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Classical economics
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-Say's Law
-Economy will automatically adjust
-Laissez-faire
-Economy will automatically adjust
-Laissez-faire
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Says law
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supply creates its own demand
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Keynesian economics theory
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Economic theory based on the principles of John Maynard Keynes stating that government spending should increase during business slumps and be curbed during booms.
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Keynesian economics:
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-Cyclinal economics can occur
-Economy will not correct itself
-Government should actively manage macroeconomic instability
-Economy will not correct itself
-Government should actively manage macroeconomic instability
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Stuck price model
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Prices are fixed
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Classical economics
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The idea that free markets can regulate themselves
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Closed economy
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An economy that does not interact with other economies in the world
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The role of sticky prices in the Aggregate Expenditures (AE) model:
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-The aggregate expenditures model views the total amount of spending in the economy as the primary factor determining the level of real GDP that the economy will produce
-The model assumes that the price level is fixed
-Keynes made this assumption to reflect the general circumstances of the Great Depression, in which declines in output and employment, rather than declines in prices, were the dominant adjustments made by firms when they faced huge declines in their sales.
-The model assumes that the price level is fixed
-Keynes made this assumption to reflect the general circumstances of the Great Depression, in which declines in output and employment, rather than declines in prices, were the dominant adjustments made by firms when they faced huge declines in their sales.
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Derive an economy's investment schedule from the investment demand curve and an interest rate
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-An investment schedule shows how much investment the firms in an economy are collectively planning to make at each possible level of GDP
-We utilize a simple investment schedule in which investment is a constant value and therefore the same at all levels of GDP
-That constant value is derived from the investment demand curve by determining what quantity of investment will be demanded at the economy's current real interest rate
-We utilize a simple investment schedule in which investment is a constant value and therefore the same at all levels of GDP
-That constant value is derived from the investment demand curve by determining what quantity of investment will be demanded at the economy's current real interest rate
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Savings and planned investments are equal (s=ig)
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-Savings is a leakage of spending causing C to be less than total output or gdp
-Investment (spending on capital goods) is an injection of spending
*In addition to to C, ig is a replacement for the leakage of s
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No unplanned changes in inventories
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Firms do not change production
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Adding International Trade
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-Include net exports spending in aggregate expenditures: Private, open economy
-Exports create production, employment, and income
-Subtract spending on imports
-Xn can be positive or negative
-Exports create production, employment, and income
-Subtract spending on imports
-Xn can be positive or negative
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International economic leakages
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-Prosperity abroad: Increase us prices
-Exchange rates: Depreciate the dollar to increase imports
-A caution on tariffs and devaluations: other countries may retaliate and lower gdp for all
-Exchange rates: Depreciate the dollar to increase imports
-A caution on tariffs and devaluations: other countries may retaliate and lower gdp for all
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Adding the Public Sector
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-Move away from a private (no-government) open economy to an economy with a public sector (mixed economy)
- Government purchases and equilibrium GDP
- Government spending is subject to the multiplier
- Taxation and equilibrium GDP
- Lump sum tax
- Taxes are subject to the multiplier
- DI = GDP
- Government purchases and equilibrium GDP
- Government spending is subject to the multiplier
- Taxation and equilibrium GDP
- Lump sum tax
- Taxes are subject to the multiplier
- DI = GDP
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Recessionary expenditure gap
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The amount by which the aggregate expenditures schedule must shift upward to increase the real GDP to its full-employment, noninflationary level
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Recessionary expenditure gap:
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-Insufficient aggregate spending
-Spending below full-employment GDP
-Increase G and/or decrease T
-Spending below full-employment GDP
-Increase G and/or decrease T
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Inflationary expenditure gap
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The amount by which the aggregate expenditures schedule must shift downward to decrease the nominal GDP to its full-employment noninflationary level.
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Inflationary expenditure gap:
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-Too much aggregate spending
-Spending exceeds full-employment GDP
-Decrease G and/or increase T
-Spending exceeds full-employment GDP
-Decrease G and/or increase T
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The recession of 2007-2009
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-Began in December 2007 and lasted 18 months and was the longest recession since the Great Depression
Aggregate Expenditure decline:
-Consumption spending declined
-Investment spending declined
-Recessionary expenditures gap
Federal government undertook keynesian policies:
-Tax rebate checks
-$787 billion stimulus checks
Aggregate Expenditure decline:
-Consumption spending declined
-Investment spending declined
-Recessionary expenditures gap
Federal government undertook keynesian policies:
-Tax rebate checks
-$787 billion stimulus checks
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Determine the economy's equilibrium level of output
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The economy is in equilibrium when aggregate demand represented by C + I is equal to total output.
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Impact of tariffs and quotas
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Ways for governments to protect domestic firms and industries
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Relationship between net exports and exchange rates
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-When the real exchange rate is high, net exports decrease as imports rise
-Alternatively, when the real exchange rate is low, net exports increase as exports rise
-Alternatively, when the real exchange rate is low, net exports increase as exports rise
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Equilibrium GDP
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The GDP at which the total quantity of final goods and services purchased is equal to the total quantity of final goods and services produced
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Full-employment GDP
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Another name for potential GDP, when the economy is producing at its potential and unemployment is at the natural rate of unemployment
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Recessionary expenditure gaps
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The amount by which the economy's potential GDP is higher than the level of aggregate expenditure.
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Inflationary expenditure gaps
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The demand for goods and services exceeds production due to factors such as higher levels of overall employment, increased trade activities, or elevated government expenditure
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