Podcast
Questions and Answers
What was the dominant school of economic thought until the Great Depression?
What was the dominant school of economic thought until the Great Depression?
- Behavioral economics
- Keynesian economics
- Classical economics (correct)
- Monetarism
What did classical economists believe in?
What did classical economists believe in?
Laissez-faire
What does Say's Law state?
What does Say's Law state?
Supply creates its own demand
Why do people work according to Jean Baptiste Say?
Why do people work according to Jean Baptiste Say?
According to classical economists, what will happen to any money that is saved?
According to classical economists, what will happen to any money that is saved?
Who made the claim 'Our economy is always at full employment'?
Who made the claim 'Our economy is always at full employment'?
According to classical economists, what happens if the amount of money people want to invest is greater than the amount they want to save?
According to classical economists, what happens if the amount of money people want to invest is greater than the amount they want to save?
What aspect does NOT support the classical theory of employment?
What aspect does NOT support the classical theory of employment?
When is our economy definitely at equilibrium?
When is our economy definitely at equilibrium?
Who believes that we are always tending toward full employment?
Who believes that we are always tending toward full employment?
What did Keynes say regarding the expected profit rate?
What did Keynes say regarding the expected profit rate?
John Maynard Keynes is most closely associated with which economic event?
John Maynard Keynes is most closely associated with which economic event?
The classical economist's aggregate supply curve is vertical in the long run.
The classical economist's aggregate supply curve is vertical in the long run.
What is needed to end a bad recession?
What is needed to end a bad recession?
What statement best describes the classical theory of employment?
What statement best describes the classical theory of employment?
According to Keynes, our economy always tends toward what?
According to Keynes, our economy always tends toward what?
When savings is greater than investment, where are we?
When savings is greater than investment, where are we?
How did Keynes view full-employment GDP?
How did Keynes view full-employment GDP?
What did Keynes primarily concern himself with?
What did Keynes primarily concern himself with?
What happens when aggregate demand exceeds aggregate supply?
What happens when aggregate demand exceeds aggregate supply?
What happens when the economy is in disequilibrium?
What happens when the economy is in disequilibrium?
As the price level rises, what happens to the quantity of goods and services demanded?
As the price level rises, what happens to the quantity of goods and services demanded?
What does NOT explain the slope of the aggregate demand curve?
What does NOT explain the slope of the aggregate demand curve?
What antirecession programs would John Maynard Keynes not prescribe?
What antirecession programs would John Maynard Keynes not prescribe?
If we are operating in the classical range of the aggregate supply curve and aggregate demand rose, what would happen?
If we are operating in the classical range of the aggregate supply curve and aggregate demand rose, what would happen?
What do Keynes and classical economics agree on?
What do Keynes and classical economics agree on?
Laissez-faire was advocated by which school of economics?
Laissez-faire was advocated by which school of economics?
Match the reasons why the aggregate supply curve moves upward to the right:
Match the reasons why the aggregate supply curve moves upward to the right:
According to Say's law, people work so that they can what?
According to Say's law, people work so that they can what?
According to Say's law, what do people do with the money they can earn?
According to Say's law, what do people do with the money they can earn?
What do classical economists believe savings would equal?
What do classical economists believe savings would equal?
If supply creates its own demand, why are we having a depression according to Keynes?
If supply creates its own demand, why are we having a depression according to Keynes?
If saving were greater than investments, how would classical economists propose to equalize them?
If saving were greater than investments, how would classical economists propose to equalize them?
What do classical economists believe about wages and prices?
What do classical economists believe about wages and prices?
What do classical economists believe about recessions?
What do classical economists believe about recessions?
During recessions, what should the government do according to classical economists?
During recessions, what should the government do according to classical economists?
What happens when aggregate demand exceeds aggregate supply?
What happens when aggregate demand exceeds aggregate supply?
What is it called when individuals, business firms, and the government are spending just enough to provide jobs for everyone willing to work?
What is it called when individuals, business firms, and the government are spending just enough to provide jobs for everyone willing to work?
At equilibrium GDP, what will be equal?
At equilibrium GDP, what will be equal?
What does our economy always tend toward?
What does our economy always tend toward?
When investment is greater than savings, where are we?
When investment is greater than savings, where are we?
What is the relationship between full-employment GDP and equilibrium GDP?
What is the relationship between full-employment GDP and equilibrium GDP?
What was Keynes most concerned with?
What was Keynes most concerned with?
According to Keynes, what determines the level of aggregate supply?
According to Keynes, what determines the level of aggregate supply?
What was Keynes's policy prescription when we were far below full-employment level of GDP?
What was Keynes's policy prescription when we were far below full-employment level of GDP?
When aggregate supply exceeds aggregate demand, what state is the economy in?
When aggregate supply exceeds aggregate demand, what state is the economy in?
According to which law does supply create its own demand?
According to which law does supply create its own demand?
What is the term for the influence a change in household purchasing power has on the quantity of real GDP that consumers are willing to buy?
What is the term for the influence a change in household purchasing power has on the quantity of real GDP that consumers are willing to buy?
What is the cost of borrowed funds called?
What is the cost of borrowed funds called?
You find the interest by dividing ____ by _____.
You find the interest by dividing ____ by _____.
What happens as a rising price level pushes up interest rates?
What happens as a rising price level pushes up interest rates?
What happens when the price level in the US rises relative to price levels in other countries?
What happens when the price level in the US rises relative to price levels in other countries?
What is the sum of all expenditures for goods and services called?
What is the sum of all expenditures for goods and services called?
What is the nation's total output of goods and services called?
What is the nation's total output of goods and services called?
Which school believes that the private economy was inherently unstable and needed government intervention?
Which school believes that the private economy was inherently unstable and needed government intervention?
Which school believed that our economy, if left free from government interference, tends toward full employment?
Which school believed that our economy, if left free from government interference, tends toward full employment?
What is it called when aggregate demand does not equal aggregate supply?
What is it called when aggregate demand does not equal aggregate supply?
What is the term for the increase and decrease in the level of economic activity over time?
What is the term for the increase and decrease in the level of economic activity over time?
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Study Notes
Classical Economics
- Dominant economic thought before the Great Depression.
- Advocated for laissez-faire policies emphasizing minimal government intervention.
Say's Law
- Asserts that supply creates demand; production inherently generates consumption.
- Individuals work to earn money for spending, aligning work with consumption.
Investment and Savings
- Classical economists believed all saved money would be invested.
- If planned investment exceeds desired savings, interest rates are driven up, encouraging savings.
Employment and Equilibrium
- Classical viewpoint posits the economy naturally trends toward full employment.
- Unemployment is expected but temporary, as the economy self-corrects.
- Equilibrium GDP coincides with full-employment GDP under ideal conditions.
Key Theorists
- John Maynard Keynes emerged during the Great Depression, advocating for increased aggregate demand to stimulate the economy.
- Keynes prioritized expected profit over interest rates when considering investments.
Aggregate Demand and Supply
- Aggregate demand, the total expenditure for goods/services, interacts complexly with aggregate supply, defined as the nation’s overall production.
- When aggregate demand exceeds supply, inventories deplete and output rises.
- Conversely, when supply outstrips demand, the economy is in disequilibrium.
Price Levels and Economic Behavior
- Rising price levels lead to decreased demand for goods and services.
- The real balance effect illustrates how purchasing power influences consumer spending.
- Interest rates are affected by price levels, impacting investments and consumption.
Economic Interventions
- Keynesians argue for government intervention during recessions to stimulate demand.
- Classical economists insist on non-intervention, promoting the view that recessions are brief and self-correcting.
Business Cycles
- Economic activity fluctuates in cycles, marked by alternating periods of growth and recession.
Aggregate Supply Dynamics
- The classical aggregate supply curve is vertical in the long run, reflecting natural full employment levels.
- Factors leading to upward shifts in the aggregate supply curve include rising resource costs and less efficient capital usage.
Consumer Behavior
- Individuals, businesses, and governments must adequately spend to ensure full employment equilibrium.
- The economy produces at equilibrium GDP when aggregate demand equals aggregate supply.
Conceptual Summaries
- Full-employment GDP represents an ideal state rarely achieved in practice.
- Aggregate demand should ideally match aggregate supply to maintain economic stability.
Important Distinctions
- Disequilibrium occurs when aggregate demand doesn't equal aggregate supply.
- Classical economics promotes self-regulation of the economy, while Keynes economics emphasizes necessary interventions to stabilize fluctuating demand.
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