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.
Draw a classical self correction of an inflationary gap.
SAS shifts to the left to return the economy to the LR equilibrium.
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
What are the three types of capital?
Human, physical, financial
Draw a graph that represents crowding out. What is happening the 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.
A deficit is a _____ over a period of time, while debt is a _____ at a period in time.
Flow; stock
1. Draw inflation 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 inflation. What fiscal policy tools were used?
1. Y1 > Yp
2. SAS shifts to the left
3. AD shifts to the left; dec G and inc T
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 the cost-push and demand-pull inflation graphs.
Cost-push: SAS shifts to the left; PL inc. GDP dec.
Demand-pull: AD shifts to the right; PL inc. GDP inc.
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.