Help
Options
Didn't know it?
click below
click below
Knew it?
click below
click below
Don't Know
Remaining cards (0)
Know
retry
shuffle
restart
0:00
Embed Code - If you would like this activity on your web page, copy the script below and paste it into your web page.
Normal Size Small Size show me how
Normal Size Small Size show me how
Ch. 11
Classical and Keynesian Economics
| Term | Definition |
|---|---|
| The centerpiece of classical economics | Say's law- named after Jean Baptiste Say |
| Classical economic system | believes that the economy, if left free from government interference, tends toward full employment |
| Say's Law | states that supply creates its own demand |
| GDP= C+I= C+S | I=S Invensments=savings |
| Savings greater than investments= | unemployment--interest rates would fall |
| surplus | the amount by which the quantity supplied of a product exceeds the quantity demanded at a specific price |
| Price flexibility | would also bring about equilibrium between saving and investing if lower interest rates did not- businesses, unable to sell their entire output, would simply lower prices, and then people would buy everything produced |
| Business would only make profit if | resource prices, especially wages, are reduced |
| Classical equilibrium | when aggregate demand is equal to aggregate supply, and we are at full employment |
| Aggregate demand curve | shows that as the price level declines, the quantity of goods and services demanded rises. |
| Aggregate demand | the sum of all expenditures for goods and services |
| 3 reasons why quantity of goods purchased declines as price level increases | 1. the real balance effect 2. interest rate effect 3. the foreign purchases effect |
| Real balance effect | the influence of a change in your purchasing power on the quantity of real GDP that you are willing to buy |
| Interest rate effect | when a rising price level pushes up interest rates, which in turn lowers the consumption of certain goods and services and also lowers investment in plant and equipment |
| Foreign purchases effect | occurs when our price level rises relative to the price levels in other countries, making American goods more expensive and causing our exports to decline |
| Aggregate supply | the nation's total output of goods and services |
| Long-Run aggregate supply curve | Why is this a vertical line? 1.In the long-run, the economy operates at full employment 2.In the long-run, output is independent of prices |
| Short-run Aggregate supply curve | Why does it sweep upward to the right? Because business firms will supply increasing amounts of output as prices rise |
| Why does the Short-run AS curve eventually become vertical? | Because there is just so much land, labor, and capital |
| Beyond full employment is only possible in | short term |
| founder of classical economics | adam smith |
| John Maynard keynes believed | "what is saving and investment were not equal. saving and investment are done by different people for different reasons" he questioned if wages and prices were downwardly flexible "we are not always at, or tending toward, full employment" |
| Keynes believed 3 possible equilibriums existed | below full employment, at full employment, and above full employment |
| As the economy begins to recover, output can be raised to about 4.7$ trillion without any increase in prices. why? | Because unemployed workers would be happy to work for the prevailing wage, so wage rates would not have to be raised to entice people back to work. |
| What causes inflation | Excessive demand |
| demand-pull | "too much $ chasing too few goods" |
| the key to keynes analysis | the role of aggregate demand |
| Keynesian economics | believed the private economy was inherently unstable and government intervention was necessary. Aggregate demand if our economy's prime mover |
| In the Keynesian model, what causes a recession? | a decline in profit expectations, aka the marginal efficiency of capital |
| both classical and keynesian are always | tending toward equilibrium, where aggregate demand=aggregate supply |
| Equilibrium | aggregate demand=aggregate supply |
| when aggregate demand exceeds supply | inventories decline-prices rise |
| GDP | identical to aggregate supply |
| 2 ways to increase aggregate supply | by increasing output and prices |
| disequilibrium | when aggregate demand does not equal aggregate supply |
| when aggregate supply exceeds demand | inventory rises |
| For it to be in equilibrium... | aggregate demand (C+I) must equal the level of production (aggregate supply) for it to be in equilibrium. If not, aggregate supply must adjust |
| Keynesian recessions | are not temporary, the private economy does not automatically move toward full employment. It is necessary for the government to intervene, or spend money |
| New Deal | made by president Franklin Roosevelt in attempt to get out of the Great Depression. Then he raised taxes, cut government spending, and cut the rate of growth of the money supply |
| Keynes believed that | demand create its own supply |
Created by:
ltameirao
Popular Economics sets