Gaps and Graphs
What kind of gap is the economy experiencing when there is inflation? Draw it.
Inflationary gap: Y1 > Yp
Label who believes in the following:
Say's Law
Supply side economics
Functional finance
Sticky wages and prices
Classical
Classical
Keynesian
Keynesian
taxes > gov spending = ______
taxes < gov spending = ______
deficit; surplus
Says law: ___ creates its own ____
Supply; demand
List the three reasons the AD curve is downward sloping.
Money wealth effect, international effect, interest rate effect.
The US imposes tariffs on copper from Chile, which curve shifts, which direction, and why?
SAS left; increase in price of intermediate goods affects the cost of production.
What fiscal policy is used to correct an inflationary gap? What tools are used.
Contractionary fiscal policy: inc. T and dec. G
Food stamps and unemployment benefits are a given out during a ________
Cyclical deficit
The classical growth model focuses on ____, while the new growth theory focuses on ______.
Capital; technology
Explain the money wealth effect and how it shows an inverse relationship between PL and AD/Y.
PL dec, goods are cheaper, people feel richer, C inc., AD inc., Y inc.
Draw the crowding out graph. What is happening to G and I?
AD shifts right with inc. in G, and left with a dec. in I.
Modern macro policy is a blend of ____ and ____.
Sound finance; functional finance
Who thinks deficits are okay? When are they okay?
Keynesian; in a recession
What is a technological lock-in?
Occurs when a technology becomes the standard due to network externalities.
The U.S. dollar appreciates on the world market. What curve shifts, which direction, and why?
AD shifts left, lowered NX.
1. Draw a recession on a graph of the AD/AS model.
2. Draw the classical self correction of the graph.
3. Draw the effect of fiscal policy to deal with the recession. What fiscal policy tools were used?
1. Y1 < Yp
2. SAS shifts to the right
3. AD shifts to the right; dec T and inc G
What is an automatic stabilizer?
Government program/policy that counteracts the business cycle without any new government action.
Why are U.S. treasury bonds a safe investment?
Earn higher interest rates than savings; pay a fixed interest rate
Draw keynes critique of classical & classical critique of keynes.
Paradox of thrift & Classical critique of fiscal policy
Draw a graph representing an inflation and then self correct it. What is happening in the real world?
Input and labor costs are high, SAS shifts left.
What 5 things shift the AD curve?
1. Foreign income
2. Exchange rate fluctuations
3. Distribution of income
4. Consumer expectations
5. Fiscal and monetary policies
List the 4 of the 7 assumptions of the AS/AD model that lead to problems with fiscal policy.
1. Financing the debt has no offsetting effects, 2. gov knows what the situation is, 3. gov knows the potential income level, 4. fiscal policy can be implemented quickly, 5. gov has flexibility in changing spending and taxes, 6. the size of the govs debt doesnt matter, 7. fiscal policy doesnt negatively affect other goals
Who owns U.S. debt?
Federal accounts; social security & medicare trust funds
The government; borrows from itself when one account has a surplus, it buys bonds
China and Japan; export driven economies
List the 5 sources of growth for the economy.
1. Growth-compatible institutions, 2. Investment and savings, 3. Available resources, 4. Technological development, 5. Entrepreneurship
Draw a graph representing an economic downturn, then self correct this graph and explain what happened in the real world.
recessionary gap, sas shifts right, lower labor and input costs lowered the costs of production.