Macro Economics Chapters 11-13 Flashcards
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Questions and Answers

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?

    Laissez-faire

    What does Say's Law state?

    Supply creates its own demand

    Why do people work according to Jean Baptiste Say?

    <p>To consume</p> Signup and view all the answers

    According to classical economists, what will happen to any money that is saved?

    <p>It will be invested</p> Signup and view all the answers

    Who made the claim 'Our economy is always at full employment'?

    <p>Neither Keynes nor the classicals</p> Signup and view all the answers

    According to classical economists, what happens if the amount of money people want to invest is greater than the amount they want to save?

    <p>Interest rates will rise and savings will rise</p> Signup and view all the answers

    What aspect does NOT support the classical theory of employment?

    <p>Government spending programs</p> Signup and view all the answers

    When is our economy definitely at equilibrium?

    <p>When equilibrium GDP equals full-employment GDP</p> Signup and view all the answers

    Who believes that we are always tending toward full employment?

    <p>The classicals</p> Signup and view all the answers

    What did Keynes say regarding the expected profit rate?

    <p>It was more important than the interest rate</p> Signup and view all the answers

    John Maynard Keynes is most closely associated with which economic event?

    <p>The Great Depression</p> Signup and view all the answers

    The classical economist's aggregate supply curve is vertical in the long run.

    <p>True</p> Signup and view all the answers

    What is needed to end a bad recession?

    <p>Spend a lot of money</p> Signup and view all the answers

    What statement best describes the classical theory of employment?

    <p>We will occasionally have some unemployment, but our economy will automatically move back toward full employment</p> Signup and view all the answers

    According to Keynes, our economy always tends toward what?

    <p>Equilibrium GDP</p> Signup and view all the answers

    When savings is greater than investment, where are we?

    <p>Above equilibrium GDP</p> Signup and view all the answers

    How did Keynes view full-employment GDP?

    <p>As a rare occurrence</p> Signup and view all the answers

    What did Keynes primarily concern himself with?

    <p>Aggregate demand</p> Signup and view all the answers

    What happens when aggregate demand exceeds aggregate supply?

    <p>Inventories get depleted and output rises</p> Signup and view all the answers

    What happens when the economy is in disequilibrium?

    <p>It automatically moves back into equilibrium</p> Signup and view all the answers

    As the price level rises, what happens to the quantity of goods and services demanded?

    <p>Falls</p> Signup and view all the answers

    What does NOT explain the slope of the aggregate demand curve?

    <p>The profit effect</p> Signup and view all the answers

    What antirecession programs would John Maynard Keynes not prescribe?

    <p>Letting the forces of supply and demand allow the economy to retain full employment</p> Signup and view all the answers

    If we are operating in the classical range of the aggregate supply curve and aggregate demand rose, what would happen?

    <p>Output would remain the same and the price level would rise</p> Signup and view all the answers

    What do Keynes and classical economics agree on?

    <p>Our economy is always at equilibrium or tending toward equilibrium</p> Signup and view all the answers

    Laissez-faire was advocated by which school of economics?

    <p>Classical</p> Signup and view all the answers

    Match the reasons why the aggregate supply curve moves upward to the right:

    <p>Resource costs rise = Less efficient capital is pressed into use</p> Signup and view all the answers

    According to Say's law, people work so that they can what?

    <p>Have money to spend</p> Signup and view all the answers

    According to Say's law, what do people do with the money they can earn?

    <p>Spend all the money they can earn</p> Signup and view all the answers

    What do classical economists believe savings would equal?

    <p>Investments</p> Signup and view all the answers

    If supply creates its own demand, why are we having a depression according to Keynes?

    <p>Depression</p> Signup and view all the answers

    If saving were greater than investments, how would classical economists propose to equalize them?

    <p>By the interest rate</p> Signup and view all the answers

    What do classical economists believe about wages and prices?

    <p>Are downwardly flexible</p> Signup and view all the answers

    What do classical economists believe about recessions?

    <p>They are temporary and self-correcting</p> Signup and view all the answers

    During recessions, what should the government do according to classical economists?

    <p>Not intervene (do nothing)</p> Signup and view all the answers

    What happens when aggregate demand exceeds aggregate supply?

    <p>Inventories will be depleted and output will rise</p> Signup and view all the answers

    What is it called when individuals, business firms, and the government are spending just enough to provide jobs for everyone willing to work?

    <p>Full employment equilibrium GDP</p> Signup and view all the answers

    At equilibrium GDP, what will be equal?

    <p>Aggregate demand will be equal to aggregate supply</p> Signup and view all the answers

    What does our economy always tend toward?

    <p>Equilibrium GDP</p> Signup and view all the answers

    When investment is greater than savings, where are we?

    <p>Below equilibrium GDP</p> Signup and view all the answers

    What is the relationship between full-employment GDP and equilibrium GDP?

    <p>Sometimes equal</p> Signup and view all the answers

    What was Keynes most concerned with?

    <p>Aggregate demand</p> Signup and view all the answers

    According to Keynes, what determines the level of aggregate supply?

    <p>The level of aggregate demand</p> Signup and view all the answers

    What was Keynes's policy prescription when we were far below full-employment level of GDP?

    <p>For the government to spend more money</p> Signup and view all the answers

    When aggregate supply exceeds aggregate demand, what state is the economy in?

    <p>Disequilibrium</p> Signup and view all the answers

    According to which law does supply create its own demand?

    <p>Say's Law</p> Signup and view all the answers

    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?

    <p>Real balance effect</p> Signup and view all the answers

    What is the cost of borrowed funds called?

    <p>Interest</p> Signup and view all the answers

    You find the interest by dividing ____ by _____.

    <p>Interest paid; Amount borrowed</p> Signup and view all the answers

    What happens as a rising price level pushes up interest rates?

    <p>It lowers the consumption of certain goods and services and investment in new plant and equipment</p> Signup and view all the answers

    What happens when the price level in the US rises relative to price levels in other countries?

    <p>Our imports rise and exports decline</p> Signup and view all the answers

    What is the sum of all expenditures for goods and services called?

    <p>Aggregate demand</p> Signup and view all the answers

    What is the nation's total output of goods and services called?

    <p>Aggregate supply</p> Signup and view all the answers

    Which school believes that the private economy was inherently unstable and needed government intervention?

    <p>Keynes economics</p> Signup and view all the answers

    Which school believed that our economy, if left free from government interference, tends toward full employment?

    <p>Classical economics</p> Signup and view all the answers

    What is it called when aggregate demand does not equal aggregate supply?

    <p>Disequilibrium</p> Signup and view all the answers

    What is the term for the increase and decrease in the level of economic activity over time?

    <p>Business cycle</p> Signup and view all the answers

    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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    Test your knowledge with these flashcards covering key concepts from chapters 11 to 13 of Macro Economics. Key topics include classical economics, laisses-faire, and Say's law. Perfect for quick reviews and study sessions!

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