Review Sheet for Exam 3

8/10/2019 Review Sheet for Exam 3

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Review Sheet for Exam 3

Chapters 8,9,10, 11

Chapter 8

Classical vs. Keynesian

Classical: supply curve is vertical, the economy is naturally at full-employmentKeynesian: supply curve is horizontal. Naturally, there are unused resources and

unemployment in the economy.

Says Law: Supply creates its own demand: Simple model: business firms providehouseholds with goods and services, which are paid for by households. Households

provide resources, business firms pay for these resources.

Classical Theory of the role of government: government does not need to

manipulate the economy as long as

Abstinence Theory of Savings: People obtain more satisfaction from spending now

compared to spending later. To induce people to save, interest must be offered.

Greater then interest = Greater quantity saved.

Wage and Price Flexibility: Wage and Prices can be manipulated to eliminateoverproduction. Classicists assume that wages and prices are proportional. When

prices fall, people with greater amounts of wealth saved will buy more and save less

(Pigou Effect)

Wage and Price Rigidity

Keynes stated that wages and prices werent as flexible as the Classicists thoughtbecause 1) Corporations have monopolies on prices and labor unions have

monopolies on wages 2)wages and prices dont fall uniformly, the burden of debt of

workers would discourage them from spending 3)For the economy to expand when

prices drop, those prices would have to stay low for a long time. There are easier

ways to spur increases in demand.

Who is John Maynard Keynes and The General Theory of EmploymentKeynes theory on wages and prices

Keynes short run supply curve (assumes price is constant)


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Chapter 9

Consumption function

Dissavings occur when consumption > 45 deg line. Savings occurs when

consumption < 45 deg line.

Income = consumption + savings

Variables that change the level of consumption and shift the consumption function

When a non-income factor changes, the consumption function shifts up or

down. Those factors include changes in: social customs/attitudes towardssavings, assets of consumers, expectations in future earnings, taxes,

distribution of income

A change in income results in a change in quantity consumed/saved

Relationship of interest rates and investment (MEC curve)

Greater quantities of investment are made when interest rates are lower.

Aggregate Expenditure Model

Shows the relationship between short-run total spending and GDP

Assumes price level is constant


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Components of Aggregate Expenditure

AE = Consumption + Investments + Government Expenditure + Net Exports

Graphic depiction of the aggregate expenditure model and the 45-degree line

Planned and unplanned inventories

Unplanned reductions in inventories occur when consumers consume morethan what the businesses produce, thus reducing inventory.

Unplanned additions to inventory occur when consumers consume less than

what businesses produce, thus forcing the businesses to add the remainders

to their inventory

Calculate these by looking at the savings equals intended investment graph.

Planned and unplanned inventories and their relationship to planned investment

and GDP

Unplanned changes in inventory will force businesses to invest a different

amount than they originally planned

Slope of the consumption function (MPC)Calculation of MPC, MPS and the multiplier

Variables that change consumption - and how that affects aggregate expenditure

Variables that change investment and how that affects aggregate expenditureVariables that change government and how that affects aggregate expenditure

Paradox of Thrift

Chapter 10

Amount of US debt and what it is:

Debt to GDP ratio

Review videos of Milton Friedman and Paul Krugman

Know the broad differences between Krugman and Friedman s approach to fiscal

policy

What is fiscal policy

Reasons why economists worry about deficit spending

Who bears the burden of a huge debt

Crowding out effect

Different types of budget reforms line item veto, balanced budget amendment,

accounting reform

Who owns the US debt

Debt ceiling

Traditional interpretation of balance of trade deficits

Hausers Law

Chapter 11

What is money:

The thing that people accept in exchange for goods and services

Measurement of money M1 and M2 and M3


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M1: currency, coin, travelers checks, all checkable deposits

M2: all of the M1 components + near monies (Savings Deposits, small time

deposits, money market mutual funds)

M3: M1 + M2 + Certificate of Deposits

MV = PQ

Effective supply of money = net national product

Documents

Review Sheet for Exam 3