is most consistent with Keynes' Law?
What does the vertical, long-run aggregate supply curve indicate?
What does the vertical, long-run aggregate supply curve indicate?
What can be expected in Canada’s economy from a neoclassical perspective during a labor shortage due to increased demand?
What can be expected in Canada’s economy from a neoclassical perspective during a labor shortage due to increased demand?
Which government policy is viewed as a neoclassical response to a recession?
Which government policy is viewed as a neoclassical response to a recession?
What happens to price level when aggregate demand increases according to neoclassical theory?
What happens to price level when aggregate demand increases according to neoclassical theory?
In the neoclassical model, what causes the AS curve to shift to the right over time?
In the neoclassical model, what causes the AS curve to shift to the right over time?
Which scenario is viewed as undermining long-run productivity growth from a neoclassical perspective?
Which scenario is viewed as undermining long-run productivity growth from a neoclassical perspective?
Why can't expansionary fiscal policy raise equilibrium output in the long run according to the neoclassical view?
Why can't expansionary fiscal policy raise equilibrium output in the long run according to the neoclassical view?
What policies should a neoclassical economist promote to foster a healthy economy?
What policies should a neoclassical economist promote to foster a healthy economy?
Which factor does not shift the aggregate demand curve?
Which factor does not shift the aggregate demand curve?
If change in economic agents' expectations is immediate, how does it affect monetary or fiscal policy?
If change in economic agents' expectations is immediate, how does it affect monetary or fiscal policy?
What does Keynes' law state?
What does Keynes' law state?
What does Say's Law say?
What does Say's Law say?
How do neoclassical economists generally emphasize the importance of the economy?
How do neoclassical economists generally emphasize the importance of the economy?
In the neoclassical zone of the aggregate supply curve, what characteristics can be observed?
In the neoclassical zone of the aggregate supply curve, what characteristics can be observed?
What is the reason inflation is not a concern in the Keynesian zone of the aggregate supply curve?
What is the reason inflation is not a concern in the Keynesian zone of the aggregate supply curve?
What is the main focus of the debate between Keynesian and Neoclassical economists?
What is the main focus of the debate between Keynesian and Neoclassical economists?
What is the period of time for real GDP when wages are sticky in response to a change in demand?
What is the period of time for real GDP when wages are sticky in response to a change in demand?
In the equation for Aggregate Demand (AD), what does I refer to?
In the equation for Aggregate Demand (AD), what does I refer to?
What does it mean if the AS-AD curves are in equilibrium in the vertical range of the AS curve?
What does it mean if the AS-AD curves are in equilibrium in the vertical range of the AS curve?
What does the economic model of aggregate demand and aggregate supply help explain?
What does the economic model of aggregate demand and aggregate supply help explain?
A ________ is a graph of an upward-sloping curve representing the relationship between the aggregate price level and the quantity of output produced by businesses.
A ________ is a graph of an upward-sloping curve representing the relationship between the aggregate price level and the quantity of output produced by businesses.
Using the context of an economy's existing resources, market and legal institutions, what term is used to describe the maximum quantity that an economy can produce?
Using the context of an economy's existing resources, market and legal institutions, what term is used to describe the maximum quantity that an economy can produce?
Study Notes
Keynesian Economics
- Recessions are primarily caused by insufficient aggregate demand.
- Factors influencing consumption expenditure include disposable income and consumer confidence.
- Business investment is highly volatile due to its dependence on confidence and expectations.
- Government actions like tax cuts or increased spending are aimed at boosting aggregate demand in recessions.
- An increase in U.S. imports subtracts from aggregate demand, as it represents spending not on domestic goods.
- An effective stimulant for a recessionary economy aligns with Say's Law by providing subsidies for investors.
- Aggregate demand's increase in the Keynesian model can lead to a rise in the aggregate price level when aggregate supply reaches potential output.
Neoclassical Economics
- Say's Law posits that supply creates its own demand, indicating a self-correcting economy that functions at potential GDP.
- In the neoclassical view, shifts of the aggregate demand curve have minimal impact on GDP due to the long-run aggregate supply being at potential.
- If the aggregate supply is vertical, it reveals that output quantity remains unaffected by changes in aggregate demand.
- Neoclassical economists emphasize long-term growth over short-term recession management, believing the economy self-adjusts.
- Expansionary fiscal policy is viewed as ineffective in the long run due to flexible prices negating any demand increase.
Aggregate Demand and Supply Dynamics
- The aggregate demand (AD) formula is composed of consumption, investment, government spending, and net exports.
- In equilibrium, the economy operates at or near potential GDP, with real GDP being responsive to price changes across various ranges of the aggregate supply curve.
- The spending (or expenditure) multiplier demonstrates that changes in autonomous spending lead to proportionally larger shifts in real GDP.
- Price and wage stickiness during short-run adjustments can lead to inefficiencies and prolonged economic malaise.
Miscellaneous Economic Concepts
- An inflationary gap occurs when output surpasses potential GDP, while a recessionary gap indicates output below potential GDP.
- Menu costs refer to expenses incurred by firms in adjusting prices; these costs contribute to price stickiness.
- Human capital signifies the skills and education of the workforce, enhancing productivity.
Expectations in Economics
- Adaptive expectations signify adjustments based on historical data, whereas rational expectations rely on current information to forecast future economic conditions.
- Keynes' Law focuses on the premise that demand generates supply, oppositely framed by Say's Law which suggests supply creates demand.
Policy Responses to Economic Conditions
- Keynesian responses to recession scenarios include stimulus measures through increased government spending, while neoclassical perspectives advocate reducing labor union influence.
- The vertical long-run aggregate supply curve implies minimal dependence on aggregate demand for determining long-term output.
- Technological advancements can shift potential GDP to the right, promoting economic growth.
Economic Indicators and Models
- Potential GDP reflects the maximum output achievable when resources are fully utilized and is critical for assessing economic health.
- The AS-AD model is fundamental in analyzing macroeconomic equilibrium and understanding the impacts of shifts in supply and demand on price levels.
Overall Economic Framework
- The debate between Keynesian and neoclassical economists primarily centers on timing and the effectiveness of government intervention in managing the economy.
- Short-term fluctuations may result from sticky wages and prices, while long-run adjustments tend to stabilize around potential GDP, showcasing the flexibility of wages and prices in the neoclassical model.
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Test your understanding of key concepts in Keynesian and Neoclassical economics with these flashcards. Each card presents important definitions and principles that highlight the differences and similarities between the two schools of thought.
